UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year endedDecember 31, 20132015

or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from                 to                

Commission file number 001-31731

 

 

Chunghwa Telecom Co., Ltd.

(Exact name of Registrant as specified in its charter)

Chunghwa Telecom Co., Ltd.

(Translation of Registrant’s name into English)

Taiwan, Republic of China

(Jurisdiction of incorporation or organization)

21-3 Hsinyi Road, Section 1, Taipei, Taiwan, Republic of China

(Address of principal executive offices)

Fufu Shen

21-3 Hsinyi Road, Section 1, Taipei,

Taiwan, Republic of China

Tel: +886 2 2344-5488

Fax: +886 2 3393-8188Email: chtir@cht.com.tw

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Shares, par value NT$10 per share

American Depositary Shares, as evidenced by American

Depositary Receipts, each representing 10 Common

Shares

 

New York Stock Exchange*

New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

7,757,446,545 Common Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  x Yes  ¨ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ¨ Yes  x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes    ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-TS -T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ¨ Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                 Accelerated filer  ¨                 Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

  

International Financial Reporting Standards as issued

by the International Accounting Standards Boardx

  Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17¨ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  x No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  ¨ Yes  ¨ No

 

*Not for trading, but only in connection with the listing on the New York Stock Exchange of the American Depositary Shares

 

 

 


CHUNGHWA TELECOM CO., LTD.

FORM 20-F ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 20132015

Table of Contents

 

     Page 

SUPPLEMENTAL INFORMATION

   1  

FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT MAY NOT BE REALIZED

   1  

PART I

   2  

ITEM 1.

 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   2  

ITEM 2.

 OFFER STATISTICS AND EXPECTED TIMETABLE   2  

ITEM 3.

 KEY INFORMATION   2  

ITEM 4.

 INFORMATION ON THE COMPANY   18  

ITEM 4A.

 UNRESOLVED STAFF COMMENTS   7066  

ITEM 5.

 OPERATING AND FINANCIAL REVIEW AND PROSPECTS   7066  

ITEM 6.

 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   92  

ITEM 7.

 MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS   102101  

ITEM 8.

 FINANCIAL INFORMATION   103102  

ITEM 9.

 THE OFFER AND LISTING   104103  

ITEM 10.

 ADDITIONAL INFORMATION   107105  

ITEM 11.

 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   122120  

ITEM 12.

 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   124122  

PART II

   126124  

ITEM 13.

 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   126124  

ITEM 14.

 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   126124  

ITEM 15.

 CONTROLS AND PROCEDURES   126124  

ITEM 16A.

 AUDIT COMMITTEE FINANCIAL EXPERT   129126  

ITEM 16B.

 CODE OF ETHICS   129126  

ITEM 16C.

 PRINCIPAL ACCOUNTANT FEES AND SERVICES   129126  

ITEM 16D.

 EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   130127  

ITEM 16E.

 PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   130127  

ITEM 16F.

 CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   130127  

ITEM 16G.

 CORPORATE GOVERNANCE   130127  

ITEM 16H.

 MINE SAFETY DISCLOSURE   132130  

PART III

   132130  

ITEM 17.

 FINANCIAL STATEMENTS   132130  

ITEM 18.

 FINANCIAL STATEMENTS   132130  

ITEM 19.

 EXHIBITS   133131  

 

i


SUPPLEMENTAL INFORMATION

All references to “we,” “us,” “our” and “our company” in this annual report are to Chunghwa Telecom Co., Ltd. and our consolidated subsidiaries, unless the context otherwise requires. All references to “shares” and “common shares” are to our common shares, par value NT$10 per share, and to “ADSs” are to our American depositary shares, each of which represents ten of our common shares. The ADSs are issued under the deposit agreement, as amended, supplemented or modified from time to time, originally dated as of July 17, 2003, among Chunghwa Telecom Co., Ltd. and the Bank of New York, and amended and restated on November 14, 2007, among Chunghwa Telecom Co., Ltd. and JP Morgan Chase Bank, as depository, and the holders and beneficial owners of American Depositary Receipts issued thereunder. All references to “Taiwan” are to the island of Taiwan and other areas under the effective control of the Republic of China. All references to “the government” or “the ROC government” are to the government of the Republic of China. All references to “the Ministry of Transportation and Communications” or “the MOTC” are to the Ministry of Transportation and Communications of the Republic of China. All references to “the National Communications Commission” or “the NCC” are to the National Communications Commission of the Republic of China. All references to the “Securities and Futures Bureau” are to the Securities and Futures Bureau of the Republic of China or its predecessors, as applicable. “ROC GAAP” means the generally accepted accounting principles of the Republic of China, “U.S. GAAP” means the generally accepted accounting principles of the United States, “IFRSs” means International Financial Reporting Standards as issued by the International Accounting Standards Board, and “Taiwan IFRSs” means the International Financial Reporting Standards as issued by the International Accounting Standards Board and endorsed by the Financial Supervisory Commission, or the FSC, which are required to be adopted by applicable companies in the ROC pursuant to the “Framework for Adoption of International Financial Reporting Standards by Companies in the ROC” promulgated by the FSC on May 14, 2009. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding. Unless otherwise indicated, or the context otherwise requires, references in this annual report to financial and operational data for a particular year refer to the fiscal year of our company ending December 31 of that year.

When we refer to our “privatization” or our being “privatized” in this annual report, we mean our status as a non-state-owned entity after the government reduced its ownership of our outstanding common shares, including our common shares owned by entities majority-owned by the government, to less than 50%. We were privatized in August 2005.

We publish our consolidated financial statements in New Taiwan dollars, the lawful currency of the Republic of China. In this annual report, “NT$” and “NT dollars” mean New Taiwan dollars, “$”, “US$” and “U.S. dollars” mean United States dollars.

FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT MAY NOT BE REALIZED

This annual report contains forward-looking statements, including statements regarding:

 

our business and operating strategies;

 

our network expansion plans;

 

our business, operations and prospects;

 

our financial condition and results of operations;

 

our dividend policy;

 

the telecommunications industry regulatory environment in Taiwan; and

 

future developments in the telecommunications industry in Taiwan.

These forward-looking statements are generally indicated by the use of forward-looking terminology such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “aim,” “seek,” “project,” “may,” “will” or other similar words that express an indication of actions or results of actions that may or are expected to occur in the future. These statements reflect our current views with respect to future events and are subject to risks, uncertainties and assumptions, many of which are beyond our control. The forward looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. You should not place undue reliance on these statements, which apply only as of the date of this annual report. These forward-looking statements are based on our own information and on information from other sources we believe to be reliable. Actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause differences include, but are not limited to, those discussed under “Item 3. Key Information—D. Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur and our actual results could differ materially from those anticipated in these forward-looking statements. The forward looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report completely and with the understanding that our actual future results may be materially different from what we expect.

PART I

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.KEY INFORMATION

We were privatized as a result of a secondary ADS offering and concurrent domestic auction of our common shares on August 12, 2005. The privatization has enabled us to develop our business and respond to changing market conditions more rapidly and efficiently.

A. Selected Financial Data

The Financial Supervisory Commission, or the FSC in the Republic of China, or ROC, supervises the financial and business matters of publicly-held companies, and we are required to comply with relevant regulations promulgated by the FSC. We have historically presentedPrior to January 1, 2013, we prepared our consolidated financial statements, including our consolidated financial statements for the year ended December 31, 2012, in accordance with ROC GAAP for purposes of our filings with the Taiwan Stock Exchange, or TWSE, with reconciliation of net income and balance sheet differences of our consolidated financial statements to U.S. GAAP for certain filings with the U.S. Securities and Exchange Commission, or the SEC. EffectiveStarting from January 1, 2013, companies listed on the TWSE, including us, must report theirwe have prepared our financial statements under Taiwan IFRSs pursuant to the requirements of the “Framework for Adoption of International Financial Reporting Standards by Companies in the ROC” promulgated by the FSC on May 14, 2009. Accordingly,While we have adopted Taiwan IFRSs for reporting in the

ROC our annual consolidated financial statements beginning in 2013 and our interim quarterly unaudited consolidated financial statements beginning in the first quarter of 2013. Whilesince January 1, 2013, we have adopted Taiwan IFRSs for ROC reporting purposes, we adopt International

Financial Reporting Standards as issued by the International Accounting Standards Board, or IFRSs, which differs in certain material respects from Taiwan IFRSs, for certain filings with the SEC, including our annual reports on Form 20-F for the year ended December 31, 2013 and thereafter and our interim quarterly unaudited consolidated financial statements provided on Form 6-K beginning with the three months ended March 31, 2013. Following our adoption of IFRSs for the SEC filing purposes,Therefore, we are no longer required to provideprepare any reconciliation of our consolidated financial statements with U.S. GAAP.

The selected consolidated statements of comprehensive income statement data and consolidated cash flowflows data for the years ended December 31, 20122013, 2014 and 2013,2015, and the selected consolidated balance sheetsheets data as of December 31, 20122014 and 20132015 set forth below are derived from our audited consolidated financial statements included elsewhere in this annual report and should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and the related notes. The selected consolidated statements of comprehensive income data and consolidated cash flows data for the year ended December 31, 2012, and the selected consolidated balance sheet data as of December 31, 2012 and 2013 set forth below are derived from our audited consolidated financial statements, which are not included this annual report. The consolidated financial statements have been prepared and presented in accordance with IFRSs. Pursuant to the transitional relief granted by the SEC in respectIn addition, financial data as of the first-time application of IFRSs, no audited financial statements and financial information prepared under IFRSs for the year ended December 31, 2011 have been includedderived from our consolidated financial statements prepared in this annual report.accordance with ROC GAAP are not set forth below.

 

  Year Ended December 31   Year Ended December 31 
  2012 2013   2012   2013   2014   2015 
  NT$ NT$ US$     NT$       NT$       NT$       NT$       US$   
  (in billions, except for percentages and
per share and per ADS data)
   (in billions, except for percentages and
per share and per ADS data)
 

Statement of Comprehensive Income Data:

    

Consolidated Statements of Comprehensive Income Data:

          

Revenues

   221.4   228.0   7.6     221.4     228.0     226.6     231.8     7.1  

Operating costs

   (141.5 (147.3 (4.9   (141.5   (147.3   (148.4   (148.1   (4.5
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Gross profit

   79.9    80.7    2.7     79.9     80.7     78.2     83.7     2.6  

Operating expenses

   (29.9  (33.1  (1.1   (29.9   (33.1   (34.0   (33.2   (1.0

Other income and expenses

   (1.6  0.1    —       (1.6   0.1     0.6     (0.1   —    
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Income from operations

   48.4    47.7    1.6     48.4     47.7     44.8     50.4     1.6  

Non-operating income and expenses(1)

   1.6    1.4    —       1.6     1.4     1.8     1.6     —    
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Income before income tax

   50.0    49.1    1.6     50.0     49.1     46.6     52.0     1.6  

Income tax expense

   (7.4  (6.5  (0.2   (7.4   (6.5   (9.0   (9.1   (0.3
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Consolidated net income

   42.6    42.6    1.4     42.6     42.6     37.6     42.9     1.3  
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Attributable to:

              

Stockholders of the parent

   41.5    41.5    1.4     41.5     41.5     37.0     42.1     1.3  

Non-controlling interests

   1.1    1.1    —    

Noncontrolling interests

   1.1     1.1     0.6     0.8     —    
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 
   42.6    42.6    1.4     42.6     42.6     37.6     42.9     1.3  
  

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Earnings per share:

              

Basic

   5.35    5.35    0.18     5.35     5.35     4.77     5.42     0.17  

Diluted

   5.33    5.34    0.18     5.33     5.34     4.76     5.41     0.17  

Earnings per ADS equivalent:

              

Basic

   53.49    53.49    1.79     53.49     53.49     47.66     54.19     1.65  

Diluted

   53.34    53.40    1.79     53.34     53.40     47.58     54.06     1.65  

  As of December 31   As of December 31 
  2012   2013   2012   2013   2014   2015 
  NT$   NT$ US$   NT$   NT$   NT$   NT$   US$ 
  

(in billions, except for percentages and per share

and per pro forma ADS data)

   (in billions, except for percentages and
per share and per ADS data)
 

Balance Sheet Data:

     

Consolidated Balance Sheets Data:

      

Working capital

   40.2     (0.3  —       40.2     (0.3   6.9     13.3     0.4  

Long-term investments

   19.7     15.3   0.5     19.7     15.3     13.1     10.5     0.3  

Properties, plant and equipment

   297.3     302.7   10.1  

Property, plant and equipment

   297.3     302.7     302.7     296.4     9.0  

Investment properties

   7.8     8.0   0.3     7.8     8.0     7.6     7.9     0.2  

Intangible assets

   5.8     44.4   1.5     5.8     44.4     42.8     50.4     1.5  

Total assets

   440.0     441.0   14.8     440.0     441.0     446.5     452.8     13.8  

Short-term loans

   0.1     0.3    —       0.1     0.3     0.6     0.1     —    

Current portion of long-term loans

   —       0.3    —       —       0.3     —       —       —    

Long-term loans(2)

   2.1     1.4    —       2.1     1.4     1.9     1.7     0.1  

Customers’ deposits

   4.9     4.8   0.2     4.9     4.8     4.8     4.7     0.1  

Accrued pension liabilities

   4.6     5.5   0.2  

Net defined benefit liabilities

   4.6     5.5     6.5     7.1     0.2  

Deferred revenue

   3.8     3.7   0.1     3.8     3.7     3.4     3.6     0.1  

Total liabilities

   76.6     77.8   2.6     76.6     77.8     80.8     83.4     2.5  

Capital stock

   77.6     77.6   2.6     77.6     77.6     77.6     77.6     2.4  

Equity attributable to stockholders of the parent

   359.1     358.3   12.0     359.1     358.3     360.8     364.3     11.1  

Non-controlling interests

   4.3     4.9   0.2  

Noncontrolling interests

   4.3     4.9     4.9     5.1     0.2  

 

  Year Ended December 31   Year Ended December 31 
  2012 2013   2012 2013 2014 2015 
  NT$ NT$ US$   NT$ NT$ NT$ NT$ US$ 
  

(in billions, except for percentages and per share

and per pro forma ADS data)

   

(in billions, except for percentages

and per share)

 

Cash Flow Data:

    

Consolidated Cash Flows Data:

      

Net cash provided by operating activities

   65.6   75.3   2.5     65.6   75.3   71.4   76.3   2.3  

Net cash used in investing activities

   (18.6 (49.1 (1.6   (18.6 (49.1 (27.3 (30.4 (0.9

Net cash used in financing activities

   (42.5 (42.5 (1.4   (42.5 (42.5 (35.1 (39.2 (1.2

Net increase (decrease) in cash and cash equivalents

   4.5   (16.3 (0.5   4.5   (16.3 9.0   6.7   0.2  

Other Financial Data:

          

Gross margin(3)

   36 35 35   36 35 35 36 36

Operating margin(4)

   22 21 21   22 21 20 22 22

Net margin(5)

   19 18 18   19 18 16 18 18

Capital expenditures

   33.3   36.4   1.2     33.3   36.4   32.6   25.1   0.8  

Depreciation and amortization

   32.2   32.2   1.1     32.2   32.2   34.1   33.4   1.0  

Cash dividends declared per share

   4.63(6)   2.39(7)   0.08(7)    4.63(6)   2.39(7)  4.86    5.49(8)   0.17(8) 

Stock dividends declared per share

   —      —      —       —      —      —      —      —    

 

(1)Includes interest income of NT$742 million, and NT$563 million, NT$288 million and NT$306 million (US$18.99.3 million) for the years ended December 31, 2012, 2013, 2014 and 2013,2015, respectively, and interest expense of NT$22 million, and NT$36 million, NT$46 million and NT$33 million (US$1.21.0 million) for the years ended December 31, 2012, 2013, 2014 and 20132015, respectively.
(2)Excludes current portion of long-term loans.
(3)Represents gross profitsprofit divided by revenues.
(4)Represents income from operations divided by revenues.
(5)Represents net income attributed to stockholders of the parent divided by revenues.

(6)In addition to the cash dividenddividends from retainedunappropriated earnings disclosed in table above, we also made cash distributions of NT$0.72 per share, which amounted to an aggregate of NT$5.6 billion, from additional paid-in capital.
(7)Dividends for 2013 have been approved for distribution by the board of directors and are expected to be approved at our annual general stockholders’ meeting scheduled to be held on June 24, 2014. In addition to the cash dividends from retainedunappropriated earnings disclosed in the table above, the board of directorswe also approvedmade cash distributions of NT$2.14 per share, which amounted to an aggregate of NT$16.6 billion, from additional paid-in capital. See “Item 5. Operating and Financial Review and Prospects—Overview—Effect of adopting Taiwan-IFRSsTaiwan IFRSs on our dividends and employee bonuses.”
(8)Dividends for 2015, which are calculated based on Taiwan IFRSs, were approved by the board of directors in March 2016 and are expected to be declared at our annual general stockholders’ meeting scheduled on June 24, 2016.

Currency Translations and Exchange Rates

For the convenience of readers, NT dollar amounts used in this annual report for, and as of, the year ended December 31, 20132015 have been translated into U.S. dollar amounts using US$1.00=NT$29.83,32.79, set forth in the statistical release of the Federal Reserve Board on December 31, 2013.2015. The U.S. dollar translation appears in parentheses next to the relevant NT dollar amount. We make no representation that any New Taiwan dollar amounts or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or NT dollars, as the case may be, at any particular rate or at all. On April 11, 2014,15, 2016, the exchange rate was NT$30.0832.32 to US$1.00.

The following table sets forth, for each of the periods indicated, the low, average, high and period-end exchange rates of the NT dollar, expressed in NT dollar per U.S. dollar. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.

 

Year Ended December 31

  Average(1)   High   Low   At Period
End
   Average(1)   High   Low   At Period
End
 

2009

   33.02     35.21     31.95     31.95  

2010

   31.50     32.43     29.14     29.14  

2011

   29.42     30.67     28.50     30.27     29.42     30.67     28.50     30.27  

2012

   29.56     30.27     28.96     29.05     29.56     30.27     28.96     29.05  

2013

   29.73     30.20     29.93     29.83     29.73     30.20     29.93     29.83  

2014

   30.38     31.80     29.85     31.60  

2015

   31.80     33.17     30.37     32.79  

October

   29.38     29.49     29.32     29.42     32.44     32.81     31.92     32.46  

November

   29.52     29.65     29.37     29.59     32.61     32.87     32.43     32.53  

December

   29.72     30.03     29.53     29.83     32.79     33.01     32.53     32.79  

2014 (through April 11)

   30.26     30.57     29.90     30.08  

2016 (through April 15)

   32.79     33.74     32.16     32.32  

January

   30.14     30.31     29.90     30.31     33.43     33.74     33.14     33.43  

February

   30.31     30.37     30.25     30.29     33.24     33.51     32.95     33.22  

March

   30.40     30.57     30.24     30.46     32.59     33.09     32.16     32.18  

April (through April 11)

   30.17     30.29     29.99     30.08  

April (through April 15)

   32.36     32.44     32.26     32.32  

 

Source: Federal Reserve Statistical Release, Board of Governors of the Federal Reserve System.

 

(1)Annual averages are calculated using the average of exchange rates on the last day of each month during the period. Monthly averages are calculated using the average of the daily rates during the relevant period.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Our business and operations are subject to various risks, many of which are beyond our control. If any of the risks described below actually occurs, our business, financial condition or results of operations could be seriously harmed.

Risks Relating to Our Company and the Taiwan Telecommunications Industry

Extensive regulation of our industry may limit our flexibility to respond to market conditions and competition, and our business may suffer.

As a telecommunications service provider in Taiwan, we are subject to extensive regulation. See “Item 4. Information on the Company—B. Business Overview—Regulation” for a discussion of the regulatory environment applicable to us. Any changes in the regulatory environment applicable to us may adversely affect our business, financial condition and results of operations.

For example, the National Communications Commission, orNCC has been focused on promulgating rules related to digital convergence. Since December 2013, the NCC submittedcontinued to solicit comments from the public on eleven topics relating to the local loop, the prevention of monopolization of broadcasting media, the regulations governing political party, government and army’s investments in broadcasting industry, the identification of dominant operators and asymmetric regulation for dominant operators, the principle of content management, the principle of hierarchical regulation, the infrastructure of telecommunications network, the structure of amendment to regulations governing digital convergence, and spectrum auction and management. On October 14, 2015, the NCC passed a “comprehensive draft legislative framework on converging digital telecommunication transmissions” proposing five pieces of legislation – the Telecommunication Business Act, Regulations Governing the Service of Cable Multi-Channel Platform, the Radio and Television Enterprises and Channel Enterprises Administration Act, Regulations Governing Telecommunication Infrastructures and Resources, and the Electronic Telecommunication Act – to constitute a legal framework for converging digital telecommunication transmissions. Such proposal was submitted to the Executive Yuan on July 30, 2012 for an amendment toDecember 31, 2015, and the Telecommunications Act. This proposed amendment includes several provisions made againstproposal is still being circulated among various ministries and reviewed by the operation of dominant telecommunication service providers, suchExecutive Yuan as the mandatory segregation of financial data, price control, separation between the underlying network infrastructure and services provision of the last-mile technologydate of this annual report. The proposed legislation focuses on introducing the concept of layered regulation, lowering barriers to entering the market, removing unnecessary restrictions and the requirement foron imposing special obligations on dominant providers to release local loops and provide relevant sharing services. These requirements would allow all telecommunications service providers to have access to our last-mile network infrastructure.operators. The Executive Yuan and the NCC are still discussing and reviewing the above amendments to the Telecommunications Act and new regulations suchmay impose more stringent measures on us as the Digital Convergence Regulation still in draft form, that may have a material adverse effect on dominant operatorsoperator and benefit our competitors.

On the other hand, the Legislative Yuan is reviewing the proposed amendmentscompetitors and potential entrants to the three applicable regulations governing broadcasting industries for relaxing the current restrictions regarding investments in the broadcasting industries by the government and political parties. Pursuant to these amendments, the government may indirectly hold shares in broadcasting companies, provided that the government’s shareholding is no more than 10% and the government does not control such companies. As the Ministry of Transportation and Communications, or MOTC, holds more than 30% of our shares and retains control over our board, such amendments will not release the current restrictions on us with respect to engaging in the broadcasting business. However, these amendments may benefit our competitors,market, which could have a material adverse effect on our business prospects and our results of operations.

Proposed amendments to the Radio and Television Act, the Cable Radio and Television Act and the Satellite Broadcasting Act were passed by the Legislative Yuan on December 18, 2015 and were declared effective by the President on January 6, 2016. As these amendments focus primarily on lessening restrictions on cable broadcasting companies’ business operating location and accelerating digital construction in the cable broadcasting industry, we believe that our broadband internet and MOD businesses may be faced with more vigorous competition in the future. As the newly amended Radio and Television Act (a) prohibits system operators from forcing content providers to offer differential treatment to other platforms in an inappropriate way, and (b) provides a legal basis for licensed shopping channels to be listed on the MOD platform, the amendment is helpful for our MOD to obtain more comprehensive program content. Since lawmakers have not yet removed restrictions on governmental and political parties’ investments in the broadcasting industries, our MOD business remains subject to such restrictions.

We have been designated by the government as a dominant provider of fixed communications and 2G and 3G mobile services within the meaning of applicable telecommunications regulations, and as a result, we are subject to special additional requirements imposed by the NCC. For example, the regulation governing the setting and changing of tariffs allows non-dominant telecommunications service providers greater freedom to set

and change tariffs within the range set by the government. If we are unable to respond effectively to tariff changes by our competitors, then our competitiveness, market position and profitability will be materially and adversely affected.

According to the Regulations for Administration on Fixed Network Telecommunications Business, the Regulations for Administration of Mobile Communications Business, the Wireless Regulations andfor Administration of the Third Generation Mobile Telecommunications ServicesCommunications Business, and the Regulations for Administration of Mobile Broadband Business, we are required to submit a report to the NCC within 20 days after our shareholders approve the reduction of our capital, entering into, modification or termination of any contracts regarding leasing of all business, outsourcing of operations or joint operations, the transfer of the whole or substantial part of our business or assets; and taking over of the whole of the business or assets of any other company which would have significant impact on our operations. On May 8, 2013, the NCC promulgated the Regulations for Administration of Mobile Broadband Businesses, which also imposes a similar reporting obligation. Any such regulationregulations may adversely affect our business, financial condition and results of operations.

The regulatory framework within which we operate may limit our flexibility to respond to market conditions, competition or changes in our cost structure. In particular, future decreases in tariff rates could immediately and substantially decrease our revenues. In particular, as a Type I service provider under the Republic of China Telecommunications Act, or Telecommunications Act, we are constrained in our ability to raise prices. For example, the NCC adopted the first three-year tariff reduction plan from April 2007 to March 2010 and a second three-year tariff reduction plan from April 2010 to March 2013, resulting in a number of price reductions in the tariff structures relating to our domestic fixed communications and mobile communications services. On February 7, 2013, the NCC announced a new plan for tariff reductions in wholesale tariffs for IP peering and domestic leased line services, and in monthly fees for fixed-line broadband access services (excluding fiber-to-the-home, or FTTH, and fiber-to-the-building, or FTTB) over a period of four years starting on April 1, 2013. While mobile tariffs were not regulated in the most recent tariff reduction plan, the revised Administrative Rules forRegulations Governing Network Interconnection among Telecommunications Enterprises mandated decreases in the mobile interconnection fees over a period of four years starting on January 5, 2013. See “Item 5. Operating and Financial Review and Prospects—Overview—Tariff adjustments”. We cannot assure you that we will not be required to further reduce our tariffs again in the future. Any mandatory tariff reductions could have a material adverse effect on our revenues.

If we fail to comply with the regulations of the ROC Fair Trade Act, we may be investigated and fined.

As a provider of telecommunication products and services, our business operations are subject to the regulations of the ROC Fair Trade Act, or the FTA, which is administered and enforced by the ROC Fair Trade Commission, or the FTC. The FTA requires, among other things, that the marketing and promotional materials of a business to be true and not misleading. The FTA also prohibits a business from participating or engaging in a cartel or other anti-competitive conduct. The FTC has the authority under the FTA to investigate and, where appropriate, impose fines and penalties on a business that violates any regulations promulgated by the FTA. The consequences of any such violations could have a material adverse effect on our business and results of operations. See “Item 4. Information on the Company—B. Business Overview—Regulation” for a discussion of the FTA applicable to us. In March 2015, the FTC found us liable for providing false and misleading data in advertisement comparing our services against our competitors on our 100 million bits per second, or Mbps, fiber broadband plus TV programs service in the PingTung area. The FTC consequently ordered us to pay a fine of NT$0.8 million, which we paid in March 2015. We have been investigated and penalized by the FTC in the past and may continue to be investigated or penalized by the FTC in the future if we fail to comply with the relevant regulations. As the FTA provides the FTC broad discretion to interpret anti-competition actions and enforce the relevant clauses under the FTA, we are unable to predict whether the FTC would initiate investigation on any of our daily business activities or find us liable for violating the FTA in the future. The investigations of and penalties imposed by the FTC could interrupt our provision of products or services and have a negative impact on our reputation, business operations and results of operations.

If we are unable to obtain and maintain the licenses to operate our business, our business prospects and future results of operations would be adversely affected.

We operate our businesses with approvals and licenses granted by the government. If these approvals or licenses are revoked or suspended or are not renewed, or if we are unable to obtain any additional licenses that we may need to operate or expand our business in the manner we desire, then our financial condition and results of operations, as well as our prospects, will suffer. For example, there are currently three mobile network operators that offer 2Gour 3G mobile services in Taiwan. The licenses granted bylicense is valid until December 31, 2018. On April 30, 2014, we obtained the ROC government authorities for operating 2G mobile services on the 900MHz and 1800MHz spectrum can be extended to June 2017 based on the operator’s request for extension, according to the Executive Yuan’s announcement on November 22, 2010. On November 29, 2011, we filed a request with the NCC to extend our 2G license to June 2017, which was approved by the NCC on November 14, 2012. The NCC released the detailed regulation for mobile broadband business licenses and spectrum bidding for 4G mobile services in May 2013. The spectrum was releasedlicense adhering to the principle of technological neutrality. Mobileneutrality for our 4G mobile broadband services, can be offered by heterogeneous networks, or HetNet, including the new 4G network and the existing 2G network under this technology-neutral spectrum. The bidding process for the spectrum to operate 4G mobile services started on September 3, 2013 and completed on October 30, 2013. There are six winners of the bidding, including Taiwan Mobile Co., Ltd., FarEasTone

Telecommunications Co., Ltd., Asia Pacific Telecom Co. Ltd., Taiwan Star Cellular Corporation, Ambit Microsystems Corporation and us. The 4G licensewhich is valid until the end of year 2030. Furthermore, according toOn March 23, 2016, we obtained the press release announced bymobile broadband services license for 2500MHz and 2600MHz frequency bands, which is valid until the NCC on March 31, 2014, the ROC government plans to release the 2600MHz spectrum band for 4G mobile services through a bidding process. We plan to participate in the bidding process to acquire the spectrum band in order to remain competitive.end of 2033. If we are unable to successfully acquire and maintain the rights to use the licenses or frequency spectrumspectrums that we need for our future business operations, our business prospects and future results of operations may be materially and adversely affected, and as a result may lead to a material impact on our business revenues.affected.

Increasing market competition may adversely affect our growth and profitability by causing us to lose customers, charge lower tariffs or spend more on marketing.

Mobile service providersAs of the date of this annual report, there are five mobile network operators in Taiwan haveproviding 4G mobile broadband services. Each mobile network operator, including us, has been offering 3G mobile services for several years. Smart phones with mobile data packages have become popular in recent years. To attract more mobile data users, the major three mobile operators, including us, have adopted comparable promotion packagesaggressive promotional programs to attract and maintain customers. Apart fromconsumers, such as unlimited data plans, when many mobile network operators around the 3G services, we also aim to begin providing 4G services in July 2014. There are a total of six players in Taiwan that are nominated to provide 4G services, which may increase the level of competition in the 4G services market compared to the 3G services market.world have eliminated unlimited data plans. We cannot assure you that we will be able to raise our revenues from 4G mobile broadband services in light of the intensifiedintense market competition, will not affectwhich could have a material adverse effect on our growthbusiness prospects and profitability.our future results of operations.

We also face increasedincreasing fixed broadband competition from cable operators. Cable operators have been usinglow-priced internet access packages to attract new customers in specific areas and buildings in Taiwan. They have also been upgrading their networks to DOCSIS 3.0 in order to provide higher speed internet access. DOCSIS refers to Data Over Cable Service Interface Specification, which is an international telecommunications standard that permits the addition of high-speed data transfer to an existing cable TV system. The government has mandated the 100% digitization of cable television networks by December 31, 2016, which would increase the availability of high-speed internet services from cable operators. In addition, as the mobile data access speeds have increased with newer technologies, such as 4G LTE, some customers have replaced fixed broadband services with high speed mobile broadband services. To counter these developments, we keepare migrating more of our ADSL customers to FTTx services and to provideoffering even higher speed fiber to the home, or FTTH access. The government has mandated the digitization of cable television networks by 2014. In addition,Furthermore, the NCC relaxed the zoning restrictions on service areas for cable operators on July 27, 2012, while cable operators remain subject to the restriction that the market share of any single cable operator cannot exceed 33%. This change will allow cable operators to provide digital cable services throughout Taiwan, including high definition cable TV with more channels as well as high speed cable modem services. As of now, it is still uncertain whether we will be deemed a cable operator and subject to the 33% market share restriction. As a result, we could face increased competition for our broadband access services and multimedia on demand, or MOD IPTV services. If we are unable to compete successfully with the cable operators for broadband access services and MOD businesses, our results of operations could be impacted.

In addition, our over the top, or OTT, business may not able to compete with video streaming providers such as Netflix, Inc., which invests extensively in contents and productions of original films and TV series. Our OTT customers might be attracted by its massive and exclusive titles, and our OTT business growth might slow down and be limited.

Many of our competitors are in alliances with leading international telecommunications service providers and have access to financial and other resources or technologies that may not be available to us. Moreover, if the government continues to liberalize the telecommunications market, such as through the issuance of new licenses or establishment of additional networks, our market position and competitiveness could be materially and adversely affected. We cannot guarantee that our measures to address competition will be effective, and therefore our business, financial condition and results of operations may be adversely affected by our competition.competitors.

Increasing competition may also cause the rate

Rates of our customer growth to reverse orhave declined in our fixed broadband and mobile businesses and may decline further, which may bring about further decreases in tariff rates and necessitate increases in our selling and promotional expenses. Any of these developments could adversely affect our business, financial condition and results of operations.

Our ability to deliver services may be disrupted due to a systems failure, shutdown in our networks, earthquakes or other natural disasters.

Taiwan is susceptible to earthquakes and typhoons. However, we do not carry insurance to cover damage caused by earthquakes, typhoons or other natural disasters or any resulting business interruption. Our services are

currently carried through our fixed and mobile communications networks, as well as through our transmission networks consisting of optical fiber cable, microwave, submarine cable and satellite transmission links, which could be vulnerable to damage or interruptions in operations due to natural disasters. For example, in 2013,2015, we recorded losses on property, plant and equipment arising from natural disasters such as earthquakes and typhoons werein the amount of approximately NT$5.312.3 million (US$0.20.4 million) as recorded in other income and expenses.. The occurrence of natural disasters could impact our ability to deliver services and have a negative effect on our results of operations. Furthermore, we might also be liable for losses claimed from our customers that were incurred from our failure to deliver our services. These potential liabilities could also have a material adverse effect on our results of operations.

We are subject to litigation or other legal proceedings that could expose us to substantial liabilities.

We are from time to time involved in various litigation, arbitration or administrative proceedings in the ordinary course of our business. Any such claims, whether with or without merit, asserted or threatened, could be time-consuming and expensive to defend and could divert our management’s attention and resources. See “Item 4. Information on the Company—B. Business Overview—Legal Proceedings”.

We cannot predict the outcome of these proceedings, and we cannot assure you that if a judgment is rendered against us in any or all of these proceedings, our financial condition and results of operations would not be materially and adversely affected.

We depend on select personnel and could be affected by the loss of their services.

We depend on the continued service of our executive officers and skilled technical and other personnel. Our business could suffer if we lose the services of any of these personnel and cannot adequately replace them. In particular, we are not insured against the loss of any of our personnel. We may not be able to retain our present personnel or attract additional qualified personnel as and when needed. Moreover, we may be required to increase substantially the number of these employees in connection with any expansion, and there is intense competition for experienced personnel in the Taiwan telecommunications industry. The major three mobile networktelecom operators in Taiwan, including us, are expanding their retail storesthe information and communication technology, or ICT, business and may increase the number of their employees as part of this expansion. In addition to telecom operators, some computer design companies and manufacturers, such as ASUSTek Computer Inc. and Quanta Computer Incorporated, are also expanding their business into this area and have been recruiting information technology related employees as well. We cannot assure you that we will be able to successfully attract and retain new employees for the expansion of our retail stores.information technology related employees. In addition, we may need to increase employee compensation levels in order to attract and retain personnel. We cannot assure you that the loss of the services of any of these personnel would not disrupt our business and operations and materially and adversely affect the quality of our services and harm our reputation.

We may not realize the benefits we expect from our investments, and this may materially and adversely affect our business, financial condition, results of operations and prospects.

We have made significant capital investments in our network infrastructure and information technology systems to provide the services we offer. In 2013,2015, we made capital expenditures in our domestic fixed

communications of NT$20.410.2 billion (US$682.6310.9 million), our mobile communications business of NT$9.28.6 billion (US$309.9262.2 million), our internet business of NT$4.64.8 billion (US$154.9146.2 million), our international fixed communications business of NT$1.61.0 billion (US$52.329.5 million) and our other businesses of NT$0.60.5 billion (US$19.916.1 million), respectively. In order to continue to develop our business and offer new and more sophisticated services, we intend to continue to invest in these areas as well as new technologies. The launch of new and commercially viable products and services is important to the success of our business. We expect to continue making substantial capital expenditures to further develop our range of services and products.

Commercial acceptance by consumers of the new and more sophisticated services we offer may not occur at the rate or level expected, and we may not be able to successfully adapt these services to effectively and economically meet our customers’ demand, thus impairing the expected return from our investments.

We cannot assure you that services enabled by the new technologies we are implementing, such as HeterogeneousInternet of Things, or Marco/Micro/Pico/Femto/BBU+RRH mobileIoT, software-defined network, or SDN, LTE Wi-Fi aggregation, or LWA, license assisted access, or LAA, voice over LTE, or VoLTE, and Wi-Fi Calling technology, will be accepted by the public to the

extent required to generate an acceptable rate of return. In addition, we could face the risk of unforeseen complications in the deployment of these new services and technologies, and we cannot assure you that we will not exceed our estimate of the necessary capital expenditure to offer such services. New services and technologies may not be developed and/or deployed according to expected schedules or may not achieve commercial acceptance or be cost effective.

The failure of any of our services to achieve commercial acceptance could result in additional capital expenditures or a reduction in profitability to the extent that we are required under applicable accounting standards to recognize a charge for impairment of assets. Any such charge could materially and adversely affect our financial condition and results of operations.

We recognized impairment losses for investment properties, equipment and intangible assets in the past. In 2012,2015, we concluded that the recoverable amount representing the fair value less costs to sell some land and buildings was higher than the carrying amount. Therefore, we recognized a reversal of impairment loss of NT$0.1 billion (US$4.3 million) and the amount was recognized only to the extent of impairment losses that had been recognized in prior years. In 2015, we also determined that parts of our investment propertiestelecommunication equipment were impaired and recognized an impairment loss of NT$1,261 million. In 2013, based on the evaluation of fair value, some impaired investment properties were recoverable, and we reversed the impairment losses of NT$246 million0.1 billion (US$8.24.2 million). In 2013, we also recognized impairment losses of NT$254 million (US$8.5 million) and NT$18 million (US$0.6 million) for telecommunication and miscellaneous equipment and intangible assets, respectively.

We cannot assure you that we will be able to continue to maintain control of and consolidate the results of operations of our minority-owned subsidiary. For example, we consolidate the results of operations of our subsidiary, Senao International Co., Ltd., or Senao, because we have secured four out of seven seats on the board of directors of Senao through the support of large beneficial shareholders of Senao. Please refer to noteNote 3 and noteNote 15 of our consolidated financial statements included elsewhere in this annual report for details of the relationship between Senao and its parent companies.company. We cannot assure you that we will be able to continue maintaining control over the board of directors of Senao. If we lose control of our minority-owned subsidiary, we will no longer be able to consolidate the results of operations of such subsidiary, which could adversely affect our consolidated results of operations and ability to meet the operating results guidance that we have projected.

We may also from time to time make equity investments in companies, but we cannot assure you of their profitability. We cannot assure you that losses related to our equity investments will not have a material adverse effect on our financial condition or results of operations. In 2013,2015, we evaluated and concluded that certain investments were impaired, and as a result we recognized an impairment loss of NT$66107.2 million (US$2.23.3 million) for available-for-sale financial assets and NT$8.2 million (US$0.3 million) for investment in associates accounted for using the equity method due to the decline in fair value owing to adverse changes in industry conditions and operating performance that were below expectations. We may be required to record additional impairment charges in future periods, which may have a material adverse effect on our financial condition and future results of operations.

Changes in technology may render our current technologies obsolete or require us to obtain licenses for introducing new services or make substantial capital investments, financing for which may not be available to us on favorable commercial terms or at all.

The Taiwan telecommunications industry has been characterized by rapid increases in the diversity and sophistication of the technologies and services offered. As a result, we expect that we will need to constantly upgrade our telecommunications technologies and services in order to respond to competitive industry conditions and customer requirements. Developments of new technologies have rendered some less advanced technologies unpopular or obsolete. If we fail to develop, or obtain timely access to, new technologies and equipment, or if we fail to obtain the necessary licenses to provide services using these new technologies, we may lose our customers and market share and become less profitable.

In addition, the cost of implementing new technologies, upgrading our networks or expanding capacity could be significant. In particular, we have made and will continue to make substantial capital expenditures in the near future in order to effectively respond to technological changes, such as the continued expansion of our fiber optic networks and High Speed Packet Access, or HSPA, and HSPA+, and Dual carrier HSPA+ mobile network. Furthermore, the spectrum to operate 4G mobile services was awarded on October 30, 2013. Therefore, we will devote additional capital expenditure to build our 4G mobile services network based on Long Term Evolution, or

LTE, technology. In addition, tobroadband networks. To meet the increasingly robust high-bandwidth requirements of digital convergence services, we willcontinue to expand construction of fiber optic networks, including passive optical networks, or PONs, and optical distribution networks, or ODNs. With respect to 4G mobile broadband networks, in December 2014, we expanded the network coverage by refarming the 900MHz frequency band from 2G to 4G and began implementing the carrier aggregation, or CA, technology of LTE-Advanced, or LTE-A, in the 900MHz and 1800MHz frequency bands to provide higher data transmission rates. In 2015, we made several procurements with Nokia Solutions and Networks Oy and Ericsson Taiwan Ltd., respectively, to further expand the 3G and 4G mobile network systems. Also, we are deploying 4G base stations with 2500MHz and 2600MHz frequency bands of mobile broadband services and to enhance our 4G mobile broadband capacity. To the extent these expenditures exceed our cash resources, we will be required to seek additional debt or equity financing. Our ability to obtain additional financing on favorable commercial terms will depend on a number of factors. These factors include our financial condition, results of operations, cash flows and the prevailing market conditions in the domestic and international telecommunications industry, the cost of financing and conditions in the financial markets, and the issuance of relevant government and other regulatory approvals. Any inability to obtain the funding for our capital expenditures on commercially acceptable terms could jeopardize our expansion plans and materially and adversely affect our business prospects and future results of operations.

If new technologies adopted by us do not perform as expected, or if we are unable to effectively deliver new services based on these technologies in a commercially viable manner, our revenue growth and profitability will decline.

We are constantly evaluating new growth opportunities in the broader telecommunications industry. Some of these opportunities involve new services for which there are no proven markets, and may not develop as expected. Our ability to deploy and deliver these services will depend, in many instances, on new but unproven technologies. These new technologies may not perform as expected or generate an acceptable rate of return. In addition, we may not be able to successfully develop new technologies to effectively and economically deliver these services, or be able to compete successfully in the delivery of telecommunications services based on new technologies. Furthermore, the success of our mobile dataIoT services is substantially dependent on the availability of mobile data applications and devices that are being developed by third-party developers.developers, and on whether we will be able to achieve a sustainable business model for consumer segments of the market. These applications or devices may not be sufficiently developed to support the deployment of our mobile data services. If we are unable to deliver commercially viable services based on the new technologies that we adopt, our financial condition and results of operations may be materially and adversely affected.

As an internet service provider, we may not be able to protect our customers and their information from cyber attacks, nor protect our services from disruptions due to cyber security breaches.

As an internet service provider, our system is susceptible to cyber security risks, including hijack attacks, phishing attacks, hacker’s intrusions to steal customer’s information and distributed denial-of-service (DDoS)

attacks. Our online services such as e-bills and multiple payment options through the internet are also vulnerable to cyber attacks. These attacks may disrupt our services and cause leakage of our customers’ personal information, which may result in significant damage and material adverse effect to our customers and our operations. We cannot assure you that our data protection measures are sufficient to prevent any data leakage or disruption of our service due to cyber attacks. We may suffer negative consequences, such as remedial costs, increased cyber security protection costs, lost revenues, litigation and reputational damage due to cyber attacks.

Our largest stockholder may take actions that conflict with our public stockholders’ best interests.

As of December 31, 2013,2015, our largest shareholder, the government of the Republic of China,ROC, through the Ministry of Transportation and Communications,MOTC, owned approximately 35.29% of our outstanding common shares. Accordingly, the government, through its control over our board, as all non-independent board members were appointed by the Ministry of Transportation and Communications,MOTC, may continue to have the ability to control our business, including matters relating to:

 

any sale of all or substantially all of our assets;

 

the approval of our annual operation and projects budget;

 

the composition of our senior management;

 

the timing and distribution of dividends;

 

the election of a majority of our directors; and

 

our business activities and direction.

We cannot assure you that our largest shareholder will not take actions that impair our ability to conduct our business competitively or conflict with the best interests of our public stockholders.

Actual or perceived health risks related to mobile handsets and base stations could lead to decreased mobile service usage and difficulties in increasing network coverage and could expose us to potential liability.

According to some published reports, the electromagnetic signals from mobile handsets and cellular base stations may pose health risks or interfere with the operation of electronic equipment. Although the findings of those reports are disputed, actual or perceived risks of using mobile communications devices or of cellular base stations could have a material adverse effect on mobile service providers, including us. For example, our customer base could be reduced, our customers may reduce their usage of our mobile services, we could encounter difficulties in obtaining sites for additional cellular base stations required to expand our network coverage or we may be requested to reduce the number of existing cellular base stations. As a result, our mobile services business may generate less revenue and our financial condition and results of operations may be materially and adversely affected. In addition, we could be exposed to potential liability for any health problems caused by mobile handsets and base stations.

Investor confidence in us may be adversely impacted if we or our independent registered public accountants are unable to attest to or express an unqualified opinion on the effectiveness of our internal control over financial reporting.

We are subject to the reporting requirements of the SEC. The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules requiring U.S. public companies to include a report of management on our internal control over financial reporting in their annual reports that contain an assessment by management of the effectiveness of our internal control over financial reporting. The effectiveness of our internal control over financial reporting has been audited by Deloitte & Touche, an independent registered public accounting firm, which has also audited our consolidated financial statements for the year ended December 31, 2013.2015. Deloitte & Touche has issued an attestation report on the effectiveness of our internal control over financial reporting in

accordance with the standards of the Public Company Accounting Oversight Board (United States). See “Item 15. Controls and Procedures—Attestation Report of the Registered Public Accounting Firm”.

While the management report included in this annual report concluded that our internal control over financial reporting was effective, we cannot assure you that our management will be able to conclude that our internal control over financial reporting is effective in future years. If in future years we fail to maintain effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, we could suffer a loss of investor confidence in the reliability of our consolidated financial statements, which in turn could negatively impact the trading price of our ADSs, and could result in lawsuits being filed against us by our stockholders or otherwise harm our reputation.

If we fail to maintain a good relationship with our labor union, work stoppages or labor unrest could occur and the quality of our services as well as our reputation could suffer.

In accordance with the articles of association of Chunghwa Telecom Workers’ Union, besides the chief manager of each department, most of our employees are members of our principal labor union, the Chunghwa Telecom Workers’ Union. Since our incorporation in 1996, we have experienced disputes with our labor union on such issues as employee benefits and retirement benefits in connection with our privatization as well as the right to protest. Despite having taken measures to improve relations, increase cooperation and ensure mutual benefit with our labor union, such as increasing channels of communications by holding periodic labor resource

review meetings and guaranteeing aour labor union a seat on our board of directors, we cannot assure you that we will be able to maintain a good relationship with our labor union. Any deterioration in our relationship with our labor union could result in work stoppages, strikes or threats to take such an action, which could disrupt our business and operations, materially and adversely affect the quality of our services and harm our reputation.

Any further economic downturn or decline in the growth of the population in Taiwan may materially and adversely affect our financial condition, results of operations and prospects.

We conduct most of our operations and generate most of our revenues in Taiwan. As a result, any decline in the Taiwan economy or a decline in the growth of the population in Taiwan may materially and adversely affect our financial condition, results of operations and prospects. For example, the global slowdown in technology expenditures has from time to time adversely affected the TaiwanIn particular, Taiwan’s economy which is highly dependent on the technology industry. There is considerable uncertainty overindustry, and any downturn in the long-term effects ofglobal technology industry may have a material adverse effect on Taiwan’s economy, which in turn, could adversely affect the expansionary monetarydemand for our products and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies.services. There have also been concerns over the armed conflicts and civil unrest in the Middle East, Africa and Ukraine, which has resulted in higher volatility on oil prices and significant market volatility.stock markets, and the economic slowdown in Mainland China, which could have a material adverse effect on economies around the world.

As our business is significantly dependent on economic growth, any uncertainty or further deterioration in economic conditions could have a material adverse effect on our financial condition and results of operations. We cannot assure you that economic conditions in Taiwan will continue to improve in the future or that our business and operations will not be materially and adversely affected by deterioration in the Taiwan economy.

We face substantial political risks associated with doing business in Taiwan, particularly due to domestic political events and the tense relationship between the Republic of ChinaROC and the People’s Republic of China, which could adversely affect our financial condition and results of operations.

Our principal executive offices and substantially all of our assets are located in Taiwan, and substantially all of our revenues are derived from our operations in Taiwan. Accordingly, our business, financial condition and results of operations and the market price of our common shares and the ADSs may be affected by changes in Republic of ChinaROC governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan and the Chinese mainland have been separately governed. The People’s Republic of

China, or PRC, claims that it is the sole government in China and that Taiwan is part of China. Although significant economic and cultural relations have been established between the Republic of ChinaROC and the PRC, such as the engagement of the Economic Cooperation Framework Agreement, or ECFA, in 2010, relations may become strained again. In June 2013, the ROC government and the PRC government entered into the Cross-Strait Agreement on Trade in Services pursuant to the ECFA. According to this agreement, both parties agreed to certain concessions on the telecommunication industries. The Executive Yuan has submitted the Cross-Strait Agreement on Trade in Services to the Legislation Yuan of Taiwan for ratification. As of March 31, 2014,2016, the Cross-Strait Agreement on Trade in Services has not yet been ratified by the Legislation Yuan of Taiwan.Yuan. If the agreementCross-Strait Agreement on Trade in Services is unable to benot ratified by the Legislation Yuan, our business operations in the PRC and our results of operationoperations may be adversely affected.

In addition, the PRC government has refused to renounce the use of military force to gain control over Taiwan. Past developments in relations between the Republic of ChinaROC and the PRC have on occasion depressed the market prices of the securities of companies in the Republic of China.ROC. Relations between the Republic of ChinaROC and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations, as well as the market price and the liquidity of our securities. In addition, the complexities of the relationship between the ROC and PRC require companies involved in cross-strait business operations to carefully monitor their actions and manage their relationships with both ROC and PRC governments. In the past, companies in the ROC, including us, have received minor sanctions such as travel restrictions or minor monetary fines by the ROC and/or PRC governments. We cannot assure you that we will be able to successfully manage our relationships with the ROC and PRC governments for our cross-strait business operations, which could have an adverse effect on our ability to expand our business and conduct cross-strait business operations.

Any future outbreak of contagious diseases may materially and adversely affect our business and operations, as well as our financial condition and results of operations.

Any future outbreak of contagious diseases, such as severe acute respiratory syndromeavian influenza, dengue fever or avian influenza,Ebola virus, may disrupt our ability to adequately staff our business and may generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we may under certain circumstances be required to quarantine such employees and the affected areas of our premises. As a result, we may have to temporarily suspend part or all of our operations. Furthermore, any future outbreak may restrict the level of economic activity in affected regions, including Taiwan, which may adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of contagious diseases would not have a material adverse effect on our financial condition and results of operations.

Stockholders may have more difficulty protecting their interests under the laws of the Republic of ChinaROC than they would under the laws of the United States.

Our corporate affairs are governed by our articles of incorporation, the Telecommunications Act, and by the laws governing corporations incorporated in the Republic of China. In addition, our corporate affairs may remain governed by the Statute of Chunghwa Telecom Co., Ltd.ROC. See “—Extensive regulation of our industry may limit our flexibility to respond to market conditions and competition, and our business may suffer”. The rights of stockholders and the responsibilities of management and the members of the board of directors of Taiwan companies are different from those applicable to a corporation incorporated in the United States. For example, controlling or major stockholders of Taiwan companies do not owe fiduciary duties to minority stockholders. As a result, holders of our common shares and ADSs may have more difficulties in protecting their interests in connection with actions taken by our management or members of our board of directors than they would as public stockholders of a United States corporation.

Our actual financial results may differ materially from our published guidance.

Prior to 2013, we used to voluntarily publish our operating results guidance on an annual basis in accordance with ROC GAAP. Beginning in 2013, we continued to voluntarily publish our operating results

guidance on an annual basis in accordance with Taiwan IFRSs. We may from time to time update our operating results guidance after evaluating the effects of any changes to the estimates and assumptions that we used to calculate our projections of our operating results. Our projections are based on a number of estimates and assumptions that are inherently subject to significant uncertainties and contingencies, including the risk factors described in this annual report. In particular, our projections are forward-looking statements that are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time.

Our results of operations and financial condition upon the adoption of Taiwan IFRSs may differ materially from our reported results of operations and financial condition under IFRSs.

We have historically presentedPrior to January 1, 2013, we prepared our consolidated financial statements including our consolidated financial statements for the year ended December 31, 2012, in accordance with ROC GAAP for purposes of our filings with the TWSE, with reconciliation of net income and balance sheet differences of our consolidated financial statements to U.S. GAAP for certain filings with the SEC. EffectiveStarting from January 1, 2013, companies listed on the TWSE, including us, must report theirwe have prepared our financial statements under Taiwan IFRSs. Accordingly, we have adopted Taiwan IFRSs for reporting in the ROC our annual consolidated financial statements beginning in 2013 and our interim quarterly unaudited consolidated financial statements beginning in the first quarter of 2013. While we have adopted Taiwan IFRSs for ROC reporting purposes, we adopt IFRSs for certain filings with the SEC, including our annual reports on Form 20-F for the year ended December 31, 2013 and thereafter. Following our adoption of IFRSs for the SEC filing purposes, we areWe no longer required to provideprepare any reconciliation of our

consolidated financial statements with U.S. GAAP. For more details, see “Item 3. Key Information—A. Selected Financial Data” for the description about the adoption of new financial reporting standards.Taiwan IFRSs.

Taiwan IFRSs differs from IFRSs in certain significant respects, including to the extent that any new or amended standards or interpretations applicable under IFRSs may not be timely endorsed by the FSC. Furthermore, the dividends for 20132015 that are expected to be declared at our 20142016 annual general stockholders’ meeting will beare calculated based on Taiwan IFRSs. It is difficult for us to evaluate the precise impact of the adoption of Taiwan IFRSs and IFRSs on our financial statements, because the FSC may issue new rules governing the adoption of Taiwan IFRSs and as other laws and regulations may be amended with the adoption of Taiwan IFRSs.

Risks Relating to Ownership of Our ADSs and Common Shares

The value of your investment may be reduced by future sales of our ADSs or common shares by us, by the government of the Republic of ChinaROC or by other stockholders.

The government may continue to sell our common shares. Sales of substantial amounts of ADSs or common shares by the government or any other stockholder in the public market, or the perception that future sales may occur, could depress the prevailing market price of our ADSs and common shares.

The market value of your investment may fluctuate due to the volatility of, and government intervention in, the Taiwan securities market.

Our common shares are traded on the Taiwan Stock Exchange, or TWSE, which has a smaller market capitalization and is more volatile than the securities markets in the United States and many European countries. The market value of our ADSs may fluctuate in response to the fluctuation of the trading price of our common shares on the TWSE. The TWSE has experienced substantial fluctuations in the prices and trading volumes of listed securities, and there are currently limits on the range of daily price movements. During 2013,2015, the TWSE Index peaked at 8,623.439,973.12 on December 30, 2013,April 27, 2015, and reached a low of 7,616.647,410.34 on January 17, 2013.August 24, 2015. On April 21, 2014,20, 2016, the TWSE Index closed at 8,951.19.8514.48. The TWSE has experienced certain problems, including market manipulation, insider trading and payment defaults. The recurrence of these or similar problems could have a material adverse effect on the market price and liquidity of the securities of Taiwan companies, including our ADSs and common shares, in both the domestic and the international markets.

In response to declines and volatility in the securities markets in Taiwan, the government of the Republic of ChinaROC formed the National Financial Stabilization Fund to support these markets through open market purchases of

shares in Taiwan companies from time to time. The details of the transactions of the National Financial Stabilization Fund have not been made public. In addition, the government’s Labor Insurance Fund and other funds associated with the government have in the past purchased, and may from time to time purchase, shares of Taiwan companies listed on the TWSE or other markets. As a result of these activities, the market price of common shares of Taiwan companies may have been and may currently be higher than the prices that would otherwise prevail in the open market. Market intervention by government entities, or the perception that such activity is taking place, may take place or has ceased, may cause sudden movements in the market prices of the securities of Taiwan companies, which may affect the market price and liquidity of our common shares and ADSs.

We may be sanctioned or lose our licenses for violations of limits on foreign ownership of our common shares, and these limits may materially and adversely affect our ability to obtain financing.

The laws of the Republic of ChinaROC limit foreign ownership of our common shares. Prior to March 1, 2006, the Ministry of Transportation and Communications,MOTC, as the competent authority under the Telecommunications Act, had the power to prescribe the limits on foreign ownership of our common shares. After the formation of the NCC on March 1, 2006, the NCC replaced the Ministry of Transportation and CommunicationsMOTC as the competent

authority under the Telecommunications Act pursuant to the National Communications commissionCommission Organization Law,Act, or the Organization Law.Act. The NCC and the Ministry of Transportation and CommunicationsMOTC reached an agreement on foreign ownership of Chunghwa Telecom. An announcement issued by the Ministry of Transportation and CommunicationsMOTC on December 28, 2007 stipulated that direct holdings by foreign investors in Chunghwa Telecom cannot exceed 49% of our outstanding share capital and the total direct and indirect holdings by foreign investors cannot exceed 55% of our outstanding share capital. As of April 21, 2014,20, 2016, foreign direct holdings of our outstanding share capital is at 14.66%24.34%. If we fail to comply with the applicable foreign ownership limitations, our licenses to operate some of our businesses could be revoked. Moreover, we cannot predict the manner in which the NCC will exercise its authority over us, or whether NCC will lower the foreign ownership cap at any time.

If we are deemed to be in violation of our foreign ownership limitations, any consequences arising from such violation may materially and adversely affect us. Moreover, since we are unable to control ownership of our common shares or ADSs representing our common shares, and because we have no ability to stop transfers among stockholders, or force particular stockholders to sell their shares, we may be subject to monetary fine or lose our licenses through no fault of our own. In that event, our business could be disrupted, our reputation could be damaged and the market price of our ADSs and common shares could decline. These limitations may also materially and adversely affect our ability to obtain adequate financing to fund our future capital requirements or to obtain strategic partners, and alternate forms of financing may not be available on terms favorable to us or at all.

Restrictions on the ability to deposit our common shares into our ADS program may adversely affect the liquidity and price of the ADSs.

The ability to deposit shares into our ADS program is restricted by Republic of ChinaROC law, under which no person or entity, including you and us, may deposit our common shares into our ADS program unless the Securities and Futures Bureau has not objected within a prescribed period following the filing with it of an application to do so, except for the deposit of the common shares into our ADS program and for the issuance of additional ADSs in connection with:

 

distribution of share dividends or free distribution of our common shares;

 

exercise of preemptive rights of ADS holders applicable to the common shares evidenced by our ADSs in the event of capital increases for cash; or

 

purchases of our common shares in the domestic market in Taiwan by the investor directly or through the depositary and delivery of such shares or delivery of our common shares held by such investors to the custodian for deposit into our ADS program, subject to the following conditions: (a) the depositary may accept deposit of those shares and issue the corresponding number of ADSs with regard to such deposits only if the total number of ADSs outstanding after the deposit does not exceed the number of ADSs previously approved by the Securities and Futures Bureau, plus any ADSs issued pursuant to the events described above; and (b) this deposit may only be made to the extent previously issued ADSs have been cancelled.

may accept deposit of those shares and issue the corresponding number of ADSs with regard to such deposits only if the total number of ADSs outstanding after the deposit does not exceed the number of ADSs previously approved by the Securities and Futures Bureau, plus any ADSs issued pursuant to the events described above; and (b) this deposit may only be made to the extent previously issued ADSs have been cancelled.

As a result of the limited ability to deposit common shares into our ADS program, the prevailing market price of our ADSs on the New York Stock Exchange, or NYSE, may differ from the prevailing market price of the equivalent number of our common shares on the TWSE.

You will be more restricted in your ability to exercise voting rights than the holders of our common shares, which may diminish your influence over our corporate affairs and may reduce the value of your ADSs.

Holders of American depositary receipts evidencing our ADSs may exercise voting rights with respect to the common shares represented by these ADSs only in accordance with the provisions of our deposit agreement. The

deposit agreement provides that, upon receipt of notice of any meeting of holders of our common shares, the depositary bank will, as soon as practicable thereafter if requested by us in writing, mail to ADS holders the notice of the meeting sent by us, voting instruction forms and a statement as to the manner in which instructions may be given by the holders.

Generally, ADS holders will not be able to exercise voting rights attached to the underlying securities on an individual basis. Under the deposit agreement, the voting rights attached to the underlying securities must be exercised as to all matters subject to a vote of stockholders collectively in the same manner, except in the case of an election of directors. The election of our directors is by means of cumulative voting. In the event the depositary does not receive voting instructions from ADS holders in accordance with the deposit agreement, our chairman or his or her designee will be entitled to vote the common shares represented by the ADSs in the manner he or she deems appropriate at his or her discretion, which may not be in your interest.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our stockholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not offer you those rights unless the distribution to ADS holders of both the rights and any related securities are either registered under the U.S. Securities Act of 1933, as amended, or the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

Changes in exchange controls that restrict your ability to convert proceeds received from your ownership of ADSs may have an adverse effect on the value of your investment.

Your ability to convert proceeds received from your ownership of ADSs depends on existing and future exchange control regulations of the Republic of China.ROC. Under the current laws of the Republic of China,ROC, an ADS holder or the depositary, without obtaining further approvals from the Central Bank of the Republic of ChinaROC (Taiwan) or any other governmental authority or agency of the Republic of China,ROC, may convert NT dollars into other currencies, including U.S. dollars, in respect of:

 

the proceeds of the sale of common shares represented by ADSs or received as share dividends with respect to the common shares and deposited into the depositary receipt facility; and

 

any cash dividends or distributions received from the common shares represented by ADSs.

In addition, the depositary may also convert into NT dollars incoming payments for purchases of common shares for deposit in the depositary receipt facility against the creation of additional ADSs. If you withdraw the common shares underlying your ADSs and become a holder of our common shares, you may convert into NT dollars subscription payments for rights offerings. The depositary may be required to obtain foreign exchange approval from the Central Bank of the Republic of ChinaROC (Taiwan) on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights of new common shares. Although it is expected that the Central Bank of the Republic of ChinaROC (Taiwan) will grant approval as a routine matter, required approvals may not be obtained in a timely manner, or at all.

Under the Republic of ChinaROC Foreign Exchange Control Law, the Executive Yuan of the Republic of ChinaROC may, without prior notice but subject to subsequent legislative approval rendered within ten days from such

imposition, impose foreign exchange controls or other restrictions in the event of, among other things, a material change in domestic or international economic conditions which might threaten the stability of the domestic economy in Taiwan.

You are required to register with the Taiwan Stock ExchangeTWSE and appoint several local agents in Taiwan if you withdraw common shares from our ADS facility and become our stockholder, which may make your ownership burdensome.

If you are a non-Republic of Chinanon-ROC person and wish to withdraw common shares represented by your ADSs from our ADS facility and hold those common shares, you are required under the current laws and regulations of the Republic of ChinaROC to appoint an agent, also referred to as a tax guarantor, in the Republic of ChinaROC for filing tax returns and making tax payments. A tax guarantor must meet certain qualifications set by the Ministry of Finance of the Republic of ChinaROC and, upon appointment, becomes a guarantor of your Republic of ChinaROC tax obligations. If you wish to repatriate profits derived from the sale of withdrawn common shares or cash dividends or interest on funds derived from the withdrawn common shares, you will be required to submit evidence of your appointment of a tax guarantor and the approval of the appointment by the Republic of ChinaROC tax authorities. You may not be able to appoint and obtain approval for a tax guarantor in a timely manner.

In addition, under the current laws of the Republic of China,ROC, you will be required to be registered as a foreign investor with the TWSE for making investments in the Republic of ChinaROC securities market prior to your withdrawal and holding of common shares represented by the ADSs. You will be required to appoint a local agent in Taiwan to, among other things, open a securities trading account with a local securities brokerage firm and a bank account to remit funds, exercise stockholders’ rights and perform other functions as holders of ADSs may designate. You must also appoint a local bank to act as custodian for handling confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. Without the relevant registration and appointment of the local agent and custodian and the opening of a securities trading account and bank account, you will not be able to hold, subsequently sell or otherwise transfer our common shares withdrawn from the ADS facilities on the TWSE.

 

ITEM 4.INFORMATION ON THE COMPANY

A. History and Development of the Company

Our legal and commercial name is Chunghwa Telecom Co., Ltd. We were officially established on July 1, 1996 as part of the privatization efforts by the government of the Republic of ChinaROC and operate under the Statute of Chunghwa Telecom Co., Ltd. Prior to our formation, we were operating as a business unit of the Directorate General of Telecommunications.Telecommunications, which was formerly the NCC. The common shares of the Company have been listed on the TWSE under the number “2412” since October 2000 and its ADSs have been listed on the New York Stock ExchangeNYSE under the symbol “CHT” since July 2003. In August 2005, we became a privatized company as the ownership by the government of the Republic of ChinaROC was reduced to less than 50%. Today, we are the largest full telecommunication service provider in Taiwan. Our principal executive offices are located at 21-3 Hsinyi Road, Section 1, Taipei, Taiwan, Republic of China,ROC, and our telephone number is (886) 2-2344-5488. Our website address is http://www.cht.com.tw. The information on our website does not form a part of this annual report. Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.

We are the largest telecommunications service provider in Taiwan and one of the largest in Asia in terms of revenue. As an integrated telecommunications service provider, our principal services include:

 

domestic fixed communications services, including local and domestic long distance telephone services, broadband access services, local and domestic long distance leased line services,Wi-Fi services, MOD services, domestic data services and other domestic services;

mobile communications services, including mobile voice and data services, sales of mobile handsets, and tablets, data cards and other mobile services;

 

internet services, including HiNet, our internet service, internet value-added services, or VAS, data communication services, internet data center services, and other internet services;

 

international fixed communications services, including international long distance telephone services, international leased line services, international data services, satellite services and other international services; and

 

other services, including non-telecom services.

In addition to these traditional telecommunication services, we also focus on selected ICT services and advanced development, such as cloud computing.development.

For each of our key services, we enjoy leading positions across a number of areas in terms of both revenues and customers:

 

we are Taiwan’s largest fixed communications services provider as well as Taiwan’s largest mobile communications service provider;

 

we are Taiwan’s largest broadband access provider; and

 

we are Taiwan’s largest internet service provider.

In 2013,2015, our revenues were NT$228.0231.8 billion (US$7.67.1 billion), our consolidated net income was NT$42.642.9 billion (US$1.41.3 billion) and our basic earnings per share was NT$5.355.42 (US$0.18)0.17).

In 2013,2015, we made capital expenditures totaling NT$36.425.1 billion (US$1.20.8 billion), of which 56%41% was related to our domestic fixed communications business, 25%34% was related to our mobile communications business, 13%19% was related to our internet business, 4% was related to our international fixed communications business and 2% was related to our other businesses. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a detailed discussion of our capital expenditures.

Competitive Strengths

We believe that we are well positioned to take advantage of the increasing opportunities in the telecommunications market in Taiwan as new technologies evolve. In particular, we have maintained our leading market share in mobile communications and internet services. Furthermore, we have enjoyed greater flexibility in making purchasing and other business decisions after we were privatized in August 2005.

We believe that further deregulation and market liberalization will continue to drive the growth of the overall market for telecommunications services in Taiwan, as well as the development of new products and services. We expect to benefit from additional opportunities as the telecommunications market in Taiwan continues to grow.

We believe that our primary competitive strengths are:

 

our premium brand and broad customer base in Taiwan;

our position as an integrated, full-service telecommunications provider in Taiwan; and

 

our capital resources and technology, which we believe we can build on to expand our leading position in the mobile communications and internet services markets, including through our continued construction of our existing 3G/HSPA/ HSPA+/Dual cell HSPA+4G mobile network,broadband networks, our expansion of FTTx broadband access services, IP-based MOD services, fixed-line/mobile value addedVAS and cloud

computing related services.

computing related services, and our construction of a 4G LTE, or Long-Term Evolution, mobile network using the spectrum that was granted in October 2013 with the largest amount of 4G frequency spectrum allocation out of all of the mobile network operators in Taiwan.

We have apremium brand and broad customer base in Taiwan.

We are the largest telecommunications service provider in Taiwan with a broad customer base across all of our service offerings. Despite deregulation and an increase in competition in the Taiwanese telecommunications industry, we have maintained a market leading position in our primary service offerings of fixed communications, mobile communications and internet services. We believe our broad customer base in each of our service offerings grants us a distinct competitive advantage to maintain our existing customers and attract new customers and increases the chance of success for the launch and popularization of new products. As the telecommunications industry continues its trend of converging fixed communications, mobile communications and internet services, we believe that our comprehensive service offerings place us in a strong position to offer converged products and services to our customers. In addition, by leveraging our capability to analyze Big Data, we are able to adopt marketing initiatives to target different customer groups’ interests and preferences and increase the effectiveness of our cross-marketing efforts of our products and services to our existing and potential customers.

We are an integrated full-service telecommunications provider in Taiwan.

We are the largest telecommunications service provider in Taiwan with a leading position in fixed communications services, mobile communications services and internet services.

Broad range of communications products and services. We believe that our ability to provide an attractive and comprehensive range of telecommunications services positions us to provide bundled and value-added servicesVAS to our business and residential customers. In addition, we are able to offer innovative integrated services and tariff packages to meet the specific needs of our customers.

Broad network coverage. The breadth of our network and our ownership of the “last-mile” infrastructure in Taiwan, which comprises the connection between the local telephone service provider’s switching centers to the end-users’ buildings or homes, provides us with access to existing and potential customers and creates a platform for expanding our services. In order to provide higher bandwidth services for our customers, we have been constructing our FTTx network since 2003. We have successfully migrated many of our customers from lower-speed to higher-speed internet access services and upgraded ADSL subscribers to FTTx, which offers even higher speeds by using fiber optic technology. The number of our FTTx subscribers has exceeded that of our ADSL subscribers since 2011. As of December 31, 2013,2015, network coverage of FTTx with speeds of 60100 Mbps and 100 Mbpshigher was approximately 91.6% and 86.4%, respectively.87.44%. In addition, our mobile communications network provides nationwide coverage. Our large cellularmobile spectrum allocation together with our extensive network coverage positions us well for the continued expansion of our mobile services in Taiwan. We are also continuing to build our Wi-Fi network to offload 3Gmobile network capacity in residential areas and public areas where subscriber density and usage is high, such as urban areas, airports and convenience stores.

Brand awareness, distribution channels and customer service. Our principal brands “Chunghwa Telecom,” “emome” and “HiNet” have a reputation for quality and reliability. We serve our large and well-established customer base through our extensive customer service network in Taiwan, including 17 operations offices, 431 service centers, 271 exclusive service storesTaiwan. See “—B. Business Overview—Marketing, Sales and six customer service call centers.Distribution—Sales and Distribution”. We are continuing to expand and transform our retail stores while increasing the number of our service centers throughout Taiwan. We also offer comprehensive and high-quality point of sale and after sale services in our service centers, stores and over the internet. Our

extensive sales and distribution channels help us attract additional customers and develop new business opportunities. In 2013,2015, we also obtained several domestic and international awards which recognized our service quality, corporate governance and our fulfillment of corporate social responsibility. In the Reader’s Digest Trusted Brands Awards, we have stood out and won the Platinum Award of Telecom Company in Taiwan for ten11 consecutive years since 2004.2005. We also were awarded the 2015 Best Practices Award for Taiwan Mobile Service Providers by Frost & Sullivan. In addition, we have been awarded The Asset Corporate Platinum Award by The Asset Magazine for three consecutive years since 2013. We were also ranked among the top five percent of TWSE-listed companies and the Taipei Exchange traded companies for corporate governance based on an evaluation conducted by TWSE in 2015. Furthermore, we were also awarded the “ExcellenceExcellence in Corporate Social Responsibility Award”Award in Taiwan by the Common Wealth Magazine and were ranked A++in “Transparency and Information

Disclosure” by the Taiwan Securities and Futures Institute in 2013. In addition, we received the Bronze Class Sustainability Award by RobecoSAM in January 2014.for nine consecutive years since 2007.

Operational expertise. Our management and employees have extensive operating experience and technical knowledge, which we believe cannot be easily replicated by competitors. We also believe we will continue to attract and retain high quality employees.

Comprehensive customer billing infrastructure. As Taiwan’s leading telecommunications services provider, we have extensive resources and infrastructure relating to billing services. We intend to continue taking advantage of this unique attribute by offering bill collection services to internet content providers and other entities that lack the necessary resources and infrastructure for effective customer billing.

We have the capital resources and technology to enhance our leading position in the growing mobile communications and internet services markets.position.

Enhancing position in our leading markets. We expect our mobile value-added service, fixed broadband value-added and ICT services to continue to be the key drivers of our future growth. With our leading market share, we enjoy substantial economies of scale in equipment procurement as well as the marketing of our products and services.

Strong capital structure. We believe we have great financial resources in Taiwan. Our low debt-to-equity capital structure, together with our strong operating cash flows, provides us with the flexibility and resources to invest in capital intensive and growing businesses. In particular, we continue to invest in broadband internet protocol networks, fiber-optic networks, and 3G/HSPA, HSPA+, Dual carrier HSPA+4G mobile communicationsbroadband networks and services. We will continue to make investments in or to acquire other companies which provide complementary telecommunications and internet-related services to further expand our business and offer new products and services.

Advanced network technology. In 2013,recent years, we have upgraded some of our FTTx access networks to FTTH access networks, aiming at promoting our broadband services from megabit connectivity to gigabit connectivity and strengthening our leading position in bandwidth services in our industry. We haveIn 2015, we also upgraded our 3G networkcontinued to HSPA and HSPA+, and Dual carrier HSPA+. We are currently deployingdeploy our 4G network, and we believe that we have the potential to be the first-to-market to launch and offer high speed 4G services over LTE technology.mobile broadband networks. Our investment in network infrastructure places us in a position to capture a significant share of the internet and high-speed data transmission market.

Research and development expertise. As of March 31, 2014, we employ over 2,546 research professionals and engineers whose principal focus is to develop advanced network services and operation support systems and to build selected core technologies. In 2013,2015, our research and development expenses accounted for 1.6% of our revenues. We believe our focus on research and development will allow us to efficiently develop and deploy new technologies and services ahead of our competitors.

Business Strategies

Taiwan has one of the highest fixed-line penetration rates in Asia and has also experienced rapid adoption of wireless communications and internet services, including broadband access services. We believe that telecommunications services will evolve over the coming years, driven by a number of technological innovations, including cloud computing, mobile value-added services and Internet of Things, or IoT. We also believe that the convergence trend of communications technologies will provide a significant competitive advantage to integrated telecommunications service providers that are able to design and construct sophisticated and scalable networks capable of serving as a common platform for a broad range of services.

Our key strategic objectives are to maintain our position as a leading integrated telecommunications services provider in Taiwan and to enhance our leadership position in growing markets, such as the mobile services and internet services markets, including fixed-line, and mobile data, services and value-added services.VAS. By leveraging our solid customer base, expanded network capacity and enhanced network capability, we plan to further enhancehave been continuously enhancing our fixed and mobile value-added services, or VAS offerings and promotion. We have also introduced new ICT services as well as cloud computing services by leveraging enterprise high speed broadband demand to offer VAS and explore emerging service.

Consistent with our strategic objectives, we have developed the following business strategies:

Focus on our core strengths while expanding our scope of services to capture new growth opportunities

Our core strengths are the management of telecommunication networks and the provision of services over these networks. We currently operate several networks linked by a core backbone infrastructure consisting of public switched telephone, cellular,mobile, ADSL, FTTx and internet protocol networks. Our strategy for each network differs depending on the market dynamics and future growth prospects of services delivered over these networks. In general, we endeavor to maintain our strong market position in each of our business lines and seek to expand the scope of our business beyond network services by offering value-added servicesVAS to generate growth andcapture new opportunities.

Fixed communications: Our strategy is to maintain our position as the market leader in domestic fixed communications. We aggressively introduced new technology and equipment of our fixed network to improve operational efficiency and facilitate business transformation. In the meantime, we also provide MOD, cloud-based multi-screen services and IoT services including Intelligent Energy Network, or iEN, street surveillance services to improve customers’ digital life. We expect that these initiatives will enhance customers’ loyaltyopportunities and generate more revenues.revenue growth.

Broadband services: We strive to maintain our broadband market share. We typically realize higher average revenue per user, or ARPU, for our FTTx internet services, and we expect to continue to offer various incentives for our ADSL customers to upgrade to FTTx services and for our FTTx customers to upgrade to even higher speed FTTx services. Therefore, we are continuing the build-out of our FTTx infrastructure. We expect that we will be ableinfrastructure, especially FTTH construction, to offer broadband services with speedsmonetize our investment, instead of 100 Mbps to 90% of households in the ROC by the end of 2014. As more customers within our currentnetwork coverage area subscribe for 100 Mbps broadband services or FTTH services, we will still need to incur additional capital expenditures to deploy such services from the cross-connection boxes to each customer’s premises. In addition, we plan to incur additional capital expenditures to further construct our FTTH infrastructure to expand our coverage area throughout the ROC.enhancement. We believe these efforts will help us maintain our competitive advantage for broadband services. A high quality broadband network is also essential for our high-definition MOD services.

We provide ADSL and FTTx services to 4.6 million customers, which represented approximately 77.7% of Taiwan’s fixed-line broadband customers by the end of 2013. Approximately 64.9% of our broadband customers were using FTTx services as of December 31, 2013.

We typically realize higher average revenue per user, or ARPU, for our FTTx internet services, and we continue to offer various incentives for our ADSL customers to upgrade to FTTx services. In 2013, FTTx revenue reached 79.5% of our total broadband revenue.

Mobile Communications: We currently offer our mobile services via both 2G and 3G networks. We obtained the 4G spectrummobile broadband license in October 2013,April 2014 and we are currently deployinglaunched our 4G network. We believe we have the potential to be the first-to-market to launch and offer high speed 4G services over LTE technology in July 2014. For 3G, wideband code division multiple access, or WCDMA, is adopted. In order to meet the demand from our customers for high-speed mobile data access, we upgraded our 3G mobile service to High-Speed Packet Access, or HSPA technology on September 12, 2006 and to HSPA+broadband services in 2010. The prevalence of smart devices, such as smart phonesMay 2014. In March 2016, we obtained the mobile broadband license for 2500MHz and tablet PCs that utilize large amounts of2600MHz frequency bands which enables us to enhance our 4G mobile data, has become a challenge for all mobile operators. We are continuing to develop HetNet to meet such demand. HetNet incorporates

macrocells for large area coverage, and small cells including micro cells, pico cells, femtocells and Wi-Fi to increase our data capacity.broadband network. Our strategy for mobile serviceservices includes the following initiatives:

 

Further introducing mid-Accelerating 4G mobile broadband network construction to low-tieraccommodate the increasing mobile data usage from consumers as a result of the growth of connected devices, such as smartphones and tablets;

Encouraging the migration of 2G service subscribers to 3G and 4G mobile services by offering promotions on various mobile handsets combined with attractive VAS and product packages;

Introducing low- to mid-tier smartphones to expand our mobile internet subscriber base;

Accelerating the migration of 2G customers to 3G network by offering various mobile handsets combined with attractive value-added services and product packages;

Expanding our HSPA+/Dual carrier HSPA+ coverage and enhancing the base station bandwidth to attract more mobile internet customers;

 

Constructing more Wi-Fi hotspots to offer more wireless internet access service and to offload 3G data traffic; in particular,traffic from our mobile networks; we plan to construct over 50,000had established 55,000 Wi-Fi hotspots by the end of 2014;

Enabling 3G/Wi-Fi auto-authentication to enhance customer experience;2015. In addition, the mobile broadband services license for 2500MHz and

Accelerating LTE network construction to launch 4G services 2600MHz frequency band spectrum which we obtained in July 2014.March 2016 will help disperse heavy traffic in metropolitan areas.

Internet services: Our strategy for internet services is to continue to build on the success of our HiNet internet services and enhance our internet value-added services.

We are developing new media to provide both higher-speed access as well as attractive content to our customers. We are also continually enhancing our internet value-added services,VAS, such as online games, internet music, internet banking and internet protocol video services, including hiChannel, an internet platform where customers can view videos and multimedia content. In addition, to cater to customers’ increasing demand for e-commerce payment systems, we are also developing a trusted service manager, or TSM, a platform to support multiple payment interfaces includingsupporting mobile payment and third-party payment.
The TSM platform commercial service launched on December 30, 2014 and provides mobile phone users a variety of payment methods. We are currently cautiously evaluating the timing to launch third-party payment services.

Emerging services: Our emerging services primarily include ICT and cloud computing and integrated services. We have been providing ICT services since 2009,2009. We continue to leverage our core telecommunication infrastructure and services to expand ICT services, including intelligent energy network, or iEN, and Intelligent Transportation System,intelligent transportation service, or ITS, IoT, smart factory and smart city services. Our experience with ICT services positions us well to develop and offer cloud computing services, and we anticipate thatservices. Underpinning the rollout of our cloud computing services could become an important area of growth for telecom operatorsis our capability and experience in offering data center services to corporate customers, which includes our ongoing initiative to build the near future. We started to offer hicloud Compute as a Service, or CaaS and provide customers 24-hour installation serviceslargest cloud computing data center in 2010. We started to offer hicloud MallTaiwan in 2011, which allows Independent Software Vendors, or ISV to offer their application software in the hicloud Mall for sale. We also introduced cloud-based multi-screen services, named Hami+, providing music, video, news, e-book, weather, travel information, personal cloud and payment services. The integration of platform and network enables our customers to use and purchase the service through their PCs, MOD, tablet PCs and smart phones, and satisfies users’ needs to utilize those services anytime, anywhere with any device. For enterprise customers, we introduced hicloud Virtual Private Cloud, or VPC to facilitate the establishmentanticipation of the dedicatedgrowing demand for this service. In 2013, we began the construction of our cloud data center for centralized controlin Panchiao, New Taipei City. The Panchiao Internet Data Center, or IDC, is expected to commence operations in the second quarter of 2016 and will offer high reliability, high speed and high security cloud services to multi-national and domestic corporate customers. With the strength and reliability of our technologies and services, we believe that we have the competitive advantages to continue expanding our cloud computing resource, storage services network services and information security total solutions. We also introducedin the hicloud boxe to provide data storage and file sharing services, which helps enterprise customers reduce storage costs while providing a platform to share resources in a protected environment. In 2013, we launched hicloud platform service, or hicloud PaaS, and hicloud S3 service, or hicloud S3:future.

hicloud PaaS is a cloud innovation platform that integrates six cloud-based components, including communications, information, marketing, digital contents, IoT, and information security, for developers to create various kind of cloud applications in a developing environment with three major programming languages: Java, .Net and PHP. In addition, hicloud PaaS innovation platform is connected to our hicloud Mall, and all cloud applications developed on the platform could be sold at our hicloud Mall; and

hicloud S3 is a cost-effective cloud-based storage service. Enterprises can lease cloud space to support their daily operation and therefore lower their storage cost. hicloud S3 also has HA, or High-Availability, operation system which provides stringent information security to reduce risks of losing information and leaking information.

We are continuing toconsistently expand the scope and variety of our integrated services to create more value for our customers. For example, we intend to developWe have been developing an OTT platform and buildbuilding relationships with content providers and service providers to offer attractive content and services overon the platform. Our strategy on MOD/VOD/OTT services is to enrich content, including by providing movies, drama, and TV series for SVOD, to enhance the user interface, to leverage our existing base of fixed broadband and 4G mobile broadband subscribers to boost our MOD and OTT subscribers, and to acquire content with all rights across different devices to become the leading IPTV/OTT service provider in Taiwan.

Emphasize quality of service and customer satisfaction

Quality of service is critical in attracting and retaining customers and enhancing our long-term profitability. In order to continually enhance and improve the quality of our services, we have, in addition to the quality assurance function of our regular operating units, established a number of dedicated task forces to monitor our network performance. Our senior management sets our quality evaluation criteria and regularly reviews the quality of our performance.

In order to ensure that our quality of service will translate into strong customer loyalty, we plan to continue to focus on and invest in the provision of a full range of services that emphasize customer care from the point of sale onward. For example, we have extended the focus of our corporate customer services from major accounts to include small and medium-sized enterprises and in January 2007 established our Enterprise Business Group. As of December 31, 2013,2015, our Enterprise Business Group was staffed by 396employed 512 professionals and offered packaged and customized services, customer-oriented solutions and integrated information and communicationsICT services. We have completed the integration of our call centers, all of which can now be reached by calling a single number “123”. We offer 24-hour customer service, including the handling of service and billing inquiries with the assistance of an Interactive Voice Response, or IVR, system.inquiries. To improve the quality of our customer services, we implemented a customer relationship management system, which encompasses among other things, a customer complaint system, a business information database for the use of our call centers, and a data miningBig Data system to enhance our sales and market analysis efforts. For example, we leverage our capability to analyze Big Data in identifying locations for constructing base stations and target groups for marketing our services.

In addition, we own hundreds of physical service stores, and we will continue to renovate our traditional service stores to enhance user experience. Please refer to “—Competitive Strengths—We are an integrated full-service telecommunications provider in Taiwan” for a discussion of our distribution channels.

Improve operational efficiency and cost structure

We have historically been focused, and will continue to focus, on cost control, particularly in the areas of network efficiencies and personnel costs. We expectcontinue to be able to further improve our operational efficiency and cost structure by migrating to more advanced networks and sophisticated operational support systems, and efficiently managing our workforce.

Capital expenditures. Our long-term goal is to optimize our capital expenditures by focusing on investing in innovative products and services with attractive return profiles. To catch up with the fast evolution of digital devices and network applications, we continue the construction of our fiber-based fixed-line and mobile network to increase the network bandwidth and enhance operational efficiencies. In particular, we planWe continue to accelerate LTE network construction to launch 4G services in July 2014,enhance population coverage and construct high capacity Wi-Fi/Fiber-Wireless networks to offload mobile network traffic, and upgrade network equipmentprecise FTTH construction to improve operational efficiency and reduce operating cost. For example, we have focused on redesigning optical distribution networks, consolidating aggregate networks, simplifying network layers, centralizing network planningWe will continue to leverage our core telecommunication infrastructure and equipment procurement, designing Single Radio Access Networks, developing remote automatic operations, administration, maintenanceservices to expand the ICT business, including cloud services, enterprise total solutions and provisioning systems and following “precision construction” policy to enhance equipment utilization rate and improve management efficiency.government projects.

Personnel costsreallocation. We seek to improve our operational efficiency by reducing our personnel costs. For example, we offered voluntary retirement programs once each year since 2005, which resulted in reductions of 6,426 employees in total as of December 31, 2013. We also hired more than 3,999 new employees after our privatization in August 2005. Since then, we continued to align our organizational structure by integrating

various operating units and departments. We will also continue to reallocate our personnel from traditional fixed-line services to our growing businesses and to our marketing and enterprise customer services departments. On January 30, 2013, we set up a human resource company,Honghwa International Co., Ltd. (formerly known as Honghwa Human Resources Co., Ltd.), or Honghwa, in order to save on personnel expenses as well as to provide our customers with bettercustomer services, on-site equipment installation services and services in stores to our retail stores. We plan to gradually restructurecustomers after the personnelretirement of our customer services departments to use personnel provided by Honghwa Human Resources Co., Ltd.personnel.

Expand our business through alliances, acquisitions and investments

We plan tocontinuously expand our business in high-growth areas, such as interactive multimedia broadband services, content delivery servicesICT and value-addedcloud services, through alliances, acquisitions and investments. We believe that our experience, operational scale and large customer base make us an attractive ally for other service providers.

Alliances. We have formed and will continue to pursue alliances with information content providers, multimedia service platform providers, customer premises equipment providers, internet portal operators, and information and communication technologyICT solutions partners

to diversify our business operations and enhance our service offerings. In January 2013,August 2015, we signedentered into an agreement with Microsoft Taiwan Corporation to provide integrated cloud solutions to end users. In September 2015, we became a memorandummember of understandingNext Generation Mobile Networks (NGMN) Alliance to foster the growth of Taiwan’s mobile communications industry and help Taiwan connect to the international 5G ecosystem. In December 2015, we entered into an agreement with Wiwynn Corporation. We aimChina Mobile Ltd. on a Hand-in-Hand Program to cooperate with Wiwynn Corporation by combining its hardware solution with our cloud technology to jointly provide customers plug-and-play appliancecollaborate in areas including mobile business, data business, innovation and explore domestic and overseas computing business opportunities. internet business.

We also aim to develop the city of industry technology intelligence. In December 2013, we formed the Taiwan Intelligent Aerotropolis Association, an association that focuses on the research, development and application of telecommunication and aerotropolis technology, together with other telecommunicationtelecommunications enterprises and equipment suppliers. The formation of the association has strengthened our leading position in the industry and further supplemented our capability to develop smart city and aerotropolis products and services. On January 17, 2014, we entered into a memorandum of understanding with Delta Electronics, Inc., under which both parties agree to coordinateservices for government, industries and to develop environmentally friendly solutions for energy saving in telecommunications industry. See “B. Business Overview—Mobile Communications Business—Mobile Services” for a discussion of our alliance on mobile services.end users.

Acquisition and Investments. We have focused our acquisition strategy on making acquisitions of companies that we believe to be complementary to our long-term strategic goals. In addition, after our privatization, we have focused our investment strategy on the development of new businesses and the enhancement of our operation efficiency. Recently we have entered into the following notable transactions:

In March 2011, we established a wholly owned subsidiary Chunghwa Telecom (China) Co., Ltd., which engages mainly in providing services of planning, design, and integration of information systems.

In May 2011, we established a wholly owned subsidiary Chunghwa Telecom Vietnam Co., Ltd. in Vietnam, which engages mainly in providing International Private Leased Circuit, or IPLC, and iEN, services to Taiwanese enterprises in Vietnam.

In May 2011, we, together with President Chain Store Corporation and EasyCard Corporation, established Dian Zuan Integrating Marketing Co., Ltd., or DZIM. As of December 31, 2013, we owned 13% of DZIM. DZIM engages mainly in information technology services and general advertising services.

In July 2011, we established Chunghwa Sochamp Technology Inc., which mainly engages in license plate recognition systems. As of December 31, 2013, we owned 51% of Chunghwa Sochamp Technology Inc.

In August 2011, we and United Daily News established a joint venture, Smartfun Digital Co., Ltd., which mainly engages in sales of educational software and providing digital parenting education. As of December 31, 2013, we owned 65% of Smartfun Digital Co., Ltd.

In September 2011, we invested in Huada Digital Corporation and owned 50% of this company as of December 31, 2013. Huada Digital Corporation mainly engages in providing software services.

In February 2012, we subscribed for shares of China Airlines Ltd. in an equity offering and became a 5.07% stockholder of China Airlines Ltd. We expect to leverage China Airlines Ltd.’s expertise and operational experience within the tourism and transportation industries to develop relevant ICT services, including intelligent tourism and transportation cloud services. We have developed a tourism cloud platform to provide travel information and products as well as physical and virtual channels to facilitate the operation of different parties in the tourism industry.

In November 2012, we established Hua-Xiong Information Technology (China) Co., Ltd., which mainly engages in providing intelligent systems and energy saving systems and services for buildings. As of December 31, 2013, we owned 51% of Hua-Xiong Information Technology (China) Co., Ltd.

In January 2013, we set up a human resource company, Honghwa Human Resources Co., Ltd., in order to save on personnel expenses as well asprovide on-site equipment installation services to provide our customers and the customers of other companies that have signed service agreements with better installation services and services in our retail stores.Honghwa.

In November 2013, Taiwan Mobile Corporation,Co., Ltd., or Taiwan Mobile, Asia Pacific Telecom, or APT, Vibo Telecom, or Vibo, EasyCard Corporation, Far EastoneEasTone Telecommunications Co., Ltd., or Far EasTone, and us established the Alliance Digital Technology Co., Ltd., or ADT, which mainly engages in the development of mobile payments and information processing services. We owned a 19%13.33% equity interest in ADT and had one seat out of five seats on the board of directors of ADT as of December 31, 2013.2015.

In February 2014, we, together with Benefit One Asia Ptd.Pte. Ltd., established Chunghwa Benefit One Co., Ltd., or Chunghwa Benefit One, and we owned a 50% equity interest in Chunghwa Benefit One. Chunghwa Benefit One mainly engages in providing an e-commerce platform for enterprises to provide employee benefits.benefits and for individuals.

Senao acquired 70% of the equity interests in Youth Co., Ltd and its subsidiaries, or Youth, in September 2015, and established 100% of the equity interests in Aval Technologies Co., Ltd. in October 2015. Both Youth and Aval Technologies Co., Ltd. are primarily engaged in the businesses of providing information technology services and selling communication products. In December 2015, Senao participated in the share subscription of Youth at a percentage different from its original ownership percentage. Therefore, Senao’s ownership interest in Youth increased from 70% to 89.48%.

Please also see notesNotes 3 and 16 to our consolidated financial statements included elsewhere in this annual report for our current strategic investments.

Going forward, we may consider making other equity investments and acquisitions that we believe are complementary to our business and strategic goals. Our future investment will be aimed at expanding our business scale and scope, making better use of our research and development resources and operational experience and increasing our revenues through investing mainly in core telecom businessessix strategic areas, such as well as value-added services. We expect to target the markets of our overseas investments from Southeast Asia to China while carefully evaluating the risks involved.IoT, info-security, OTT, mobile VAS, enterprise business and IDC/Cloud.

Maintain focus on maximizing stockholder value

We are committed to maximizing stockholder value and we intend to maintain our higha sustainable dividend payout policy. Following our privatization, we have more flexibility to implement capital management initiatives, including possible repurchases of our outstanding common shares and increases in our leverage through debt financing We bought back 121,075,000 common shares between August 29, 2007 and October 25, 2007 and cancelled those shares on December 29, 2007 and February 21, 2008, respectively.financing.

We continued our capital reduction plan from 2007 to 2010. We effected the last capital reduction plan in 2010 by reducing 20% capital stock in the amount of NT$19.4 billion. The cash payment of NT$19.4 billion was made on January 25, 2011 to our stockholders.

Under the ROC Company Act, of the ROC, companies are allowed to distribute special cash dividend from capital surplus. Atsurplus, which we had implemented at our annual general stockholders’ meeting held on June 25,meetings in 2013 our stockholders approved the distribution of NT$5.6 billion from capital surplus, and such amount was subsequently paid in August 2013.2014. See

“Item “Item 5. Operating and Financial Review and Prospects—Overview—Effect of adopting Taiwan-IFRSsTaiwan IFRSs on our dividends and employee bonuses.” In addition, the accumulated legal reserve that we had set aside in previous years has amounted to the aggregate par value of our outstanding share capital. Therefore, according to relevant regulations, we are not required to appropriate profits to our legal reserve starting from 2015. With the approval of our board of directors in March 2016, our payout ratio was 99.41% in 2015 after adjusting for unappropriated earnings and reversal of the special reserve. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information.

B. Business Overview

Our Principal Lines of Business

Our core business segments are our domestic fixed communications business, mobile communications business, internet business and international fixed communications business. The selected financial data for the years ended December 31, 2012 and 2013 have been prepared and presented in accordance with IFRSs as issued by the International Accounting Standards Board.

Domestic Fixed Communications Business

The provision of domestic fixed communications services is one of our principal business activities. Our domestic fixed communications business includes local telephone services and domestic long distance telephone services, broadband access services, local and domestic long distance leased line services, Wi-Fi services, multimedia on demand services, and other domestic services including ICT, corporate solution services, cloud computing services. We are the largest provider of local and domestic long distance telephone services in Taiwan. We also provide interconnection with our fixed-line network to other mobile and fixed-line operators. Our revenues from domestic fixed communications services were NT$76.173.5 billion, or 34.4%NT$72.1 billion and NT$72.5 billion (US$2.2 billion), respectively, in 2013, 2014 and 2015, representing 32.2%, 31.8% and 31.3% of our revenuestotal revenue in 2012 and NT$73.5 billion (US$2,465.5 million) or 32.2% of our revenues in 2013.such periods. In general, we expect that revenues from our domestic fixed communications business as a percentage of our total revenues will continue to decline primarily due to mobile and VoIP substitution.

Local Telephone

The following table sets forth our revenues from local telephone services for the periods indicated.

 

  Year Ended December 31   Year Ended December 31 
  2012   2013   2013   2014   2015 
  NT$   NT$   US$   NT$   NT$   NT$   US$ 
  (in billions)   (in millions)   (in billions)   (in millions) 

Local telephone revenues:

          

Usage

   20.1     17.9     599.0     17.9     16.0     14.5     442.3  

Subscription

   16.4     16.4     550.5     16.4     16.3     16.1     490.6  

Interconnection

   1.2     1.0     34.7     1.0     0.9     0.8     25.1  

Pay telephone

   0.4     0.3     11.0     0.3     0.3     0.3     8.4  

Other

   2.8     2.2     72.7     2.2     2.1     1.9     58.3  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   40.9     37.8     1,267.9     37.8     35.6     33.6     1,024.7  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

We provide local telephone services to approximately 11.611.2 million customers in Taiwan. Our fixed-line network reaches virtually all homes and businesses in Taiwan. Revenues from local telephone services comprised 18.5%16.6%, 15.7% and 16.6%14.5% of our total revenues in 20122013, 2014 and 2013,2015, respectively. Approximately 73.9%73.8% of our local telephone customers as of December 31, 20132015 were residential customers. We are currently the leader of the local telephone service market, with an average subscriber market share of approximately 95.0%94.6%, 94.3% and 94.6%94.0% in 20122013, 2014 and 2013,2015, respectively.

The following table sets forth information with respect to our local telephone customers and penetration rates as of the dates indicated.

 

  As of December 31   As of December 31 
  2011 2012 2013       2013         2014       2015     
  (in thousands, except percentages
and per household data)
   (in thousands, except percentages
and per household data)
 

Taiwan population(1)

   23,225   23,316   23,374     23,374   23,434   23,485  

Fixed line customers:

        

Residential

   8,948   8,728   8,555     8,555   8,395   8,239  

Business

   3,133   3,061   3,017     3,017   2,970   2,928  

Total

   12,081   11,790   11,572     11,572   11,365   11,167  

Growth rate (compared to the same period in the prior year)

   (1.8)%  (2.4)%  (1.8)% 

Penetration rate (as a percentage of the population)

   52.0 50.6 49.5   49.5 47.5 47.5

Lines in service per household

   1.11   1.07   1.03     1.03   1.00   0.97  

 

(1)Data from the Department of Population, Ministry of the Interior, Republic of China.ROC.

With the continued development of mobile technologies and the disconnection of additional lines for dial-up services, demand for local customer lines has been declining. The number of fixed-line customers decreased by 2.4% in 2012 compared to 2011 and 1.8% in 2013 compared to 2012.2012, 1.8% in 2014 compared to 2013 and 1.7% in 2015 compared to 2014. We attribute the decrease in fixed-line customers to a general industry-wide trend of migrating from fixed-line services to mobile and internet telephony services. In adherence to a ruling by the Supreme Administrative Court, starting from September 2011, we no longer require our broadband service subscribers to apply for our fixed-line services. We also allow our existing broadband subscribers to unsubscribe their fixed-line service. The foregoing factors also caused the decrease in our fixed-line customers.

The following table sets forth information with respect to local telephone usage for the periods indicated.

 

  Year Ended December 31   Year Ended December 31 
  2011 2012 2013       2013         2014         2015     
  (in millions, except
percentages)
   (in millions, except percentages) 

Minutes from local calls(1)(2)

   15,569   14,368   12,942     12,942   11,567   10,511  

Growth rate (compared to the same period in the prior year)

   13.9 (7.7)%  (9.9)%    (9.9)%  (10.6)%  (9.1)% 

 

(1)Includes minutes from local calls made on pay telephones. It also includestelephones and minutes from fixed line-to-mobile calls due to the change in policy starting from 2011.calls.
(2)Calls to our HiNet internet service, which are recorded as part of our internet services, are not included in our local call minutes or revenues.

Minutes from local calls increased in 2011 due to the inclusion of minutes from fixed-line-to-mobile calls in this category starting from 2011 as a result of the NCC’s change in policy for collecting the tariffs of fixed-to-mobile phone calls by our fixed communications business. Minutes from local calls decreased in 20122013, 2014 and 20132015 due to the impact of mobile substitution and increased use of VoIP applications.

We charge our local telephone service customers a monthly fee and a usage fee. We also charge separate fees for some value-added services.VAS. The monthly fees for our primary tariff plans are NT$70 with a deductible on usage fees of NT$25 for residential customers and NT$295 for business customers. Our primary peak time usage fee is NT$1.6 for three minutes, or NT$2.7 for ten minutes, depending on the tariff plan selected by the customer, and our off-peak usage fee is NT$1.0 for ten minutes. Our usage fees are the same for residential and business customers.

The following table sets forth information with respect to the average local telephone usage charge per minute for the periods indicated.

 

  Year Ended December 31   Year Ended December 31 
  2012 2013       2013         2014           2015     
  NT$ NT$   NT$ NT$   NT$ 

Average local telephone usage fee (per minute)

   1.41   1.39     1.39   1.39     1.39  

Growth rate (compared to the same period in the prior year)

   3.7 (1.4)%    (1.4)%   —       —    

Average per minute usage charges increased 3.7% to NT$1.41 in 2012, and we attribute this increase to the fact that users with lower average tariffs switched to using VoIP telephony services to a greater extent than users with higher average tariffs. However, average per minute usage charges decreased 1.4% to NT$1.39 in 2013, mainly due to more users switching to use mobile phones and VoIP telephony services, which also led to the decreases in total revenue derived from local telephone. Average per minute usage charges remained relatively stable from 2013 to 2015. Part of our

competitive strategy is to offer customers innovative products and services intended to both secure customer loyalty and enhanceincrease revenues. In particular, our value-added servicesVAS offerings are designed to increase our call revenues by increasing the number of calls our customers make and by receiving fees for usage of the value-added services.VAS. These services include call waiting, caller identification, call forwarding, three-party calls, ring back tone and voicemail.

Domestic Long Distance Telephone

We provide domestic long distance telephone services in Taiwan. Total revenues from domestic long distance telephone services were NT$3.83.5 billion, NT$3.3 billion and NT$3.1 billion (US$0.1 billion) in 2013, 2014 and 2015, respectively, representing 1.7%1.5%, 1.5% and 1.3% of our total revenues in 2012 and NT$3.5 billion (US$0.1 billion) representing 1.5% of our total revenue in 2013.such periods. This decrease was mainly due to the increased use of mobile services and VoIP applications. Our average market sharecontinuous decline in the domestic long distance market was approximately 74.1%, 75.4% and 76.6% in 2011, 2012 and 2013, respectively.

The following table sets forth information with respect to usage of our domestic long distance telephone services for the periods indicated.

   Year Ended December 31 
       2011          2012          2013     
   (in millions, except percentages) 

Domestic long distance telephone service usage (minutes)

   3,202    3,354    3,288  

Growth rate (compared to the same period in the prior year)

   (6.2)%   4.7  (2.0)% 

Along with the mandatory tariff reduction for domestic long distance telephone services, the minutes of use increased in 2012. See “Item 5. Operating and Financial Review and Prospects—Overview—Tariff adjustments”. However, call minutes declined in 2013 compared to 2012. We expectresulting from the minutes of use for domestic long distance calls will continue to decline as a result of traffic migration to mobile services and increased use of VoIP applications.

The following table sets forth information with respect to Our average market share by minutes in the average domestic long distance telephone usage charge per minute for the periods indicated.

   Year Ended December 31 
   2012  2013 

Average domestic long distance telephone usage fee (per minute)

   NT$0.90    NT$0.84  

Growth rate (compared to the same period in the prior year)

   (41.2)%   (6.6)% 

According to the resolution released by the NCC on November 30, 2011, we reduced our peak hour domestic long distance rate from NT$0.032 per second to our current rate of NT$1.6 per three minutes,market was approximately 76.6%, 80.5% andoff-peak hours rate from NT$0.023 per second to our current rate of NT$1.0 per three minutes, 82.2% in January 2012. All domestic long distance calls, regardless of the distance between the calling parties, are subject to the same tariff. Our average domestic long distance usage charge per minute decreased 41.2% in 2012 due to the mandatory tariff reduction mentioned above. The slight difference in the average domestic long distance usage charge per minute in 20122013, 2014 and 2013 was due to the higher tariff in early January 2012 before the tariff reduction mentioned above. For more details of the NCC’s mandatory tariff reduction, please see “Item 5. Operating and Financial Review and Prospects—Overview—Tariff adjustments”.2015, respectively.

We provide so-called “intelligent” network services over our domestic long distance network, includingtoll-free calling personal number, televoting, premium rate service and virtual private network,networks, or VPN, services.services and others. We also focus on offering our customers an increasing number of value-added servicesVAS with flexible tariff packages.

Broadband (ADSL+(FTTx and FTTx)ADSL) Access

We provide broadband internet access through connections based on ADSL and our FTTx technology.and ADSL technologies. FTTx generally offers a faster access medium for our internet customers compared to ADSL by using fiber optic technology. We are continuing the build-out of our FTTx infrastructure. The majority of our FTTx deployments consist of fiber-to-the-node with some fiber-to-the-building deployments.

The following table sets forth our revenues from our broadband access services for the periods indicated.

 

    Year Ended December 31     Year Ended December 31 
  2012   2013       2013           2014           2015     
  NT$   NT$   NT$   NT$   NT$ 
  (in billions)   (in billions) 

Broadband access revenues:

          

Broadband access (ADSL and FTTx)

   19.1     19.1  

Broadband access (FTTx and ADSL)

   19.1     19.1     19.3  

We provide broadband access services to other internet service providers that do not have their own network infrastructure, and as a result, our broadband customers also include some customers that use only our broadband data access lines and choose another provider for internet service provider, or ISP, services. We began

From 2013 to provide2015, we continued accelerating our ADSL service in August 1999 and had approximately 1.6 million customers as of December 31, 2013. As of December 31, 2013, approximately 68.8%, or 1.1 million, of our ADSL customers were also our HiNet subscribers. As a result of increased migration to our higher-bandwidthhigh speed FTTx services, the number of our ADSL customers continued to decline in 2013.

The number of our FTTx customers increased significantly in 2011, 2012 and 2013 as prices became more affordable, coverage areas expanded and customer demand for higher bandwidth heightened. Many of new FTTx customers have migrated from using our ADSL internet services. We also provide FTTx access services to other internet service providers that do not have their own network infrastructure, and as a result, our FTTx customers also include some customers who only use us for the FTTx data access lines and choose another ISP to provide internet services. Of the approximately 3.0 million FTTx customers as of December 31, 2013, approximately 2.7 million were also our HiNet subscribers.household coverage. We currently offer various promotional packages to encourage more migration of our ADSL subscribers to our FTTx service and migration of our FTTx subscribers to higher speed FTTx service. In 2015, FTTx revenue reached 86.6% of our total broadband revenue. As of December 31, 2013, 69%2015, 92.5% of HiNet subscribers accessed the internet through our FTTx service and we expect this ratio to increase in the future as a result of these promotional measures.customers subscribe HiNet ISP service.

Our subscriber market share of Taiwan’s broadband market was approximately 79.2%77.7%, 79.2%76.7% and 77.7%75.8% in 2011, 20122013, 2014 and 2013,2015, respectively.

The following table sets forth our broadband service customers as of each of the dates indicated.

 

  As of December 31   As of December 31 
  2011   2012   2013       2013           2014           2015     

FTTx service customers (in thousands)

   2,955     3,120     3,358  

ADSL service customers (in thousands)

   2,101     1,839     1,598     1,598     1,419     1,138  

FTTx service customers (in thousands)

   2,398     2,719     2,955  

Average downlink speed (Mbps)

   11.2     16.3     26.9     26.9     34.5     39.5  

Our FTTx service offers downlink speeds of 6, 20, 60, 100, 300, 500 Mbps and 1 Gbps matched with uplink speeds of 2, 5, 20, 40, 100, 250 and 600 Mbps, respectively. Our ADSL service offers downlink speeds that range from 12 Mbps to 8 Mbps and uplink speeds that range from 64 kilobits per second, or Kbps, to 640 Kbps. Our FTTx service offers downlink speeds of 12, 20, 50 and 100 Mbps matched with uplink speeds of 20, 40 and 100 Mbps, respectively. As of December 31, 2013, our average downlink speed was 26.9 Mbps.

We have experienced competition in the ADSL and FTTx service marketbroadband from cable operators and other fixed-line operators. In addition, as faster wireless technologies, such as 4G LTE, have been deployed, some customers have replaced fixed broadband services with high-speed mobile broadband services. Our strategy is to continue the migration of ADSL subscribers to FTTx and the migration of FTTx subscribers to higher speed FTTx so as to increase the ARPU. In addition, in order to strengthen customer loyalty, we have provided free speed upgradesmaintain our competitiveness.

Charges for broadband customers since August 2010. In Aprilour FTTx and October 2013, we further reducedADSL services include one-time installation charges and monthly subscription fees. These charges for our broadband tariff, especially for higher speedFTTx and ADSL services such as 60 Mbps and 100 Mbps, in order to speed up the migration to fiber solutions and facilitate the take-up of relevant applications. Although the lower broadband tariff had a temporary impactvary based on our revenue, we believe the speed upgrade will have a positive effect on our promotion of broadband value-added services in the long run.

connection speed. Charges for our HiNet dial-up service include a monthly fee entitling the customer to a fixed number of minutes of service, with an additional charge per minute when the fixed number of minutes is exceeded. Alternatively, we offer our HiNet dial-up customers an unlimited number of minutes for a fixed monthly fee. Charges for our ADSL and FTTx services include one-time installation charges and monthly subscription fees. These charges for our ADSL and FTTX services vary based on connection speed.

The following table sets forth our ARPU for each of the periods indicated.

 

   Year Ended December 31 
   2012   2013 
   NT$   NT$ 

ARPU for HiNet dial-up services per month(1)

   15     11  

ARPU for ADSL services per month(2)

   437     424  

ARPU for FTTx services per month(3)

   895     859  
   Year Ended December 31 
       2013           2014           2015     
   NT$   NT$   NT$ 

ARPU for broadband services per month(1)

   704     704     714  

ARPU for FTTx services per month(2)

   859     838     828  

 

(1)ARPU for HiNet dial-up services per month is calculated by dividing the sum of local telephone usage revenues generated by HiNet dial-up subscribers and internet access revenues by the average of the number of our HiNet dial-up subscribers on the first and last days of the period and dividing the result by the number of months in the relevant period.
(2)ARPU for ADSLbroadband services per month is calculated as the sum of (a) ADSLbroadband access revenues for the relevant period divided by the average of the number of our ADSLbroadband access customers on the first and last days of the period divided by the number of months in the relevant period and (b) HiNet ADSL ISP service revenues divided by the average of the number of HiNet ADSL ISP service subscribers on the first and last days of the period divided by the number of months in the relevant period.
(3)(2)ARPU for FTTx services per month is calculated as the sum of (a) FTTx access revenues for the relevant period divided by the average of the number of our FTTx access customers on the first and last days of the period divided by the number of months in the relevant period and (b) HiNet FTTx ISP service revenues divided by the average of the number of HiNet FTTx ISP service subscribers on the first and last days of the period divided by the number of months in the relevant period.

The decline ofDespite tariff reductions mandated by the NCC, our ADSLoverall broadband ARPU wasincreased in 2015, mainly due to the NCC’s mandatory tariff reduction. The decline of FTTx ARPU was due to (1) the NCC mandatory tariff reduction and (2) the promotional packages and discounts provided for existing customers.our successful strategy in migration mentioned above. For more details of the NCC’s mandatory tariff reduction, please see “Item 5. Operating and Financial Review and Prospects—Overview—Tariff adjustments.”

Leased Line Services—Local and Domestic Long Distance

We are the leading provider of domestic leased line services in Taiwan. Leased line services involve offering exclusive lines that allow point-to-point connection for voice and data traffic. Leased lines are used by business customers to assemble their own private networks and by telecommunications service providers to establish networks to offer telecommunications services.

We provide data transmission services to major corporate customers in Taiwan. We also provide leased lines to other mobile and fixed-line service operators for interconnection with our fixed-line network and for connection within their networks.

The following table shows the bandwidth of local and domestic long distance lines leased to third parties as of each of the dates indicated.

 

   As of December 31 
   2011   2012   2013 
   (in gigabits per second, or Gbps) 

Total bandwidth

   1,705.7     1,294.6     1,054.7  
   As of December 31 
   2013   2014   2015 
   (in gigabits per second, or Gbps) 

Total bandwidth

   1,054.7     1,359.1     1,556.8  

The total bandwidth of local and domestic long distance lines leased to third parties decreasedincreased from 20112013 to 2013 primarily2015 mainly due to the general trenddemand of migrating tothe bandwidth of backbone network for 4G mobile broadband services and the increased competition from other service providers constructing their own lines.services.

Rental fees for local leased lines are generally based on transmission speed while domestic long distance leased line rental fees are generally based on transmission speed and distance. We continue to experience a decline in rental fees for all of our leased line products. We attribute the general decline in rental fees since 2000 to a general migration toward broadband services and increased competition from other service providers constructing their own lines mentioned above. In response, we continue to implement marketing and service campaigns to retain our high-value corporate customers for our leased line products. Our local and domestic long distance leased line services revenues were NT$5.55.1 billion, NT$4.6 billion and NT$5.1 billion4.4 (US$0.20.1 billion) in 20122013, 2014 and 2013,2015, respectively. Although the bandwidth leased to third parties increased in 2014 and 2015, the revenue decreased year over year mainly due to the decline in rental fees described above.

Wi-Fi Services

We launched our wireless local area network service in May 2002. As of December 31, 20122013, 2014 and 2013,2015, we had a total of approximately 1,280,3151.8 million, 2.0 million and 1,816,0902.4 million residential and business customers that leased our access points, respectively. In addition, we had established 42,00055,000 hot spots and 150 hot zones in public areas by the end of 2013,2015, such as convenience stores, airports and international convention centers, where our smartphone subscribers can access our Wi-Fi network and help to offload 3Gmobile data network traffic.

Multimedia on DemandMOD Services

Using video streaming technology through a set top box that connects to our FTTx and ADSL data connections, our MOD customers can access TV programs, video-on-demand and other services. We had over 160195 broadcasting channels and over 12,00020,000 hours of on-demand programs and served approximately 1.241.3 million customers as of December 31, 2013. In addition, our video-on-demand service provides movies, dramas, animations, documentaries, e-learning and music programs for home entertainment.2015. Also, as of December 31, 2013,2015, we offered 88152 high definition, or HD, channels and other HD video-on-demand programming, such as

sports, movies and knowledge materials. InSince 2013, we offered TV Everywhere“TV Everywhere” service for our MOD subscribers to enjoy a seamless program viewing experience on multi-screensacross multiple platforms, including smartphones, tablets and PCs. Additionally, we offered movie SVoD, or Subscription Video on Demand, targeting customers who are film fans. In addition to our regular packaged offerings, we also offered new family packages to attract moreoffer subscription video on demand, or SVoD, services for film and broadcasted free movies every week to increase the household TV usage rate and enhance user experience.drama. As of December 31, 2015, we had 475 thousand SVOD subscribers. Our MOD revenues accounted forfrom 2013 to 2015 were NT$1.92.2 billion, NT$2.6 billion and NT$2.22.5 billion (US$74.40.1 million) in 20122013, 2014 and 2015, respectively. The increase in revenue from 2013 respectively.to 2014 was mainly due to a continuous increase in the number of subscribers that purchased packaged offerings. With a solid base of 1.3 million customers that is expected to steadily expand, starting from 2015, we began adjusting our cooperation schemes with channel providers. The new schemes bring down our operating expenses while also impacting our revenues at the same time. We expect this structural shift to enhance our IPTV margins in the mid-to-long term.

ICT andOther Domestic Services

Our ICT and other services in domestic servicesfixed communications business include information and communication technologyICT services, corporate solution and bill handling services. See “Emerging Services”.

Mobile Communications Business

Mobile communications services are one of our principal business activities. Our mobile communications services include mobile services, sales of mobile handsets, tablets and data cards and ICT and other mobile services.

Mobile Services

We are Taiwan’s largest provider of mobile services in terms of both revenues and customers. In 2012, we generated revenues of NT$72.5 billion, or 32.8% of our total revenues, from mobile services. In 2013, we generated revenues of NT$76.7 billion, or 33.6% of our total revenues, from mobile services. In 2012,2014, we managed to increase

generated revenues of NT$77.5 billion, or 34.2% of our total revenues, from mobile revenue by promotingservices. In 2015, we generated revenues of NT$80.9 billion (US$2.5 billion), or 34.9% of our total revenues, from mobile internet services, which fully offset the decline of mobile voice revenue due to the NCC’s mandatory tariff reduction and market competition.services. In 2013, we continued to migrate customers (1) from 2G to 3G with additional data plans and (2) from 3G voice only to data plan adoption. As a result, our mobile VAS revenue grew by 38.4% year over yearfrom 2012 to 2013. It further grew by 22.5% from 2013 to 2014 and by 13.8% from 2014 to 2015 due to the continuous mobile internet adoption and fast development in 2013.the 4G mobile broadband segment in our industry.

 

  Year Ended December 31   Year Ended December 31 
  2012   2013   2013   2014   2015 
  NT$   NT$   US$   NT$   NT$   NT$   US$ 
  (in billions)   (in millions)   (in billions)   (in millions) 

Mobile services revenues:

              

Usage(1)

   42.1     40.1     1,345.6     40.1     36.0     35.8     1,090.3  

Interconnection

   7.3     6.0     200.7     6.0     4.8     3.7     113.9  

Mobile data

   20.4     28.3     948.4  

Mobile VAS

   28.3     34.8     39.6     1,207.3  

Other

   2.7     2.3     76.6     2.3     1.9     1.8     54.7  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total mobile services

   72.5     76.7     2,571.3     76.7     77.5     80.9     2,466.2  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Includes monthly fees.

As the market for mobile services has continued to expand, we have experienced growth in our mobile customer base. We are the largest mobile operator in Taiwan in terms of revenues and number of customers. We had 10.711.2 million mobile customers, for a market share of approximately 35.9%38.1% of total mobile customers and approximately 35.3%37.2% of total mobile services revenues in Taiwan, as of December 31, 2013.2015.

In October 2013, we obtained a 4G mobile broadband services spectrum of 10 MHz paired spectrum in the 900 MHz frequency band and 25 MHz paired spectrum in the 1800 MHz frequency band. In November 2013, we paid NT$39.1 billion to the government for our 4G mobile servicesthe spectrum. Our 4G mobile servicesThe license is valid until December 31, 2030. We are currently deployinghave launched 4G mobile broadband services in May 2014 and deployed our 4G mobile broadband networks for better coverage. By the end of 2015, our 4G mobile broadband network population coverage had reached 99% for the whole country. We will continue enhancing our 4G mobile broadband network capacity.

In December 2015, we obtained additional spectrum for 4G mobile broadband services of 30 MHz paired spectrum in the 2500MHz and 2600MHz frequency bands, and we planpaid NT$10.0 billion to launch 4G services using LTE technologythe government in July 2014.the same month. The license is valid until December 31, 2033. We put these 2500MHz and 2600MHz frequency bands into use on March 24, 2016.

In February 2002, the Ministry of Transportation and CommunicationsMOTC granted 3G mobile services concessions to five companies, including us. In March 2002, we paid NT$10.2 billion to the government for our

concession. Our 3G mobile services license is valid until December 31, 2018. In July 2005, we launched our 3G mobile services, using WCDMA technology. We have been allocated 15 MHz pairedSee the detail in mobile spectrum plus 5 MHz unpaired spectrumallocation in the 2 GHz frequency band for 3G mobile services, and 15 MHz in the 900 MHz frequency band and 11.25 MHz in the 1800 MHz frequency band for GSM services and general packet-switched radio services, or GPRS. “Network Infrastructure”.

We offer the largest international roaming network among Taiwan mobile service providers. By the end of 2013,2015, our 3G roaming contracts includes 213265 networks in 8999 countries, our 2G GSM roaming contracts include 425461 networks in 198 countries, and our 2.5G GPRS roaming contracts include 350393 networks in 144154 countries. We have also established 4G LTE roaming contracts with 70 networks in 49 countries.

As of December 31, 2013, we had upgraded all of our 3G cellular base stations with HSDPA capacity, and 2,400 GSM base stations with EDGE capacity in the larger metropolises of Taiwan. We will continue this process of implementing HSDPA and EDGE upgrades in the major areas of Taiwan.

The following table sets forth information regarding our mobile service operations and our mobile customer base for the periods indicated.

 

   As of or for the Year Ended December 31 
   2011  2012  2013 

Taiwan population (in thousands)(1)

   23,225    23,316    23,374  

Total mobile customers in Taiwan (in thousands)(2)

   28,862    29,449    29,701  

Penetration (as a percentage of the population)(2)

   124.3  126.2  127.1

Total mobile revenues in Taiwan (in billions)(3)

   NT$217.0    NT$219.2    NT$216.8  

Number of our mobile customers (in thousands)(2)(4)

   10,072    10,269    10,656  

Our market share by customers

   34.9  34.9  35.9

Our market share by revenues(5)

   32.6  33.0  35.3

Number of our prepaid customers (in thousands)(4)

   1,052    1,124    1,325  

Our prepaid customers as a percentage of our total customers

   10.4  10.9  12.4

Annualized churn rate(6)

   11.52  13.26  13.87

Minutes of usage (in millions of minutes)

    

Incoming

   11,368    12,536    12,372  

Outgoing

   10,897    12,258    12,316  

Average minutes of usage per user per month(2)(7)

   188    203    197  

ARPU per month(2)(8)

   NT$598    NT$594    NT$611  
   As of or for the Year Ended December 31 
   2013  2014  2015 

Taiwan population (in thousands)(1)

   23,374    23,434    23,485  

Total mobile revenues in Taiwan (in billions)(2)

   NT$216.8    NT$207.6    NT$217.1  

Annualized churn rate(3)

   13.87  13.61  18.17

Minutes of usage (in millions of minutes)

    

Incoming

   12,372    12,043    11,428  

Outgoing

   12,316    12,243    11,626  

Average minutes of usage per user per month(4)(5)

   197    186    172  

 

(1)Data from the Department of Population, Ministry of the Interior, Republic of China.ROC.
(2)The number of mobile customers is based on the number of subscriber identification module, or SIM, cards. Since 2006, the total number of mobile customers in Taiwan included 2G, 3G and personal handy-phone system, or PHS, customers. The number of our mobile customers also includes our prepaid and VPN customers.
(3)Data from the statistical monthly release by the NCC, in the Republic of China,ROC, which include mobile revenues 2G, 3G, PHS, and PHS. The figures of 2011 and 2012 have not been adjusted by the NCC after the adoption of IFRSs.
(4)Includes GSM, GPRS and 3Gsince 2014, 4G mobile broadband services.
(5)Market share by revenues is calculated by dividing mobile service revenues by the total mobile revenues in Taiwan.
(6)(3)Measures the rate of customer disconnections from mobile service, determined by dividing (a) our aggregate voluntary and involuntary deactivations (excluding deactivations due to customers switching from one of our mobile services to another) during the relevant period by (b) the average number of customers during the period (calculated by averaging the number of customers at the beginning of the period and the end of the period), and multiplying the result by the fraction where (c) the numerator is 12 and (d) the denominator is the number of months in that period. The calculation includes both prepaid and postpaid customers.

(7)(4)The number of mobile customers is based on the number of subscriber identification module, or SIM, cards. Since 2006, the total number of mobile customers in Taiwan included 2G, 3G and personal handy-phone system, or PHS, customers. Since 2014, the number of mobile customers also included 4G mobile broadband customers. The number of our mobile customers also includes our prepaid and VPN customers.
(5)Average minutes of use per user per month is calculated by dividing the total minutes of use during the period by the average of the number of our mobile customers on the first and last days of the period and dividing the result by the number of months in the relevant period.
(8)ARPU per month is calculated by dividing our aggregate mobile services revenues during the relevant period by the average of the number of our mobile customers on the first and last days of the period and dividing the result by the number of months in the relevant period.

The total mobile customers in Taiwan had reached approximately 29.729.4 million as of December 31, 2013.2015. Mobile penetration was approximately 127.1%125.1% on the same date. The overall mobile services market experienced a slight decreaseincrease of 1.1%4.6% in revenues in 20132015 mainly due to the downturngrowth in overall 2G4G mobile broadband market, and the tariff cut for 3G services owing to the promotion of our 3G data services.which brings in more mobile internet subscribers. As of December 31, 2013,2015, we had 8.044.4 million, 6.1 million and 2.620.7 million subscribers for 4G, 3G and 2G services, respectively.

We began offering prepaid card services in October 2000, and prepaid 3G card services in February 2008.2008, and prepaid 4G card services in April 2015. As of December 31, 2013,2015, we had approximately 1.331.7 million prepaid customers, representing approximately 12.4%15.5% of our total mobile customers. Prepaid customers do not pay monthly fees but pay a higher usage charge on a per second basis. Once the prepayment has been fully utilized, a prepaid customer can make additional prepayments to continue the service. Alternatively, the customer may convert to become a post-paid customer while retaining the same telephone number.

We offer incentives, such as mobile handset subsidies, when new customers agree to sign a service contract with us or when existing customers renew their contracts with us ranging from 12 months to 30 months. We generally offer subsidies on mobile handsets equipped with more advanced data functions to promote the expansion of our 3G and 4G mobile services. Smart phonesSmartphones accounted for 87%90.0% of the total handsets we offered in 2013, and we expect the percentage to reach more than 90% in 2014.2015. We expect our average subsidy per handset in 20142016 to continue to decrease as we focus more on promoting low- to mid-tier and low-tier smart phones.smartphones. At the same time, we expect to maintain our mobile internet market leadership.

Our tariffs for post-paid mobile customers primarily consist of usage fees and monthly fees. We also offer discounts on usage fees for calls made between our mobile customers to encourage subscription to our mobile service.

When our customers are outside Taiwan, they pay roaming charges plus international long distance charges and, where applicable, local charges in roaming destinations. Our strategic alliance with Vodafone has been terminated by the end of April 2013 after our agreement expired, as Vodafone has already entered into another strategic alliance with one of our competitors. We have already signed agreements with other Europeansome providers such asT-Mobile, Telefonica, Orange, TeliaSonera,in foreign countries for strategic cooperation for our roaming business, and we also continue cooperating with local operators in different countries. We also offer discounts on usage fees for calls made between our mobile customers to encourage subscription to our mobile service. Our 3G service provides a monthly flat rate service to our customers using our 3G service for internet purposes.business.

Our ARPU per month increaseddecreased to NT$593 in 2014 from NT$594 in 2012 to NT$611 in 2013 mainly due to our strong promotion onlower promotional tariffs that we offered in 2014 to attract more subscribers and an increase of the total number of subscribers. Our ARPU per month increased to NT$604 in 2015 from NT$593 in 2014, primarily due to successful 4G mobile broadband migration which attracted additional mobile internet services. We intend to continue migrating mobile voice only customers to adopt additional data plan.subscribers.

In addition to our basic mobile services, we also offer a broad range of value-added telecommunications and information services. In August 2001, we introduced a platform of integrated mobile value-added services under the brand name “emome”. Our “emome” services offer a broad range of value-added services, including financial information, transaction services, emergency services access numbers, directory information, time, weather and traffic reports. After the launch of our 3G mobile services, we began providing video phone, video-on-demand and other related 3G mobile value-added services as well. In 2009, we offered the “Hami” value-added service platform and provided e-book and Hami Apps services. Revenues from mobile data servicesVAS represented 28.3%37.0%, 44.9% and 37.0%49.0% of our total mobile services revenues in 20122013, 2014 and 2013,2015, respectively. The increase of mobile data serviceVAS revenue percentage was mainly attributed to the increase in mobile data plan subscriber number.

Paging Services

Due to substitution by mobile services and a decline in demand for our paging services in recent years, beginning in February 2007, we started downsizing our paging services by limiting access to certain telephone prefixes. We ceased providing paging services since September 2011 as approved by the NCC.

Sales of Mobile Handsets, Tablets and Data Cards

We engage in the distribution and sales of mobile handsets, tablets and data cards for use on our mobile network to customers through our directly-owned stores, our subsidiary Senao, and also through third-party retailers. See “Marketing Strategy—Distribution Channels” and “Sales and Distribution” in “—Marketing, Sales and Distribution”.

In January 2007, we acquired 31.33% equity ownership of Senao, a major distributor of mobile handsets in Taiwan. Senao has been listed on the TWSE under the number “2450” since May 2001. ICT andOther Services

Our equity ownership in Senao decreased from 31.33% as of January 15, 2007 to 28.18% as of March 31, 2014 due to the exercise of options by employees that were previously granted before 2007. We consolidated the results of operations of Senao because we control four out of seven seats on the board of directors through the support of large beneficial shareholders of Senao. Please refer to note 3 and note 15 of our consolidated financial statements included elsewhere in this annual report for description about the control relationship between the parent company and Senao. Our investment in Senao enhanced our mobile handset distribution and sales capabilities. Starting from January 2014, customers can subscribe for our broadband service, MOD serviceICT and other services at Senao retail stores. See “Item 7. Major Stockholders and Related Party Transactions—B. Related Party Transactions” for a discussion of the agreement between the parent company and Senao aboutin our mobile communications business cooperation.

Other Mobile Services

Our mobile other services include information and communication technologyICT services, corporate solution and bill handling services. See “Emerging Services”.

Internet Business

Our internet business includes HiNet, our internet service provider, internet value-added services, or VAS, data communication services, internet data center, or IDC, services, and ICT and other internet services. Our internet revenues represented 11.2%, 11.5%, and 11.1% of our revenues in 20122013, 2014 and 2013,2015, respectively.

HiNet Internet Service

We are the largest ISP in Taiwan, with a subscriber market share of 68.8%68.3% as of December 31, 2013.2015. As of December 31, 2013,2015, HiNet had approximately 4.2 million subscribers. Our HiNet internet service generated revenues of NT$16.917.2 billion, NT$17.2 billion and NT$17.217.5 billion (US$0.60.5 billion) in 20122013, 2014 and 2015, respectively. Our ISP service subscribers decreased from 2013 respectively.to 2015 mainly due to substitution by mobile broadband services and the competition from cable broadband operators. Although the number of our ISP service subscribers decreased, the revenues slightly increased from 20112013 to 2013, the revenues decreased mainly2015 primarily due to the tariff reductions for the HiNet ISPmigration of our subscribers to higher speed service.

The following table sets forth HiNet’s subscribers as of each of the dates indicated.

 

  As of December 31   As of December 31 
  2011 2012 2013   2013   2014   2015 
  (in thousands, except
percentages)
   (in thousands, except
percentages)
 

Total internet subscribers in Taiwan

   6,092   6,101   6,158     6,158     6,178     6,151  

HiNet subscribers:

          

HiNet FTTx subscribers

   2,683     2,843     3,083  

HiNet ADSL subscribers

   1,099     948     688  

HiNet dial-up subscribers

   487   469   454     454     439     426  

HiNet ADSL subscribers

   1,559   1,321   1,099  

HiNet FTTx subscribers

   2,132   2,451   2,683  

Other access technology subscribers

   4   3   3     3     3     2  
  

 

  

 

  

 

   

 

   

 

   

 

 

Total HiNet subscribers

   4,182    4,244    4,239     4,239     4,233     4,199  
  

 

  

 

  

 

   

 

   

 

   

 

 

Market share(1)

   68.6  69.6  68.8

(1)Based on data provided by the NCC.

We have maintained our leading market position despite operating in a highly competitive market with approximately 218421 ISPs in Taiwan. As of December 31, 2015, approximately 93.4% of our broadband customers were also HiNet subscribers, using HiNet as their ISP. We expect the competitive conditions currently prevailing in the internet service provider market to continue to intensify.

Internet Value-added ServicesVAS

Our HiNet portal atwww.hinet.net provides value-added servicesVAS to our customers, such as network security, Blog, travel, games, e-learning, financial information, music, video, anti-virus and links to other portals. We charge fees for some of these services. We also receive commissions for transactions completed on some of these other portals. Our internet video portal atwww.hichannel.hinet.net offers online entertainment services through the internet. In particular, our HiNet broadband (ADSL(FTTx and FTTx)ADSL) subscribers can access music, television programs, movies and other multimedia content on demand. We charge access fees for some of this content. We expect the revenues generated from these value-added servicesVAS to continue to grow as a percentage of our total internet services revenues.in the long run.

Data Communication Services and Internet Data CenterIDC Services

We provide a wide range of managed data services, including frame relay services, asynchronous transfer mode services, and VPN services. Frame relay services provide high-speed data communications linking remote sites. Asynchronous transfer mode services are used to handle high-bandwidth, integrated voice, video, data and internet traffic between sites.

Internet data centersIDCs are facilities providing the physical environment necessary to keep computer network servers running at all times. These facilities are custom-designed with high-volume air conditioning temperature control systems, secure access, reliable electricity supply and connections to high-bandwidth internet networks. Data centers house, protect and maintain network server computers that store and deliver internet and other network content, such as web pages, applications and data. We currently have the largest floor area of internet data centers in Taiwan compared to our competitors in Taiwan. We offer co-location, web hosting and application service provider services.

ICT andOther Internet Services

Our ICT and other services in our internet servicesbusiness include government services, corporate solution and ICT and cloud services. See “Emerging Services”.

International Fixed Communications Business

Our international fixed communications business includes international long distance telephone services, international leased line services, international data services, satellite services and ICT and other international services.

International Long Distance Telephone

We provide international long distance telephone services in Taiwan. Total revenues from international long distance telephone services comprised 5.2%4.9%, 4.6% and 4.9%4.2% of our revenues in 20122013, 2014 and 2013,2015, respectively. In addition, we provide wholesale international long distance services to international simple resale operators that do not possess their own telephone network or infrastructure. Our international long distance telephone revenues decreased by 2.6% from7.3% to NT$11.510.4 billion in 20122014, and further decreased by 7.5% to NT$11.29.6 billion (US$0.40.3 billion) in 20132015, primarily due to the increased competition from VoIP-based international long distance service providers and free VoIP applications.

Since international fixed communication services have been open for competition since 2001, we expect competition in this line of business will continue to intensify. Our average market share of the international long distance market by minutes was approximately 54.9%55.1%, 51.0%56.0%, and 55.1%57.8% in 2011, 20122013, 2014 and 2013,2015, respectively. Despite the decrease in our international long distance traffic volume, our market share increased from 2012 to 2013 because our international long distance traffic volume decreased less than our competitors. However, the overall market for international long

distance services declined due to the intense competition from VoIP-based international long distance service providers and free VoIP applications. Our international long distance services consist primarily of international direct dial services and the wholesale of international long distance traffic.

We commenced the wholesale of international long distance minutes to licensed domestic international simple resale, or ISR operators, and other international carriers in 2001. The domestic ISR operators require fixed-line operators in Taiwan, such as us, to provide international long distance telephone services to their end-users. We provide time-division multiplexing, or TDMIn 2013, 2014 and VoIP connections with committed standard and premium route quality to connect to over 230 worldwide destinations for ISR operators and international carriers. We offer customized solutions with competitive prices and “24 hours a day, 7 days a week” service to satisfy their needs. In 2012 and 2013,2015, we sold 1,064743 million, 699 million and 743786 million minutes of wholesale international long distance traffic, which represented approximately 42.2%35.5%, 42.1%, and 35.5%58.4% of our total outgoing international long distance traffic, respectively. Despite the decrease in international long distance traffic volume, revenues from the wholesale of international long distance minutes increased by 5.4% from6.8% to NT$2.93.3 billion in 20122014, and further increased by 13.5% to NT$3.13.7 billion (US$0.1 billion) in 20132015, primarily due to our focus on expanding such services in higher-unit-price areas, such as Europe.Central and South America, Africa, Asia and Middle East.

International calls to our top five destinations represented 62.4%65.4% of our outgoing international long distance call traffic in 2013.2015. International calls from our top five destinations represented 47.7%44.9% of our incoming international long distance call traffic in 2013.2015.

The following table shows the percentage of total outgoing international long distance minutes for our top five outgoing destinations in 2013.2015.

 

Destination

  Percentage of Total
Outgoing Minutes (%)
 

Mainland China

   27.231.1  

Indonesia

   16.113.7  

Philippines

   8.210.8  

VietnamHong Kong

   6.55.2  

United States

   4.44.6  
  

 

 

 

Total of top five destinations

   62.465.4  
  

 

 

 

The following table shows the percentage of total incoming international long distance minutes for our top five incoming destinations in 2013.2015.

 

Destination

  Percentage of Total
Incoming Minutes (%)
 

Mainland China

   19.016.3  

United States

   8.1

Indonesia

7.39.8  

Canada

   6.77.7  

MalaysiaSpain

   6.65.6

Hong Kong

5.5  
  

 

 

 

Total of top five destinations

   47.744.9  
  

 

 

 

The following table sets forth information with respect to usage of our international long distance services for the periods indicated.

 

  As of December 31   Year Ended December 31 
  2011 2012 2013   2013   2014   2015 
  (in thousands, except
percentages and incoming/
outgoing ratio)
   (in millions, except
percentages and incoming/
outgoing ratio)
 

Incoming minutes

   1,737   1,529   1,198     1,198     983     937  

Growth rate (compared to the same period in the prior year)

   (9.3)%  (11.9)%  (21.6)% 

Outgoing minutes

   2,560   2,523   2,095     2,095     1,658     1,346  

Growth rate (compared to the same period in the prior year)

   (5.7)%  (1.4)%  (17.0)% 

Total minutes

   4,297   4,052   3,293     3,293     2,641     2,283  

Incoming/outgoing ratio

   0.68   0.61   0.57     0.57     0.59     0.70  

Total outgoingincoming call volume decreased by 21.6%17.9% from 20122013 to 2013 primarily2014, and further decreased by 4.7% in 2015, mainly due to the intensified market competition from VoIP-based international long distance service providers and other international long distance service providers. Similarly, due to this intensified competition, total outgoing call volume decreased by 20.9% from 2013 to 2014 and further decreased by 18.8% in 2015.

Outgoing calls made by customers in Taiwan and by customers from foreign destinations using Taiwan direct service are billed in accordance with our international long distance rate schedule for the destination called.

Rates vary depending on the time of day at which a call is placed. Customers are billed on a six-second unit basis for international direct dial services.

The following table sets forth information with respect to the average international long distance usage charge per minute that we received for outgoing international calls during the periods indicated:

 

  Year Ended December 31 
  2012  2013 

Average international long distance usage charge (per minute)

  NT$3.4    NT$3.8  

Growth rate (compared to the same period in the prior year)

  (5.6)%   11.8
   Year Ended December 31 
       2013           2014           2015     

Average international long distance usage charge (per minute)

  NT$3.8    NT$4.4    NT$5.0  

In 2012, since other operators offered competitive tariff to grab market share, we reduced our retail price to maintain competitiveness which resulted in the lower average charge per minute. Despite the decrease in averageAverage charge per minute our growth rate increased from negative 5.6% in 2012 to 11.8%, 15.8% and 13.6% in 2013, 2014 and 2015, respectively, mainly due to our focus on expanding the wholesale of international long distance minutes in higher-unit-price areas, such as Europe.Central and South America, Africa, Asia and Middle East.

We pay for the use of networks of carriers in foreign destinations for outgoing international calls and receive payments from foreign carriers for the use of our network for incoming international calls. Traditionally, these payments have been made pursuant to settlement arrangements under the general auspices of the International Telecommunications Union. Settlement payments are generally denominated in U.S. dollars and are made on a net basis.

The following table sets forth information with respect to our gross international settlement receipts and payments during the periods indicated.

 

  Year Ended December 31   Year Ended December 31 
  2012   2013   2013       2014       2015 
  NT$   NT$   US$   NT$   NT$   NT$   US$ 
  (in billions)   (in billions)   (in millions)   (in billions)   (in millions) 

Gross international settlement receipts

   3.0     3.3     0.1     3.3     3.2     2.8     85.4  

Gross international settlement payments

   5.6     6.0     201.1     6.0     6.5     6.4     195.2  

Our payments to international carriers on an aggregate basis have been greater than our receipts from these carriers primarily because our customers’ outgoing minutes exceeded incoming minutes. BothInternational settlement payments increased in 2014 mainly attributable to our actively promotion for international wholesale business mentioned above. However, international settlement receipts slightly decreased in 2014 primarily due to the decrease in the incoming minutes, which was primarily due to the worldwide trend of VoIP substitution. VoIP substitution is also the reason why both receipts and payments increaseddecreased in 2013 because we promoted our international wholesale business.2015.

In order to compete more effectively in the international long distance market, we have implemented innovative and customized discount calling plans and marketing campaigns directed at high-usage business customers. We also continue to promote our intelligent network services, including international VPNs, international toll free calling and calling card services, and our international long distance minutes wholesale business. Our subsidiary, Chief Telecom, launched its 070 phone-to-phone VoIP service in April 2009. In addition to the change in policy for collecting the tariffs for fixed-line-to-mobile calls starting from 2011, we are also required to pay transition fees to the mobile operators, which as a whole caused a negative impact on our revenues. As we did not have the right to set and collect the tariffs for our 070 service at that time, we filed with NCC to return 30 thousand 070 numbers assigned by the NCC to Chunghwa Telecom, until the NCC gives us the right to set and collect the tariffs for outbound calls from 070 numbers. The application was approved by the NCC on July 1, 2011.

Leased Line Services—International

We are a leading provider of international leased line services in Taiwan. Leased line services involve offering exclusive lines that allow point-to-point connection for voice and data traffic. Leased lines are used by business customers to assemble their own private networks and by telecommunications service providers to establish networks to offer telecommunications services.

We provide data transmission services to major corporate customers in Taiwan. Since August 2001, licenses have been awarded to four undersea cable operators to engage in leased line services. Demand for high-speed data transmission services has been growing rapidly, as a result of growing consumer demand and lower tariffs due to increased competition. In particular, the total bandwidth of our lines leased increased by 6.2%111.2% in 2013.2015.

The following table shows the bandwidth of international lines leased to third parties as of each of the dates indicated.

 

   As of December 31 
       2011           2012           2013     
   (in gigabits per second, or Gbps) 

Total bandwidth

   243.9     531.7     564.8  

   As of December 31 
       2013           2014           2015     
   (in gigabits per second, or Gbps) 

Total bandwidth

   564.8     951.4     2,009.6  

Rental fees for international long distance leased line are generally based on transmission speed and distance.

We continue to experience a decline in rental fees for all of our leased line products. The decline in rental fees since 2000 has been substantial, particularly for international leased lines, partly as a result of competition from newother international leased line service providers. In response, we continue to implement marketing and service campaigns to retain our high-value corporate customers. Our international leased line services revenues were NT$1.21.4 billion, NT$1.5 billion and NT$1.41.7 billion (US$47.950.9 million) in 20122013, 2014 and 2013, respectively.2015, respectively, mainly due to our expansion to the overseas markets and growing consumer demand mentioned above.

International Data Services

Our international data services include international IP VPN services and Taiwan internet gateway services. Total revenues for international data services were NT$1.31.5 billion, NT$1.7 billion and NT$1.52.0 billion (US$48.059.5 million) for 20122013, 2014 and 2013,2015, respectively. Due to the growth of the number of Taiwanese corporations with operations outside of Taiwan, we expect demand for IP VPN and Taiwan internet gateway services to continue to increase and our revenues from our international data services to continue to grow.

Satellite Services

We entered into a contract with ST-2 Satellite Ventures Pte., Ltd. on March 12, 2010 to lease capacity on the ST-2 satellite. The lease term is 15 years starting from the official start of operations of the ST-2 satellite, and the total contract value is approximately NT$6.0 billion. This contract requires a prepayment of NT$3.1 billion, and the remaining amount will be paid annually when ST-2 satellite starts its official operation.annually. The ST-2 telecommunications satellite launched on May 21, 2011 and began commercial operation in August 2011. Please refer to note 39Note 40 of our consolidated financial statements included elsewhere in this annual report for further details.

In addition, we have two satellite communication centers that enable us to provide TV broadcast, satellite value-added servicesVAS and backup systems for use in major emergencies. We also provide satellite services to Southeast Asia.

ICT andOther International Services

Our ICT and other services in our international servicesfixed communications business include corporate solution services. See “Emerging Services”.

Others

Our other business segment includes our non-telecom services, including property sales made by our subsidiary, Light Era Development Co., Ltd., or Light Era, and electronic products sales made by our subsidiary, Chunghwa Precision Test Tech Co., Ltd.

Interconnection

We provide interconnection of our fixed line network and mobile network with other operators.

The following table sets forth our interconnection fee revenues and costs for the periods indicated. These revenues and costs are included, depending on the nature of the call made, in domestic fixed communications or mobile communications revenues and expenses, respectively.

 

 Year Ended December 31  Year Ended December 31 
 2012 2013      2013         2014     2015 
 NT$ NT$ US$  NT$ NT$ NT$ US$ 
 (in billions) (in millions)  (in billions) (in millions) 

Interconnection fee revenues:

       

Fixed line

 1.3   1.2   40.2    1.2    1.1    1.0    29.0  

Mobile(1)

 8.0   6.6   219.8    6.0    4.8    3.7    113.9  

Interconnection costs:

       

Fixed line

 5.7   4.6   155.3    4.6    3.3    2.3    69.1  

Mobile

 7.7   6.2   207.7    6.2    4.9    3.9    119.1  

 

(1)IncludesWe account for revenues from SMS air time charges.charges under mobile VAS instead of interconnection for years. The table for the periods indicated uses accounting categorization described above.

The interconnection rate between fixed-line customers and other fixed-line customers is NT$0.32 per minute during peak times and NT$0.09 per minute during off-peak times. The interconnection rate for calls initiated by mobile customers to fixed-line customers is NT$0.52190.4851 per minute during peak times and NT$0.27180.2531 per minute during off-peak times.

The NCC has mandated mobile interconnection rate reduction over a period of four years starting on January 5, 2013. The rate should be reduced from NT$2.15 per minute to NT$1.15 per minute in four years with a CAGR of -14.5%. Therefore, our mobile interconnection revenues and costs both decreased in 2013.from 2013 to 2015.

Before January 1, 2011, the rates of telecommunication fees for telephone calls between fixed-line customers and mobile customers were set by the mobile network operators. Mobileoperators: mobile network operators collected such telecommunication fees from customers and paid the fixed-line network operators interconnection fees based on minutes of use,usage, regardless of which party of the interconnection initiated the call. The above mechanism was changed by the NCC on August 4, 2010, and startingStarting from January 1, 2011, the fixed-line network operators that initiate the call have the right to set the rates of telecommunication fees and to collect such fees from customers for fixed-line-to-mobile calls. Meanwhile,calls; fixed-line network operators have to pay interconnection fees to mobile network operators in accordance with the interconnection rate set forth by the NCC mentioned in the preceding paragraph. ToNCC. In addition, to balance the competition between us, the market leader of fixed-line network operators, namely us, and other mobile network operators, in addition to the interconnection fees, we are also required by the NCC to pay transition fees (in addition to the interconnection fees) to the other mobile network operators for a period of six years starting from January 1, 2011. The transition fees will decrease gradually over the six-year period, and we will not be required to pay such transition fees from January 1, 2017.

Fixed interconnection costs decreased infrom 2013 to 2015 mainly due to (1) decreasing transition fees year over year, (2) reduction of mobile interconnection rate for fixed-line-to-mobile calls, and (3) decreasing traffic volume.

In accordance with governmental regulations, the contracts governing our interconnection arrangements must specifically address a number of prescribed issues. For example, our interconnection charge should reflect our costs with respect to the network elements used. In addition, cost increases are subject to approval by the regulatory authorities. We expect that our interconnection contracts will generally be reviewed annually, although we may also enter into long-term contracts. See “Regulation—Telecommunications Act—Interconnection Arrangements”.

Emerging Services

We continue leveraging our advantages in network infrastructure, IDC, Content Delivery Network, or CDN, etc. to offer customized ICT total solutions to enterprise customers and to expand our ICT business. The revenues from our ICT business are classified in “ICT and Other Services” of each business segment. We are offering ICT total solutions by integrating our capabilities of cloud, information security, IoT and customization expertise. We are developing in-house Big Data capability for future commercialization as well as cooperating with partners to develop an IoT ecosystem across various industries.

Our ICT services includes integrated services such as our Intelligent Energy Network, or iEN, ITS, and our Intelligent Transportation System, or ITS, services.Internet of Vehicles. Our iEN service helps companies and corporations

implement energy savingenergy-saving measures through computer analysis of data.computer-driven data analysis. Our ITS service provides navigation, real-time traffic information and infotainment through mobile devices for cars and drivers. By leveraging high speed 4G mobile broadband networks, we offer innovative Internet of Vehicles services including GPS, audio and video streaming, car information, etc. available for tablets. In addition to developing ICT businesses such as iEN, ITS, IS, Call Center, IDC,mentioned above, we also pursue ICT projects from both public and bid for government projectsprivate sectors aiming to boostexpand our revenues. We won several significant ICT projects in 2013, including but not limited to a monitoring and recording system project for the Taipei City Police Department, a network construction project for Taiwan Lottery Co., Ltd., a core system project for MingTai Insurance Co., Ltd. and a thin client (meaning a remote computer or computer program that heavily relies on its server for data access, computing and storage) and storage service project for Farglory Land Development co., Ltd.

Cloud Computing is also one of our key new business initiatives, as it is expected to be one of the main long-term growth platforms for telecom operators in the coming years. We have made advances in this segment throughout past two years which we believe will position us as an industry leader over the long run. We continue to cooperate with the government network communication entities and independent software vendors to promote innovative cloud services and applications. We have already begun to offer software as a service customer relationship management, or SaaS CRM, hicloud CaaS, and hicloud Apps mall to small and medium sized enterprises and public users. We have also made over 1,000 SaaS applications in hicloud Apps mall available for our cloud services customers, which exceeded 4,000 small and medium sized enterprises as of the December 31, 2013. Underpinning the rollout of our cloud computing services is our capability and experience in offering data center services to enterprise customers, including our ongoing initiative to build the largest cloud computing data center in Taiwan in anticipation of growing demand for this service. In 2013, we began the construction of our cloud data center in Panchiao, New Taipei City. The Panchiao cloud data center is expected to commence operations in 2015 and will offer high quality and high security cloud services to international and domestic enterprise customers. We believe the strength and reliability of our technology and services provide us with competitive advantages to continue expanding our cloud computing services in the future.

As an integrated telecom service provider, we are providing and continuing to develop integrated services. For example, we have integrated our internal resources to offer cross-platform services over our broadband, mobile and internet platforms. These integrated services allow our customers to access our services, such as our multimedia programs, through a variety of terminals and devices.revenue streams.

Marketing, Sales and Distribution

Marketing Strategy

In order to retain and expand our large customer base and to encourage our customers to increase their use of our services and products, we continue to focus our marketing strategy on the following areas.

 

Services, Products and Bundled Offerings. We continually develop new value-added servicesVAS and products, and bundle our services and products based on different market segments, with the aim of increasing our high-usage customers and enhancing customer loyalty. For example, we entered into an agreement with Apple Inc. and are currently a reseller of the iPhone in Taiwan. The iPhone combined with our mPro service helps retain existing customers and generate revenues through the increased use of our value-added services. In addition, we exempt deposits that we collect from specific mobile subscribers in advance for bundling subsidized mobile handsets with service plans.

 

Pricing and Promotions. We design flexible pricing packages that allow customers to select structures best tailored to their usage patterns, and design special promotional packages to encourage usage. For example, we have provided “Let’s Talk”, “My Hotline”, “Triple Save” and “Big Save” promotion packages to attract mobile customers.

 

Distribution Channels. We seek to facilitate customer subscription by adding more service points. In addition, we seek to broaden our distribution reach by strengthening our cross-industry alliances and marketing relationships. Furthermore, we seek to expand our sales channels more effectively, we also implement an external sales agent system by implementation of a

collaborating with Senao, Synnex Technology International Corporation and Tsann Kuen Trans-Nation Group, which collaborations enable us to get closer to every customer.

sales agent system. In 2009, we began a collaboration with Tsann Kuen Trans-Nation Group, allowing the registration of mobile numbers at electronics stores for the first time, effectively increasing our points of sale. We also developed staff incentive programs to better motivate our sales staff.

 

Business Customers. We expanded our customer focus to include small and medium-sized enterprises, or SME, in addition to large corporations. We seek to serve the needs of large corporate customers by devoting a project manager or project engineer to service these customers. These account managers are responsible for developing customized solutions and tariff packages to meet the specific needs of our customers. We continually update and expand our service offerings so that we can remain a one-stop telecommunications services provider to our corporate customers and provide for all of their telecommunications needs. Our dedicated local teams serve the needs of small and medium-sized enterprises. These teams also use our data bank to identify and target potential clients for promoting our e-commerce and mobile services. In addition, we help our corporate customers improve their efficiency and competitiveness by creating information systems for them.

 

Advertising. We are committed to further strengthening the Chunghwa Telecom brand and image as well as strengthening and expanding market recognition of our specialized product brands, such as HiNet and emome. We plan to leverage our leading market position and status to strengthen the overall advantage of our product brands.

Sales and Distribution

Our marketing department at our corporate headquarters in Taipei is responsible for central business planning and formulating our marketing strategies and objectives. We have multiple marketing departments for our various businesses which are responsible for business and marketing planning.

As of December 31, 2013,2015, we also had 17 operations offices, 431468 service centers, 271268 Senao exclusive service stores and 6 customer service call centers located throughout Taiwan that are responsible for operations, sales and customer service in their respective local areas.

In January 2007, we acquired 31.33% equity ownership of Senao, a major distributor of mobile handsets in Taiwan. Senao has been listed on the TWSE under the number “2450” since May 2001. Our equity ownership in Senao decreased from 31.33% as of January 15, 2007 to 29.31% as of March 31, 2016, due to the exercise of options by employees that were previously granted before 2007, which decrease was partially offset by Senao purchasing its treasury stock in June and July of 2015. We consolidated the results of operations of Senao because we control four out of seven seats on the board of directors through the support of large beneficial shareholders of Senao. Please refer to Note 3 and Note 15 of our consolidated financial statements included elsewhere in this annual report for description about the control relationship between the parent company and Senao. Our investment in Senao enhanced our mobile handset distribution and sales capabilities. Starting from January 2014, customers can subscribe for our broadband service, MOD service and other services at Senao retail stores. See “Item 7. Major Stockholders and Related Party Transactions—B. Related Party Transactions” for a discussion of the agreement between the parent company and Senao about our business cooperation.

Customer Service and Billing

We believe our reputation for quality customer service has helped us attract new customers and maintain customer loyalty. We regularly survey our customers to improve our service and better understand market demand and customer preferences, and seek to develop products and services accordingly.

We provide the following services to our customers:

 

24-hour customer service and technical support through our service centers, call centers and website;

English billing documents available upon request;

free of charge itemized billing for international and domestic long distance calls;

bill payment services at 24-hour convenience stores, bank service counters, automatic teller machines, and service centers throughout Taiwan, via direct debit, over the phone, online at our website (www.cht.com.tw), on MOD, and on mobile handset emome or Hami;

 

online information and bill payment services at our website (www.cht.com.tw) and customer service hotline for telephone payment;

24-hour customer service and technical support through our service centers, call centers and website;

free of charge itemized billing for international and domestic long distance calls; and

 

consolidated and automated billing for all services.services, including English billing documents available upon request.

Network Infrastructure

Our network infrastructure consists of transmission networks that convey voice and data traffic, switching networks that route traffic between networks, and mobile, internet, leased line and data switching networks.

We purchase most of our network equipment from well-known international suppliers. As part of the purchase contract, these suppliers deliver and install the equipment for us. We also purchase from local suppliers a variety of components such as transmission lines, switches, telephone sets, MOD set-top boxes, and radio transmitters.

Approximately 13,95113,540 of our employees were engaged in network infrastructure development, maintenance, operation and planning as of December 31, 2013.2015.

Transmission Networks

As of December 31, 2013,2015, our transmission networks consisted of approximately 1.471.67 million fiber kilometers of fiber optic cable for trunking and approximately 7.118.49 million fiber kilometers of fiber optic cable for local loop.

SynchronousBetween 2009 and 2013, we deployed next generation synchronous digital hierarchy, or NG SDH, architectureand optical cross connect, or OXC, equipment for providing TDM and data service. Due to the emergence of packet-transport network, or PTN, technology, which is an advanced technology that allowsa cost-effective method for instantaneous reroutingtransmitting packet-based data services, we began the deployment of PTN and eliminates downtimestopped the deployment of NG SDH network in the event of a fiber cut. In addition, SDH offers better reliability and performance for optical fiber transmissions at a lower operating cost. In December 2002, we installed synchronous transport module 64 or STM 64, multiplexer and 32-wavelength dense wavelength division multiplexing, or DWDM, equipment on our long-haul backbone network. Our STM 64 multiplexer can multiplex several low speed signals into a 10 gigabits per second, or Gbps, high-speed signal. DWDM equipment uses a technology that puts data from different sources together on an optical fiber with each signal carried on its own separate wavelength. Both STM 64 multiplexer and DWDM equipment can increase our network capacity.2014. Between 2007 and 2013,2014, we deployed 40/80-wavelength Re-configurable Optical Add-Drop Multiplexer, or ROADM, for backbone transmission network in order to provide new data services such as gigabit Ethernet, fiber channel, 2.5 gigabit and 10 gigabit packet over SDH and 10 gigabit Ethernet. We have already completedDue to the deploymenthigh utilization of 1,135 wavelengthour existing ROADM bynetwork, we began to introduce the end of 2013. Tooptical transport network, or OTN, trial network to meet the demand for broadbandof 100G wavelength services we have installed an optical cross-connect, or OXC, network and a next generation synchronous digital hierarchy, or NG SDH, network, which provides gigabit Ethernet over SDH service, betweenin 2014. Between 2009 and 2013. We have2013, we had already completed the deployment of 5,519 GbE OXC/NG SDH, which was stopped in 2014 due to the introduction of PTN. In addition, we had completed the deployment of 1,190 wavelength ROADM and 6,270 GbE PTN by the end of 2013.

Based on2015. We will begin the transmission network described above, we have been providing connection circuit servicelarge-scale deployment of 10 gigabit packet over SDHOTN to meet demand for wavelength and 10 gigabit Ethernet to the government’s Taiwan Advanced Research and Education Network since November 2006 and will continue the service until November 2014.sub-wavelength services in 2016.

As part of our strategic focusfocuses on the internet and data markets, our local loop connections use ADSLmainly adopt FTTx technology. This enables us to deliver high-speed internet, multimedia and other data services to our customers. Substantially all of our installed telephone lines are capable of delivering ADSL services. As of December 31, 2013, we had approximately 2.97 million lines of ADSL. In addition, the Ethernet-based FTTx system is also introduced into our access network to provide broadband services, such as MOD, high speed internet access and VPN. As of December 31, 2013,2015, we have constructed approximately 6.076.92 million FTTx ports. Our FTTx service can offer high-speed broadband internet access rates up to 1Gbps.1 Gbps. For low bandwidth demand, we use ADSL technology to provide the internet connection services for the customers.

Switching Networks

Domestic telecommunications network.Our domestic public switched telephone network currently consists of 19 message areas connected by a long distance network. As of December 31, 2013,2015, we had 38 long distance exchanges, which are interconnection points between our telecommunications network and approximately 17.817.1 million telephone lines, which reached virtually all homes and businesses in Taiwan.

We currently have intelligent networks installed over our public switched telephone networks for our domestic long distance and international networks, as well as a local intelligent network in the Taipei, Taichung

and Kaohsiung metropolitan areas. Our intelligent network is designed to facilitate the use of value-added servicesVAS by providing more information about calls and allowing greater management of those calls.

As of December 31, 2013,2015, our next generation network, or NGN core network capacity consisted of 985,5001,160,000 local telephone subscribers, comprising 448,000 Session Initiation Protocol-based, or SIP-based, and 537,500712,000 Access Gateway-based, or AG-based, subscribers.

Our NGN Managed IP backbone network consists of an inner core network and an outer core network. We completed the construction of ourowned high-speed NGN Managed IP backbone network atby the end of 20132015 with 12 sets of 1.64 Tbps switch routers for the inner core network and more than 34 sets of 1.6 Tbps switch routers for the outer core network. The bandwidth of the network is approximately 9151,375 Gbps as of the end of 2013.2015. We believe this network will enable us to meet the increasing demand for NGN services, such as VoIP, and all managed services, including MOD and VPN.

International network.Our international transmission infrastructure consists of both submarine cable and satellite transmission systems, which link our national network directly to 10297 telecommunications service providers in 4443 international destinations.

International calls are routed between Taiwan and international destinations through one of our two international switching centers, one located in Taipei and the other in Kaohsiung. Each center had time-division multiplexing, or TDM, international gateway switches and NGN international gateway switch. We had a trunk capacity of 150,040170,040 channels in total as of December 31, 2013.2015.

As of December 31, 2013,2015, we had invested in 19 submarine cables, nine of which land in Taiwan. We had increased the capacity of each of our current submarine cables, increasing our aggregate total capacity from 1,2081,829 Gbps in 20122014 to 1,6552,245 Gbps in 2013.2015.

Mobile Services Network

Our mobile services network consists of:

 

cell sites, which are physical locations equipped with a base station consisting of transmitters, receivers and other equipment used to communicate through radio channels with customers’ mobile handsets within the range of a cell;

 

BSC (base station controllers) for GSM or RNC (radio network controller) for 3G, which connect to, and control, the base station within each cell site;

 

cellular switching service centers for GSM or 3G, which control the base station controllers and the processing and routing of telephone calls;

 

GGSN (gateway GPRS support nodes), which connect our GPRS network to the internet;

 

SGSN (serving GPRS support nodes), which connect the GPRS network to the base station controllers;

MME (mobility management entity), which connects the base station to our 4G core network that is responsible for control side;

S GW (Serving Gateway), which connects the base stations to our 4G core network that is responsible for data side;

PDN GW (Packet Data Network Gateway), which connects our 4G core network to the internet; and

 

transmission lines, which link (i) with respect to the GSM or 3GGSM/3G/4G network, the mobile switching service centers, MME, S GW, base station controllers, base stations and the public switched telephone network, and (ii) with respect to the GPRSGPRS/4G core network, the base station controllers, the support nodes, PDN GW and the internet.

We provide 2G mobile services based on the GSM network standards. We havePrior to October 22, 2014, we had the 900 MHz and 1800 MHz frequency bands paired with spectrumsspectrum of 15 MHz and 11.25 MHz, respectively, for our 2G mobile services and the licenses will expire in June 2017. Due to the gradual migration of the 2G subscribers to 3G and 4G, we returned the 2G license in the 900 MHz frequency band to the NCC on October 22, 2014 and transferred the spectrum of 900 MHz frequency band to 4G mobile broadband license. Our usage right of the 900 MHz frequency band is changed from 15 MHz paired spectrum to 10 MHz paired spectrum since October 22, 2014, and the 10 MHz paired spectrum is shared by 2G GSM services.and 4G LTE networks adhering to the principle of technological neutrality of our 4G mobile broadband license. As of December 31, 2013,2015, we had provided up to 99.9% population coverage.coverage on our GSM network. Since the launch of our 3G and 4G mobile services, we have gradually transitionedmigrated GSM subscribers to 3G and 4G networks and have started to consolidate our GSM network. The number of our 2G subscribers has decreased from 2.6 million as of December 31, 2013, to 0.7 million as of December 31, 2015.

We have installed an intelligent network on our mobile services network infrastructure to enable us to provide prepaid services as well as a wide range of advanced call features and value-added services, such as VPN service.

We have 15 MHz paired spectrum plus 5 MHz unpaired spectrum in the 2 GHz frequency band for our 3G mobile services, which was launched in July 2005. We contracted with Nokia SiemensSolutions and Networks Oy to provide the core network, radio access network, service network, transmission network and maintenance network for our 3G network. To promote mobile internet use, we upgraded our network to 3.5G in September 2006, with downlink and uplink speeds of 7.2 Mbps and 2.0 Mbps, respectively. To meet the high growth in mobile data traffic, we have upgraded our existing High-Speed Packet Access (HSPANetwork to Dual Cell High-Speed Packet Access Plus (DC HSPA+ with capability of 14.442 Mbps and 5.76 Mbps each for Down-link and Up-link) Network.

We have 10 MHz paired spectrum in the 900 MHz frequency band and 25 MHz paired spectrum in the 1800 MHz frequency band for our 4G mobile broadband services, which were launched in May 2014. In December 2015, we obtained additional spectrum for 4G mobile broadband services of 30 MHz paired spectrum in the 2500 MHz and 2600 MHz frequency bands. We contracted with Nokia Solutions and Networks Oy and Ericsson Taiwan Ltd. to DC HSPA+ (with capability of 42 Mbpsprovide the radio access network, and 11.5 Mbps each for Down-link and Up-link).Ericsson Taiwan Ltd. to provide the core network, respectively. In March 2016, we implement three frequency band CA technology into our 900/1800/2600 MHz frequency band base stations that is expected to increase users’ down-link speed over 300 Mbps.

In order to operate our packet-switched network more efficiently, we have consolidated GSM and 3G serving GPRS support nodes (SGSN) into a single core network. We have also introduced the Direct Tunnel technologyinstalled an intelligent network on our existing mobile services network infrastructure, which enable us to flatten the packet-switched network to enhance the user’s experience.provide additional functions, such as prepaid and VPN services as well as a wide range of VAS.

Internet Network

HiNet, our internet service provider, has the largest internet access network in Taiwan, with 33 points of presence approximately 5,626,0005,734,000 broadband remote access server ports and a backbone bandwidth of approximately 3,1094,667 Gbps as of December 31, 2013.2015. We planaim to increaseachieve HiNet’s points of presence and backbone bandwidth to approximately 3,9175,617 Gbps by the end of 2014.2016.

HiNet’s broadband backbone network consists of an inner core network and an outer core network. We completed the construction of ourhad high-speed internet protocol backbone network atby the end of 20132015 with 16 sets of 12.8Tbps/7.04Tbps/4.48Tbps/1.6Tbps/1.28Tbps4Tbps/1.6Tbps switch routers for the inner core network and more than 50 sets of 5.28Tbps/4Tbps/2.64Tbps/1.6Tbps/880Gbps/640Gbps switch routers for the outer core network. We believe this network will enable us to meet the increasing demand for our internet services.

HiNet’s total international connection bandwidth is 612.599920 Gbps as of December 31, 2013.2015. As we expect that internet traffic flows to and from the United States will continue to increase, we plan to expandhave been continuously expanding our bandwidth to the United States. We also planendeavor to increase our links to other countries, including Japan, Korea, Hong Kong, Singapore, Mainland China, Malaysia and Thailand.

Leased Line and Data Switching Networks

We operate leased line networks on both a managed and unmanaged basis. In addition, we operate a number of switched digital networks used principally for the provision of packet-switched, frame relay, asynchronous transfer mode technology and a multi-protocol label switching internet protocol VPN. We have completed the construction of a digital cross connect system for provisioning and managing voice-grade data services throughout Taiwan with a total of 5046 nodes. As of December 31, 2013,2015, we had 462344 frame relay ports, 999922 asynchronous transfer mode ports and approximately 83,10791,688 multi-protocol label switching internet protocol VPN virtual ports.

Our data networks support a variety of transmission technologies, including frame relay, asynchronous transfer mode and ethernet technology. We have also built up our HiLink VPN that combines internet protocol and asynchronous transfer mode technologies. The advantage of HiLink VPN based on multi-protocol label switching technology is that it can carry different classes of services, such as video, voice and data together to provide services with various qualities of service, high performance transmission and fast forward solution in an enhanced security network. HiLink VPN can be accessed by xDSL/FTTx/NG-SDH and can include built-in

mechanisms that can deal with overlapping internet protocol addresses. Therefore, the network potentially is less costly and requires less management for business applications.

Competition

We face competition in virtually all aspects of our business.

Domestic Fixed Communications

 

Local and domestic long distance telephone services: Revenue from local and domestic long distance telephone service of telecommunication services providers has continuously decreased in the past few years primarily due to mobile and VoIP substitution. Competition from mobile data service providers increased significantly due to the popularity of smart mobile devices and mobile applications such as LINE and WeChat. In addition, we are required by the ROC regulations to provide number portability and unbundled local loop access, which has increased the level of competition. Although there are other providers of fixed communications, including Taiwan Fixed Network,TWM Broadband, New Century Infocomm Tech. Co., Ltd. and Asia Pacific Telecom Co. Ltd.,APT, competition from these providers was not significant in the past few years.

 

Leased line services: Major competitors in this field are threefour fixed line operators including Taiwan Fixed Network,TWM Broadband, New Century Infocomm Tech. Co., Ltd., APT and Asia PacificTaiwan Optical Platform Co., Ltd. We believe that the leased line services providers primarily compete on the basis of price and the bandwidth speed of services.

 

Broadband internet access services: Major competitors in this field are five multiple-system operators, or MSOs, including Kbro Co., Ltd., China Network Systems Co., Ltd., Taiwan Fixed Network,TWM Broadband, Taiwan Broadband Communication Co., Ltd. and Taiwan Optical Platform Co., Ltd., and one fiber broadband service provider, namely Taiwan Intelligent Fiber Optic Network. With the increasing speed of mobile data service, we also face fierce competition from mobile data providers. We believe that the broadband internet access service providers primarily compete on the basis of price and the bandwidth speed of services.

 

MOD services: Major competitors in this field include five cable TV MSOs and 2628 independent MSOs. We believe that the different service providers compete on the basis of the multimedia content offered along with the ability to offer converged services by offering comprehensive solutions including data communications, voice communications and multimedia content.

Mobile Communications

There are currently three majorfive mobile operators in Taiwan, namely,including Chunghwa Telecom, Taiwan Mobile, Co.,Far EasTone, Taiwan Star Telecom Corporation Ltd., FarEasTone Telecommunications Co., Ltd.or T-Star, and us. Smart phones with 3GAPT. All of these five operators won 4G mobile data packages are becoming popularbroadband licenses in recent years. To attract more data users, all three major operators offer free intra-network calling packages bundled with mobile data service. Also, there are two 3G mobile operatorsthe auction finalized in Taiwan inOctober 2013. In addition to us, namely Asia Pacific Telecom Co., Ltd.the big three, T-Star and ViboAPT underwent mergers and acquisitions in order to compete in the market for 4G mobile broadband services. T-Star merged with VIBO Telecom Inc., a former 3G operator, in October 2014, while APT merged with Ambit Corporation, one of the 4G mobile broadband license winners, in December 2015, with APT as well as one personal handyphone systemthe surviving company. Each 4G mobile broadband network operator has been providing promotional programs to attract consumers, including unlimited data plans. In addition to the 2G, 3G and 4G mobile network operators discussed above, First International Telecom. Furthermore,Telecom used to operate a personal handy-phone network but was declared bankrupt by the governmentTaiwan Taipei District Court on December 26, 2014, and discontinued operations on March 31, 2015.

In addition to the mobile network operators, the NCC has issued a total of 1614 3G mobile virtual network operator, or MVNO, licenses, which allow operators without a spectrum allocation to provide 3G mobile services by leasing the capacity and facilities of a mobile service network from a licensed mobile service provider. We are currently cooperating with Carrefour Telecom Co., Ltd. We may cooperate with other mobile virtual network operators in the future.

As of the end of 2013,2015, there were also sixno WiMAX service providers in Taiwan. The NCC has already recalled and released the 2500MHz and 2600MHz frequency band spectrum for 4G mobile broadband services through a bidding process in December 2015. We compete in the wireless services market primarily on the basis of premium brand, price, quality of service, network reliability and attractiveness of service packages.

Internet

Our primary competitors in internet services are other internet services providers, including SeedNet and TWM Broadband. We compete in the internet services market primarily on the basis of price, technology, speed of transmission, amount of bandwidth available for use, network coverage and value-added services.VAS.

International Fixed Communications

Our major competitors are Taiwan Fixed Network,TWM Broadband, New Century Infocomm Tech. Co., Ltd. and Asia Pacific Telecom Co. Ltd.,APT, which have provided fixed-line services since June 2001. These operators are primarily focused on international long distance services and corporate customer services, which typically generate higher revenue than residential customers. There have been four submarine cable services licenses granted since August 2001. These submarine cable operators have begun offering international leased line services to other fixed-line operators, internet service providers and international simple resaleISR operators.

Our international long distance services compete with international long distance resale services and VoIP services such as those provided by Line and Skype.

Cybersecurity and Personal Information Protection

To prevent increasing cyber risks and threats, we have implemented the measures described below.

 

We have built an online service system that enables Certificate Authority’s Secure Socket Layer functions that performs as a secure tunnel to transmit encrypted customer’s information. In addition, we offered the Global Trust Secure Site Seal to protectprevent from phishing attacks on payment web sites.

 

The high-availability systems in our data centers deploy firewall and Intrusion Prevention System, or IPS, to defend against hackers’ attacks,attacks.

All information systems and the web application programs enforce vulnerability assessmentwebsites are scanned for vulnerabilities and a team of information security experts is responsible for conducting penetration testtesting on our information system, websites and Apps, to ensure the securityprevent leakage of our customers’customer information.

 

We have enhanced the firewall policy and adopted minimum principle to limit the IPs and ports access control, in order to reduce intrusion risk from hackers.

 

We have usedenhanced our system access controls including, among other measures, by using two-factor authentication mechanism and isolated endpoint device for operating critical information system.by limiting daily operational access to dedicated terminals in a separate network.

 

The network equipment inWe have enhanced the retention and monitoring for all system, database, and applications logs as an additional information security measure and our data centers could distinguish DDoSmanagers review system logs and inquiry records on a daily basis.

We required our branch offices to comply with ISO27001 and obtain the ISO27001 certification.

We established CHT Security Operation Center, or SOC, which is responsible for incidents and threats monitoring, notification and reject or block the attacks. In the future, we could even block the DDoS traffic over the backbone network.emergency response.

On May 26, 2010, the President of the Republic of China announced theThe amendment of the Personal Information Protection Act, or PIPA, which became fully effective on October 1, 2012, except for its Articles 6 and 54 that await further determination by the Executive Yuan. PIPA applies to all individuals, legal entities and enterprises that collect, process and use personal information, and has a significant impact on the banking and service industries in Taiwan. Due to the adoption of PIPA, the level of responsibility and liability on personal information protection of a company was raised. We have conducted inventory checks of personal information that we currently hold, established standard operating procedures, or SOP, to comply with the requirements under PIPA, and have taken information security measures to protect the data.

To comply with the PIPA, we implemented a series of measures to avoid the customer’sleakage of customers’ information:

Personal information leakage:protection policies and regulations are defined in the operational rules of all of our business and service contracts.

According to our personal data safety and awareness plan, all of our employees are required to take training programs and to pass the awareness test at least twice per year.

We required our branch offices to implement a drill in personal data leakage incident handling once a year.

 

Our auditing department completes an annual audit plan and regularly audits information circulation in each department on customer information management and protection.

 

EnforceWe enforced customer service center and call center to comply with BS10012 and passobtain the BS10012 certification.

 

Documents containing customer’s personal information are labeled highly confidential. All levels of managers shall monitor the usage of customers’ personal information by employees.“highly confidential”.

Properties, plantsProperty, plant and equipment

Our properties, plantsproperty, plant and equipment consist mainly of telecommunications equipment, land and buildings located throughout Taiwan. Although we have a significant amount of land and buildings throughout Taiwan, most of our properties are for operational use and only a small part of them are for investment purposes, which were classified as “investment properties” in our consolidated financial statements included in this annual report. Notes 17 and 18 to our consolidated financial statements, included elsewhere in this annual report, provide additional details as to our “Property, plant and equipment” and “Investment properties”, respectively. See “Item 3. Key Information—D. Risk Factors—Our ability to deliver services may be disrupted due to a systems failure, shutdown in our networks, earthquakes or other natural disasters” for a discussion of environmental issues that may affect utilization of our assets.

Our property development subsidiary, Light Era, Development Co., Ltd., acquired land located near the high speed rail station in Taoyuan in October 2012. This property, which was classified as “inventories” in our consolidated financial statements included in this annual report, will be used to develop intelligent homes, in which our fiber broadband and ICT services, such as energy saving technologies, will be deployed. See Note 12 to our consolidated financial statements, included elsewhere in this annual report, for additional details regarding our inventories.

We are now focusing more on rental income and will continue seeking development opportunities from the ROC central and local governments’government urban planning programs to increase the value of our land, buildings and equipment. We have received approximately NT$573609.7 million (US$19.218.6 million) in rental income from properties in 2013.2015.

Insurance

We do not carry comprehensive insurance for our properties or any insurance for business disruptions. We do, however, maintain in-transit insurance for key materials, such as cables, equipment and equipment components. We do not carry insurance for the ST-2 satellite since we only lease capacity for our operations instead of owning the satellite.

Employees

Please refer to “Item 6. Directors, Senior Management and Employees—D. Employees” for a discussion of our employees.

Our Pension Plans

Currently, we offer two types of employee retirement plans—our defined contributions plan and defined benefits plan—which are administered in accordance with the Republic of China Labor Standards Act and the Republic of China Labor Pension Act.

Legal Proceedings

WeFrom time to time, we are involved in various legal and arbitration proceedings of a nature considered to be in the ordinary course of our business. It is our policy to provide for reserves related to these legal matters when it is probable that a liability has been incurred and the amount is reasonably estimable.

We believe that From time to time, we have also been assessed fines by various government agencies such as the various asserted claimsNCC and litigation in which we are involved will not materially affectFTC, but none of these fines have had a significant effect on our financial condition or results of operations although nooperations.

Except as disclosed in our annual report, we believe that we have not been involved in any legal or arbitration proceedings during 2013, 2014 or 2015 that would have a significant effect on our financial condition or results of operations; however, we cannot give you any assurance can be given with respect to the ultimate outcome of any such claimasserted claims against us or litigation.

We had not been involved in any legal or arbitration proceedings that would materially affect our financial condition or results of operations in 2013.involving us.

Capital Expenditures

See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a discussion of our capital expenditures.

Enforceability of Judgments in Taiwan

We are a company limited by shares and incorporated under the Republic of ChinaROC Company Act and the Statute of Chunghwa Telecom Co., Ltd.Act. All of our directors, executive officers and some of the experts named in

this annual report are residents of Taiwan and a substantial portion of our assets and the assets of those persons are located in Taiwan. As a result, it may not be possible for investors to effect service of process upon us or those persons outside of Taiwan, or to enforce against them judgments obtained in courts outside of Taiwan. We have been advised by our Republic of ChinaROC counsel that in their opinion any final judgment obtained against us in any court other than the courts of the Republic of ChinaROC in connection with any legal suit or proceeding arising out of or relating to the ADSs will be enforced by the courts of the Republic of ChinaROC without further review of the merits only if the court of the Republic of ChinaROC in which enforcement is sought is satisfied that:

 

the court rendering the judgment has jurisdiction over the subject matter according to the laws of the Republic of China;ROC;

 

the judgment and the court procedure resulting in the judgment are not contrary to the public order or good morals of the Republic of China;ROC;

 

if the judgment was rendered by default by the court rendering the judgment, we, or the above mentioned persons, were duly served within a reasonable period of time in accordance with the laws and regulations of the jurisdiction of the court or process was served on us with judicial assistance of the Republic of China;ROC; and

 

judgments at the courts of the Republic of ChinaROC are recognized and enforceable in the court rendering the judgment on a reciprocal basis.

A party seeking to enforce a foreign judgment in the Republic of ChinaROC would be required to obtain foreign exchange approval from the Central Bank of the Republic of ChinaROC (Taiwan) for the payment out of Taiwan of any amounts recovered in connection with the judgment denominated in a currency other than NT dollars if a conversion from NT dollars to a foreign currency is involved.

Regulation

Overview

We were subject to the Statute of Chunghwa Telecom Co., Ltd. prior to our privatization. Although we have been privatized the Legislative Yuan has not yet abolishedsince August 2005, the Statute of Chunghwa Telecom Co., Ltd. was still effective until December 24, 2014. The Legislative Yuan approved the abolishment of the Statute of Chunghwa Telecom Co., Ltd. on December 9, 2014, and the President of the ROC approved the abolishment of Statute of Chunghwa Telecom Co., Ltd. effective from December 24, 2014. The abolishment of the Statute of Chunghwa Telecom Co., Ltd. did not and will not have any material impact on our company.

Regulatory Authorities

Prior to March 1, 2006, we were under the supervision of the Ministry of Transportation and CommunicationsMOTC and the Directorate General of Telecommunications. On March 1, 2006, the NCC was formed in accordance with the Organization Law,Act, which was intended to transfer regulatory authority over the Taiwan telecommunications industry from the Ministry of Transportation and CommunicationsMOTC and the Directorate General of Telecommunications to the NCC. The NCC was comprised of nine commissioners who were recommended by the government and opposition political parties in the Legislative Yuan, as well as recommended by the Executive Yuan and approved by the Legislative Yuan. However, the Executive Yuan considered the composition of the NCC unconstitutional and petitioned the Grand Justices of the Republic of China,ROC, or the Grand Justices, to interpret the constitutionality of the formation of the NCC and the procedure for nominating commissioners to serve on the NCC. On July 21, 2006, the Grand Justices rendered an interpretation and held that the relevant provisions under the Organization LawAct as to the nomination procedures for the commissioners of the NCC were unconstitutional. However, the Grand Justices granted a grace period allowing such provisions of the Organization LawAct to remain in effect until December 31, 2008.

On January 9, 2008, an announcement issued by the President amended the Organization Law,Act, or New Amendment, amending the unconstitutional formation articles and reducing the total number of commissioners to seven with a term of four years, but three of the commissionersCommissioners appointed after the New Amendment served a term of two years. The commissioners will be nominated by the premier of the Executive Yuan and approved and appointed by the Legislative Yuan.

The new nomination method under the New Amendment became effective on February 1, 2008 when the Legislative Yuan started its new term.2008. The nine incumbent commissionersCommissioners continued to serve until July 31, 2008, when their terms ended. The premier of the Executive Yuan nominated seven commissionersCommissioners on July 1, 2008, and they were approved and appointed by the Legislative Yuan on July 18, 2008. The new commissionersCommissioners took office on August 1, 2008. Thereafter, upon the resignation of one commissionerCommissioner and the expiry of the term for the three commissioners,Commissioners, four new commissionersCommissioners were nominated by the premier of the Executive Yuan, approved and appointed by the Legislative Yuan and began serving as commissionersCommissioners on August 1, 2010.

The Organization LawAct was further amended on December 28, 2011. The amendment stipulates that the premier of the Executive Yuan shall appoint one Commissioner to serve as Chairperson, and one as Vice Chairperson upon nomination of the commissioners.seven Commissioners. Accordingly, the Chairperson and the Vice Chairperson and two new Commissioners were nominated by the premier of the Executive Yuan on April 30, 2012, approved and appointed by the Legislative Yuan and began tenure as commissionersCommissioners on August 1, 2012. Upon the resignation of one commissioner and the expiry of the term for two Commissioners, three new Commissioners were nominated by the premier of the Executive Yuan, approved and appointed by the Legislative Yuan and began serving as Commissioners on August 1, 2014.

In accordance with the Organization Law,Act, the NCC is responsible for:

 

formulating, implementing and interpreting telecommunications laws and regulations;

issuing telecommunications licenses and regulating the operation of telecommunications industry participants;

 

assessing and testing telecommunication systems and equipment;

 

drafting and promulgating technical standards for telecommunications and broadcasting;

 

classifying and censoring the contents of telecommunications and broadcasting;

 

managing telecommunications and media resources in Taiwan;

 

maintaining competition order in the telecommunication and broadcasting industries;

 

governing technical standards in connection with the safety of information communications;

 

managing and facilitating the resolution of disputes pertaining to the Taiwan telecommunications and broadcasting industries;

 

managing offshore matters relating to Taiwan’s telecommunications and broadcasting industries including matters of international cooperation;

 

managing funds allocated for the development of Taiwan’s telecommunications and broadcasting industries;

 

monitoring, investigating and determining matters in relating to Taiwan’s telecommunications and broadcasting industries;

 

enforcing restrictions under telecommunications and broadcasting laws and punishing violators; and

 

supervising other matters in relation to communications and media.

Telecommunications Act

The Telecommunications Act and the regulations under the Telecommunications Act establish the framework and govern the various aspects of the Taiwan telecommunications industry, including:

 

licensing of telecommunications services;

 

telecommunication numbers;

 

restrictions on dominant telecommunications service providers;

 

tariff control and price cap regulation;

accounting separation system;

 

interconnection arrangements;

 

bottleneck facilities;

 

spectrum allocation;

 

provision of universal services;

 

equal access;

 

number portability;

 

local loop unbundling;

 

co-location; and

 

ownership limitations.

Each of these aspects is described below. The Telecommunications Act also establishes a non-auction pricing system for assignment of radio frequencies.

Licensing of Telecommunications Services

Type I and Type II Service Providers

Under the Telecommunications Act, telecommunications service providers are classified into two categories:

Type I.I. Type I service providers are providers that install network infrastructure, such as network transmission, switching and auxiliary equipment for the provision of telecommunications services. Type I services include fixed-line services such as local, domestic long distance and international long distance services, as well as interconnection, leased line, ADSL and satellite services and wireless services such as mobile, including 3G mobile, paging, mobile data and trunked radio services.

Type II. Type II service providers are defined as all telecommunications service providers other than Type I service providers. Type II services are divided into special services and general services. Special services include simple voice resale, VoIPE.164 internet telephony service, Non-E.164 internet telephony service, international leasedtelecommunications services that provide to unspecific customers by leasing international circuit and other services specified by the Ministry of Transportation and CommunicationsMOTC before March 1, 2006 or by the NCC from March 1, 2006. General services include any Type II service other than special services.

Until 1996, we were the sole provider of Type I services in Taiwan. In 1996, the government opened the market for mobile, paging and trunked radio, mobile data and digital low power cordless telephone services. In 1998, the government opened the market for fixed-line and mobile satellite services. In June 2001, the government granted licenses to three operators for establishing fixed-line services, thereby opening the market for fixed-line services. Since August 2000, the government has permitted four undersea cable operators to engage in the undersea cable leased-circuit business.

Commencing in 2007, the NCC began accepting applications for licenses to provide fixed-line services in March, June, September and December of each year. The NCC started to accept applications for fixed-line services on a daily basis beginning in 2008. There is no limit on the number of fixed-line licenses that they may decide to issue.

Granting of Licenses

Type I

Type I service providers are more closely regulated than Type II service providers. The government has broad powers to limit the number of providers and their business scope and to ensure that they meet their

facilities roll-out obligations. Under the Telecommunications Act, Type I service providers are subject to pre-licensing merit review of their business plans and tariff rates.

Before March 1, 2006, licenses for Type I services were granted by the Ministry of Transportation and CommunicationsMOTC through a three-step procedure. Applicants obtained a concession from the Ministry of Transportation and Communications.MOTC. After obtaining a concession, the applicant obtained a network construction permit and an assignment of spectrum, in the case of mobile telephone services and satellite services, from the Directorate General of Telecommunications or the Ministry of Transportation and CommunicationsMOTC prior to applying for a license. Upon completion of construction of its network and review by the Directorate General of Telecommunications, the applicant was granted a Type I license. The Ministry of Transportation and CommunicationsMOTC had the authority to grant Type I licenses for each of fixed-line services, wireless services and satellite services. Type I licenses have different minimum paid-in capital requirements for applicants and varying durations depending on the particular type of service.

Since March 1, 2006, the same procedure applies except that the licenses are granted by the NCC.

The Telecommunications Act further authorizes the competent authority, now the NCC, to promulgate separate regulations governing each Type I service, including the business scope of the Type I service provider, as well as the procedures and conditions for granting special permits and the length of the period of the special permits of each Type I service. Each holder of a Type I license will pay a fee ranging from 0.5% to 2% of their annual revenues or their bid price ratio (Article 2 of the Type I Service Provider Special Tariff Standards) multiplied by their annual revenues generated from the particular Type I service for which a license has been granted.

Fixed Line Services. Under the Telecommunications Act, the Regulations for Administration on Fixed Network RegulationsTelecommunications Business govern the issuance of fixed-line service licenses and the business scope of fixed-line providers. Fixed-line service licenses are subdivided into the following categories:categories, and we conduct our fixed line services with a license for integrated services.

 

integrated services, including local, domestic long distance and international long distance telephone services;

 

local telephone services;

 

domestic long distance telephone services;

 

international long distance telephone services; and

 

local, domestic long distance and international long distance leased line services. We conduct our fixed line services through a license for integrated services.

Licenses for local telephone and integrated services are valid for 25 years. Licenses for domestic long distance and international long distance telephone services are valid for 20 years. Licenses for leased line services are valid for 15 years. If the service provider wishes to continue operating, the service provider needs to apply for a license renewal to the NCC between nine months and six months before the expiration of their license. The minimum paid-in capital requirements for integrated services providers that applied for a license before June 30, 2004, between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 are NT$21 billion, NT$8.4 billion and NT$6.4 billion, respectively. The minimum paid-in capital requirements for both domestic and international long distance telephone service providers that applied for a license between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 are NT$1.05 billion and NT$800 million, respectively. The minimum paid-in capital requirements for international undersea leased cable service providers that applied for a license before June 30, 2004, between July 1, 2004 and January 31, 2008, between February 1, 2008 and June 30, 2013 and on or after July 1, 2013 are NT$420 million, NT$420 million, NT$320 million, and NT$300 million, respectively. The minimum paid-in capital requirement for local telephone service providers that applied for a license between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 are NT$6.3 billion and NT$4.8 billion, respectively, multiplied by the Local Network Operation Weights for the

regions in which local network managerial rights have been granted to the service provider. The Local Network Operation Weights are calculated as the population of the region as a proportion of the entire population of Taiwan and are announced by the competent authority every three years. If an applicant for a license is also a Type I service provider, it will need to combine the minimum paid-in-capital requirements for all relevant services.

In March 2000, the government granted three new concessions to fixed-line services providers for integrated services. Recipients of these concessions are required to apply for a network construction permit to deploy broadband local access networks. Each recipient of these concessions is required to have capacity for 150,000 customers before it is able to apply for a fixed-line license to launch its proposed services. The three fixed-line service providers have since obtained fixed-line licenses and are required to achieve capacity for one million customers by the sixth year following the date of the grant of the network construction permit awarded. Operators that applied for integrated service provider licenses before June 30, 2004, between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 must achieve a capacity for 1.0 million, 0.4 million and 0.3 million customers, ports or a combination of both, respectively, by the fourth year following the date of the grant of the network construction permit.

Wireless Services.Services. Under the Telecommunications Act, the Wireless Regulations for Administration of Mobile Communications Business promulgated by the Ministry of Transportation and CommunicationsMOTC before March 1, 2006 or by the NCC from March 1, 2006 continue to govern the issuance of wireless services licenses and the business scope of wireless service providers. Wireless service licenses are subdivided into the following categories:

 

mobile services;

 

paging services;

 

mobile data services;

 

digital low-power cordless telephone services; and

 

trunked radio services.

Wireless service licenses are granted to both regional and national service providers through review and bidding procedures.

The wireless service license for mobile or paging service, once granted, should be valid for a term of 15 years starting from the date when such license is granted, and licenses for mobile data, digital low-power cordless telephone and trunked radio are valid for 10 years starting from the date when such license is granted. According to the Regulations for Administration of Mobile Communications Businesses amended by the NCC on September 19, 2011, the wireless service provider may file an application with the NCC for extension of the valid term of its license for providing mobile or paging service one year prior to the expiry of the 15-year valid term. Once the NCC approves the application, the valid term of the wireless service license for mobile or paging service will be extended to June 30, 2017. The valid terms of our licenses granted by the ROC government authorities for providing 2G mobile services on the 900MHz and 1800MHz spectrum will expireexpired in 2012 and 2013 respectively. We filed the application with the NCC for extending the valid terms of our 2G licenses on November 29, 2011. Our application was approved by the NCC in November 2012 and the terms of our licenses for providing 2G mobile services on the 900MHz and 1800MHz spectrum should be valid until June 2017. See “Item 4. Information on the Company—B. Business Overview—Network Infrastructure—Mobile Services Network” for the discussion of our early return of the 2G license in the 900 MHz frequency band to the NCC on October 22, 2014.

The minimum paid-in capital requirements for different mobile communication businesses are as follows: Digital Low-Power Wireless Telephone Business, NT$200 million; Trunking Wireless Telephone Business, NT$20 million for regional operation and NT$60 million for island-wide operation; Mobile Data Communication Business, NT$50 million for regional operation and NT$150 million for island-wide operation; Radio Paging Business, NT$200 million for regional operation and NT$400 million for island-wide operation; Mobile Telephone Business, NT$2 billion for regional operation and NT$6 billion for island-wide operation. If one

single applicant acquires operational licenses of two or more businesses with minimum paid-in capital requirements, the paid-in capital for the businesses should be calculated and collected by the applicant separately.

For an operator who obtains the permission of operation over two businesses through the legal procedure, its minimum paid-in capital shall be separately calculated upon approval for establishment, if such other businesses are subject to the minimum paid-in capital restriction.

Third Generation Mobile Services.Services. The MinistryMOTC promulgated the Regulations for Administration of Transportation and Communications promulgated the Third Generation Mobile Telecommunications Services RegulationsCommunications Business on October 15, 2001. The NCC amended the above regulations on July 5, 2007, designating itself as the authority in charge of the third generation, or 3G, mobile services regulations and further amended such regulations on December 30, 2008 for the establishment of base stations. Thestations.The regulations govern voice and non-voice telecommunications services provided using the spectrum assigned by the Ministry of Transportation and Communications,MOTC, and now governed by the NCC, that utilizes the IMT-2000 technical standards as

announced by the International Telecommunications Union. Licenses for 3G mobile services were granted by the Ministry of Transportation and CommunicationsMOTC and are now granted by the NCC. We have received our 3G mobile services license, which is valid from May 26, 2005 to December 31, 2018.

Under the Regulations for Administration of the Third Generation Mobile Telecommunications Services Regulations,Communications Business, the operation area of this business is the whole nation; the minimal paid-in capital for operating this business shall be NT$6 billion. If the applicant operates another business of a Type I telecommunications enterprise at the same time and there is a restriction on the paid-in capital to the other business, after acquiring the establishment approval, the required minimal paid-in capital shall be calculated by aggregating the minimal requirement of each service.

Mobile Broadband Services. The NCC promulgatedPursuant to the Regulations for Administration of Mobile Broadband Businesses, on May 8, 2013. Under such regulation, the 4G mobile broadband service providers must obtain the concession license issued by the NCC before providing 4G mobile broadband services. The license granted for the application in 2013 is valid from the license issue date of issuance until December 31, 2030.2030 and the license granted for the application in 2015 is valid from the license issue date until December 31, 2033. The operation area of 4G mobile broadband services covers throughout the ROC.

The minimum paid-in capital for operating the mobile broadband services is NT$6 billion. If an applicant also operates another business of Type I telecommunications enterprise, the minimal paid-in capital required for operating the mobile broadband services and the other Type I telecommunications services shall be determined by aggregating the paid-in capital of the entity required for operating the mobile broadband services and that of the entity required for operating the other Type I telecommunications services.

The mobile broadband services license was released for the first time in 2013. We have received the system installation4G mobile broadband services license on April 30, 2014, and launched the services on May 29, 2014. Mobile broadband services licenses were released for bidding for a second time in 2015, and we were declared the winning bidder on December 7, 2015. After the revision of our 2500MHz and 2600MHz business plan was approved by the NCC on January 27, 2016, we received a permit for establishment by the NCC on February 17, 2016, in accordance with such business plan, and now we are accelerating the deployment of 4G base stations with these frequency bands. We received the license to operate these frequency bands on March 12, 201423, 2016, and are currently constructing our network system. The NCC will grant the concession license to us once it confirms that our network system and business operation satisfy the requirements under the Regulations for Administration of Mobile Broadband Businesses.put these frequency bands into use on March 24, 2016.

Satellite Services.Under the Telecommunications Act, the Regulations for Administration on Satellite RegulationsCommunication Services promulgated by the Ministry of Transportation and CommunicationsMOTC govern the issuance of satellite services licenses and the business scope of satellite service providers. The NCC amended the above regulations on July 20, 2007, designating itself as the authority in charge of the Satellite Regulations. Satellite services licenses are subdivided into fixed satellite services licenses and mobile satellite services licenses.

The satellite services license should be valid for a term of 10 years starting from the date when such license is granted. If the service provider wants to re-new its satellite services license before the expiry of the 10-year term, such service provider needs to file a renew application with the NCC within the period from 9 months to 6 months before the expiry date of the original satellite license. The valid term of the renewed satellite license will be 10 years. Minimum paid-in capital requirements for fixed satellite service providers and mobile satellite service providers are NT$100 million and NT$500 million, respectively. If an applicant applies to operate fixed satellite services and mobile satellite services at the same time, its minimum paid-in capital should be calculated separately. The same also applies to an applicant who operates another business of Type I telecommunications enterprise at the same time.

We currently hold a fixed satellite services license, valid from December 10, 2008 to December 9, 2018.

Type II

The Telecommunications Act was amended in 1996 to open the market for all Type II services. Under the Regulations for Administration on Type II Services Regulations,Telecommunications Business, Type II services are divided into special services and general services. Special services include simple resale, VoIP, network telephone service of E.164 and non-E.164 user numbers (IP Phone Numbers)(VoIP), international leased circuit and other services specified by governing authority. General services include any Type II service other than special services. The policy for granting a Type II service license is as follows:

 

there is no limit on the number of licenses to be issued;

 

licenses were granted by the Directorate General of Telecommunications before March 1, 2006 and are now granted by the NCC; and

 

no bidding procedure is required.

We hold a license to operate all Type II services. Type II service licenses issued before November 15, 2005 are valid for ten years and may be renewed by submitting an application madewithin two months prior to the expiration date. Type II service licenses issued or renewed on or after November 15, 2005 are valid for three years and may be renewed during the period commencing two months prior to the expiration date. There is no minimum paid-in capital requirement for Type II service providers. Our license to operate Type II services is included in our license to operate integrated services, and is valid from July 29, 2000 to July 28, 2025.

Under regulations governing the fees payable for Type II licenses,Telecommunications Enterprise Permit Fee Schedule, operators of simple resale or network telephone services of E.164 or non-E.164 user numbers must pay an annual license fee equal to 1% of annual revenues generated from these services during the previous year. Type II service operators providing services other than simple resale or network telephone services of E.164 or non-E.164 user numbers must pay license fees ranging from NT$6,000 to NT$150,000 depending on their respective paid-in capital. For operators who operate over two or more businesses, their license fee shall be separately calculated but jointly collected. TheThese regulations do not apply to integrated services providers who are permitted to provide Type II services without additional Type II Licenses.

The Directorate General of Telecommunications started to process the applications for allocating E.164 and non-E.164 user numbers (IP phone numbers) on November 15, 2005. A few operators, including our company, have applied for IP phone numbers. We applied to the NCC for E.164 user numbers and as of January 30, 2008, we have received approval to build a network with a capacity of 30,000 numbers. As we are governed by fixed-line regulations, we need to receive approval from the NCC for our operation rules, tariff and service agreement for IP phone numbers before we can commence E.164 service. We filed with NCC to return 30,000 E.164 numbers, and the application was approved by the NCC on July 1, 2011. Please refer to “—B. Business Overview” for further discussion.

Telecommunications Numbers

According to the Telecommunications Act, numbering codes, subscriber numbers, identification numbers and other telecommunication numbers will be distributed and managed by the NCC. These telecommunication numbers may not be used or changed without approval by the NCC. In order to maintain effective use of available telecommunication numbers, the Telecommunications Act empowers the NCC to reallocate and retrieve assigned telecommunication numbers and to collect a usage fee for distributed telecommunication numbers. The NCC promulgatedAccording to the Fee StandardsRegulations for Special TelecommunicationUsage Fees of Specific Telecommunications Numbers, on March 18, 2010, effective immediately, requiring telecommunications service providers have to pay 70% of revenues collected from the auctioning off and selection of “golden numbers” and the standard usage rates for “special identification numbers” in use.

Restrictions on Dominant Telecommunications Services Providers

Under the Telecommunications Act, the regulations governing dominant telecommunications services providers apply only to Type I service providers. A Type I service provider is deemed to be dominant if it meets any of the following criteria and was declared by the Ministry of Transportation and CommunicationsMOTC or now the NCC as dominant:

 

controls key basic telecommunications infrastructure;

 

has dominant power over market price; or

 

has more than a 25% market share in terms of customers or revenues.

We have been declared by the former competent authority Ministry of Transportation and CommunicationsMOTC as a dominant Type I service provider for fixed-line and GSM mobile services. On July 7, 2012, we have been classified as a dominant Type I service provider for 3G mobile services by the NCC. Under the Telecommunications Act, a dominant Type I service provider must not engage in the following activities:

 

directly or indirectly hinder a request for interconnection with its proprietary technology by other Type I service providers;

 

refuse to release to other Type I service providers the calculation methods of its interconnection fees and other relevant materials;

 

improperly determine, maintain or change its tariffs or means of services;

 

reject, without due cause, a request for leasing network components by other Type I service providers;

 

reject, without due cause, a request for leasing lines by other service providers or customers;

 

reject, without due cause, a request for negotiation or testing by other service providers or customers;

 

reject, without due cause, a request for negotiation for co-location by other service providers;

 

discriminate, without due cause, against other service providers or customers; or

 

abuse its position as a dominant provider, or engage in other unfair competition activities as determined by the regulatory authorities.

In addition, a dominant Type I service provider is subject to special regulations limiting its tariff changes.

Tariff Control and Price Cap Regulation

In order to promote competition in the telecommunications market, and as part of the government’s overall policy toward deregulation, the Telecommunications Act was amended in 1999 to abolish the former rate of return system on tariff setting in favor of price cap regulation of Type I services.

Under the Administrative Regulation Governing Tariffs of Type I Telecommunications Enterprises, a dominant Type I service provider must submit its proposed adjustment in primary tariffs and promotional packages including primary tariffs to the NCC for approval at least 14 days prior to the date of the proposed tariff changes and announce such change on media, website and business locations on the day after the NCC grants the approval. The tariff change will come into effect seven days after the announcement.

Primary tariffs include:

 

for fixed line local telephone services: monthly fees, usage fees, monthly rental fees of leased lines, pay telephone usage fees and internet connection service;service fees;

 

for fixed line domestic long distance telephone services: monthly rental fees of leased lines;

for fixed line international long distance telephone services: leased line monthly rental fees;

 

for wireless services, including 3G mobile services: monthly rental fees and the prepaid communication charges;

 

the wholesale price enacted in accordance with this regulation; and

 

other fees or tariffs announced by the NCC.

In addition, a dominant Type I service provider is required to set wholesale prices for the provision of its telecommunication services to other telecommunicationtelecommunications enterprises. Factors affecting the determination and adjustments of the wholesale price include the establishment, change, cancellation and connection fees. These telecommunication services and their suitable targets, all of which are subject to annual reviews by the NCC, include:

 

interface circuits (local and long distance) between internet access service providers and customers for Type I and Type II service providers;

interface circuits (local and long distance) between internet access service providers for Type I and Type II service providers that are internet access service providers;

 

interconnection circuits between Type I service providers and between Type I and Type II service providers of international simple resale, or ISR, and E.164 VoIP services;

 

DSL-family (xDSL) circuits for fixed line service providers and internet service providers;

 

other local and long distance data circuits for Type I and Type II service providers; and

 

broadband internet interconnection for Type I and Type II service providers that are internet access service providers.

The initial wholesale prices set by a dominant Type I service provider may be the retail price less fees and expenses which need not be incurred, but shall not be higher than its promotional pricing. Changes in the wholesale price charged by a dominant Type I service provider may not be greater than (i) the retail price less fees and expenses which need not to be incurred but not greater than the promotional pricing; or (ii) the annual growth rate of the consumer price index in Taiwan minus the constant set by the NCC, whichever is the lower. The Administrative Regulations Governing Tariffs of Type I Service ProvidersTelecommunications Enterprises further prohibits a dominant Type I service provider from practicing unfair competition against other telecommunicationtelecommunications enterprises.

In addition, changes in tariffs charged by dominant Type I1 service providers (notwithstanding the type of their respective services) may not, in any event, be greater than the annual growth rate of the consumer price index in Taiwan adjusted by a set constant, which will be periodically determined and announced by the NCC. For example, if:

 

the annual growth rate of the consumer price index in Taiwan minus the set constant is positive, the increased percentage of tariffs must not exceed such positive figure;

 

the annual growth rate of the consumer price index in Taiwan minus the set constant is negative, the decreased percentage of tariffs must be at least the absolute value of such negative figure, and the tariffs used in the given year must not be higher than the decreased tariff; and

 

the annual growth rate of the consumer price index in Taiwan minus the set constant equals to zero, no increase in tariffs is allowed to be made by any Type I service providers.

On January 29, 2010, the NCC announced that effective from April 1, 2010 to March 31, 2013:

 

the set constant to be applied to the tariff adjustment for the fixed line integrated services is 4.816% and covers the following:

 

dominant providers of fixed line services

tariffs of the following:

 

the monthly fee for ADSL leased line and the usage fee for domestic long distance telephone services (excluding public pay phones)

 

wholesale prices of the following:

 

the monthly fee for leased lines services (including local and domestic long distance leased lines) between internet service providers and their customers

 

the monthly fee for leased lines services (including local and domestic long distance leased lines) between an internet service provider and another internet service provider

 

the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and another Type 1 telecommunication service provider; the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and a Type 2 telecommunication service provider who provides simple resale and network telephone service of E.164 user numbers

telecommunication service provider; the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and a Type 2 telecommunication service provider who provides simple resale and network telephone service of E.164 user numbers

 

the monthly fee for other local and domestic long distance leased lines

 

the interconnection fee for internet bandwidth interconnection

 

no set constant to be applied to the call charges for the domestic fixed communication services during the following periods:

 

the integrated services operators and the domestic telephone services operators can determine the tariff adjustment for the domestic telephone services during the specific period and seek NCC’s approval or recognition

 

the specific periods include 11:00 p.m. to 8:00 a.m. from Monday to Friday, 12:00 a.m. Saturday to 8.00 a.m. Monday, and the wholeentire day of a national holidaysholiday

 

the set constant to be applied to the tariff adjustment for the mobile services and the 3G mobile services is 5% and covers the following:

 

2G mobile service and 3G mobile service operators

 

tariffs of the following:

 

domestic short messaging services

 

calls made from a 2G mobile servicesservice customer or from a 3G service network to a domestic fixed communication network

 

calls made from a 2G mobile servicesservice customer or from a 3G service network to a 2G mobile service network, a 3G mobile service network, a 1900MHz Digital Low-Tier Cordless Telephone Services,Service, or PHS, or WiMAX services

 

the set constant to be applied to the cellular voice access charge will be announced separately after the amendment to the relevant regulations.

 

the set constant to be applied to the tariff adjustment for other Type 1 telecommunication services is the annual growth rate of the consumer price index in Taiwan.

On February 7, 2013, the NCC announced that effective from April 1, 2013 to March 31, 2017:

 

the set constant to be applied to the tariff adjustment for the fixed line integrated services is 5.1749% and covers the following:

 

dominant providers of local network services and long-distance network services in Type I service

tariffs of the following:

 

the monthly fee for fixed-line broadband access services (excluding fiber-to-the-home, or FTTH, and fiber-to-the-building, or FTTB)

 

wholesale prices of the following:

 

the monthly fee for leased lines services (including local and domestic long distance leased lines) between internet service providers and their customers

 

the monthly fee for leased lines services (including local and domestic long distance leased lines) between an internet service provider and another internet service provider

the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and another Type 1 telecommunication service provider; the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and a Type 2 telecommunication service provider who provides simple resale and network telephone service of E.164 user numbers

 

the monthly fee for other local and domestic long distance leased lines

 

the interconnection fee for internet bandwidth interconnection

 

the set constant to be applied to the tariff adjustment for other Type 1 telecommunication services is the annual growth rate of the consumer price index in Taiwan, no increase in tariffs is allowed.

In comparison, all non-dominant Type I service providers are only required to fully disclose and notify the public of their proposed tariff adjustments and promotional packages, through the media, websites, and at all business premises, in an appropriate manner, and to report to the NCC prior to the date of the proposed tariff change, with respect to all tariffs.

Type II service providers are free to establish their own tariff schemes, but are required to notify the NCC and the public upon adoption and upon any subsequent adjustments.

Accounting Separation System

The Telecommunications Act requires that a Type I service provider, including one who concurrently offers Type II services, separately calculate the profits and losses for its different services and prohibits any cross-subsidization among services that will impede fair competition.

Interconnection Arrangements

The Telecommunications Act requires all Type I service providers to allow other Type I service providers access to their networks. It further requires Type I service providers, within three months upon request by the other Type I service provider, to reach an agreement on the relevant terms for the interconnection. Prices charged for interconnection must be based on cost. If the parties fail to reach an agreement within three months, the NCC may, either at the request of the parties or on its own accord, arbitrates and determines the interconnection terms for the parties. The Telecommunications Act authorizes the Directorate General of Telecommunications or, from March 1, 2006, the NCC to issue rules and regulations pertaining to interconnection.

The Administrative Rules forRegulations Governing Network Interconnection among Telecommunications Enterprises establishes the basis for determining the interconnection charge of a dominant Type I service provider, which shall be reviewed every four years. The interconnection charge of a dominant Type I service provider shall be reviewed by the NCC in advance, and the NCC has the right to modify the rate.

A dominant Type Ifixed-line service provider shall unbundle its network elements. The unbundled network elements shall contain the following:

 

local loops;

 

local switch transmission equipment;

local trunks;

 

toll switch transmission equipment;

 

long distance trunks;

international switch transmission equipment;

 

network interfaces;

 

directory equipment and services; and

 

signaling network equipment.

Unless otherwise provided by the laws, interconnection charge of the providers for mobile communications businesses and the 3G mobile communications business should be calculated based on the decrees issued by NCC. The foregoing shall apply, mutatis mutandis, to the calculation and reviewing method of the interconnection charge of the dominant providers for fixed communication services.

Unbundled network components of the providers for mobile communications businesses and the 3G mobile communications business include:

 

mobile telecommunications trunks;

 

mobile telecommunications base stations;

 

controlling equipment of mobile telecommunications base stations;

 

mobile telecommunications switch transmission equipment; and

 

other items recognized by the NCC.

The Administrative Rules forRegulations Governing Network Interconnection Between Telecommunication Service Providersamong Telecommunications Enterprises specifies the charges for network interconnection among Type I service providers as follow:

 

Before January 1, 2011, except for international communications, tariffs for communications between a mobile telecommunications network and a fixed-line network were collected from the call-originating subscribers by the call-originating service provider pursuant to the tariff schedules set by the mobile communication service provider, and revenues or any uncollectible accounts from such tariffs went to the mobile service provider. However, from January 1, 2011, although the tariffs shall still be paid by the call-originating subscribers, the tariff schedules are set by the call-originating network service provider, and revenues or any uncollectible accounts from such tariff shall go to the call-originating service provider. During the transition period from January 1, 2011 to December 31, 2016, we, as a dominant Type I fixed-line service provider, shall pay extra transition fee in addition to access charges to the mobile communications service providers.

 

Tariffs for communications between mobile telecommunications networks shall be paid by thecall-originating subscribers pursuant to the tariff schedules set by the call-originating service providers, and the revenues or any uncollectible accounts from such tariffs shall go to the call-originating service providers.

 

Tariffs for communications between fixed-line network will be determined by the following principles:

 

tariffs for communications between the local telephone networks shall be paid by the call- originating subscribers pursuant to the tariff schedules set forth by the call-originating service providers, and revenues or any uncollectible accounts from such tariffs shall gobe allocated to the call-originating service providers;

 

tariffstariff schedules for the local telephone network subscribers using domestic long-distance telephone services shall be set by the domestic long-distance telephone servicesservice provider and tariffs shall be

collected from local telephone network subscribers using domestic long-distance telephone services. Revenues or any uncollectible accounts from such tariffs shall be allocated to the domestic long-distance telephone service providers; and

collected from the local telephone network subscribers using domestic long-distance telephone services. Revenues or any uncollectible accounts from such tariffs shall go to the domestic long-distance telephone services providers; and

 

tariffs

tariff schedules for the local telephone network subscribers using international long-distance telephone services shall be set by the international long-distance telephone servicesservice provider and collected from the local telephone network subscribers using international long-distance telephone services. Revenues or any uncollectible accounts from such tariffs shall go to the international long-distance telephone service providers.

local telephone network subscribers using international long-distance telephone services. Revenues or any uncollectible accounts from such tariffs shall be allocated to the international long-distance telephone service providers.

 

Tariffs schedules for communications between satellite mobile networks and between satellite mobile networks and fixed-line communications networks or mobile communications networks shall both be set by the call-originating service providers. Revenues or any uncollectible accounts from such the tariffs shall go to the call-originating service providers.

 

Tariffs schedules for communications between the E. 164 VoIP networks provided by the Type I service providers and mobile telecommunications networks, or local telephone networks, or satellite mobile networks shall be set by the call-originating service providers. Revenues or any uncollectible accounts from such tariffs shall go to the call-originating service providers.

Bottleneck Facilities

Under the Telecommunications Act, when a Type I service provider cannot construct bottleneck facilities within a reasonable period of time or substitute those facilities with other available technologies, it may request for co-location on a fee basis from the owner of the facilities located at the bottleneck of the relevant telecommunications network. The owner of the facilities so requested may not reject these requests without due cause. The NCC has the authority to prescribe facilities as bottleneck facilities, and has prescribed bridges, tunnels, lead-in tubes and telecommunications chambers located within buildings and horizontal and vertical telecommunications cables and lines as bottleneck facilities in relation to fixed-line telecommunications networks. The NCC, in an announcement on December 21, 2006, has defined local loop facilities as the “bottleneck” of the telecommunications network and amended the Administrative Rules for Network Interconnection Between Telecommunication Service Providers in April 2007, providing that we, as a Type I service provider, can only charge other local telephone service providers at cost for local loop services. The rental tariff is derived from a cost basis and must be approved by the NCC each year.

Spectrum Allocation

The Ministry of Transportation and CommunicationsMOTC is responsible for allocating all telecommunicationsradio related frequencies primarily according to the standards set by the International Telecommunications Union. The NCC is responsible for the licensing of operators to use these frequencies. The 900 MHz and 1,800 MHz frequency bands have been allocated for 2G mobile services and the licenses will be expired in June 2017. A total of 40 MHz of FDD spectrum around the 850 MHz frequency band and a total of 110 MHz of FDD spectrum and 20 MHz of TDD spectrum around the 22.1 GHz band have been allocated for 3G mobile services.services, and the licenses will be expired in December 2018.

On October 30, 2013, NCC completed the bidding process for the spectrum to provide 4G mobile broadband services and a total of 270MHz of FDD spectrum over 700MHz, 900MHz, and 1800MHz frequency bands have been assigned to six nominated bidders, including us.us, and the licenses will expire in December 2030. The spectrum for 4G mobile broadband services was released adhering to the principle of technological neutrality. Mobile broadband services can be offered by heterogeneous networks, or HetNet, including the 4G network and the 2G network under this technology-neutral spectrum. On December 7, 2015, the NCC completed a second round of bidding on 4G frequency band spectrum. A total of 190 MHz spectrum of the 2500 MHz and 2600 MHz frequency bands were assigned to four nominated bidders, Far EasTone, T-Star, APT and us, and the licenses will expire in December 2033.

Provision of Universal Services

Under the Telecommunications Act, a Type I service provider may be required by the NCC, previously the Ministry of Transportation and Communications,MOTC, to provide universal telecommunications services in remote or unprofitable areas. These services include voice communication services, such as public phones, and data communication services, such as

internet provision for libraries and public primary and secondary schools. All

Type I service providers and certain Type II service providers designated by the NCC, previously the Ministry of Transportation and Communications,MOTC, will be required to contribute a fixed portion of their annual revenues to a universal services fund. Such a fund will be used to compensate for any losses, bad debts and management fees incurred by the relevant Type I service provider in providing the universal services. All providers of universal services cannot refuse any request for service, unless for legitimate reasons, and cannot charge more than the predetermined tariffs.

Equal Access

As a result of the liberalization of Taiwan’s telecommunications industry, a Type I service provider, including a 3G mobile services provider and a WiMax service operator, is required to provide its customers with equal access to the domestic and international long distance telephone services provided by other service providers. A Type I service provider may provide equal access through pre-selection or call-by-call selection. Before July 1, 2005, all Type I service providers, including us, provide equal access only through call-by-call selection. When a customer makes a call using call-by-call selection, such customer has the option to select a service provider by dialing the network identification prefix assigned to the service provider of his choice. This will result in the automatic selection of the preferred service provider for the provision of relevant telecommunication services. Starting from July 1, 2005, all Type I service providers also provide equal access through pre-selection in Keelung City, Taipei City/County, Taichung City/County and Kaohsiung City/County. Equal access through pre-selection is available throughout Taiwan since January 1, 2006. The pre-selection function allows any customer to select in advance a long distance or international service provider of his or her choice. When such customer makes a call using this function, the communications network will automatically interconnect to the long distance or international network previously selected by such customer.

Number Portability

According to the Telecommunications Act and the Administration RulesRegulations Governing Number Portability, Type I service providers shall provide number portability service which enables customers to retain their existing local and toll free fixed-line telephone numbers or mobile phone numbers when they switch from the original Type I service provider to other Type I service providers. Meanwhile, Type I service providers shall mutually grant each other number portability services on a reciprocal basis, and shall conform in accordance with the principle of impartiality and reasonableness, and shall not be discriminatory.

Under the regulation, we are required to provide number portability service for fixed-line customers in Taipei City, Taipei County (now New Taipei City,City), Keelung City, Taichung City, Kaohsiung City and other areas where there are two or above fixed-line service providers. We have also provided number portability service for mobile communication customers since October 15, 2005. Pursuant to the regulation, we shall compile and submit related information of number portability for the previous six months to NCC by January 10 and July 10 of each year.

Local Loop Unbundling

In December 2006, the NCC defined the local loop as facilities “at the bottleneck of telecommunications networks” in accordance with the Regulations Governingfor Administration on Fixed Network Telecommunications Businesses. The NCC requires us to unbundle the local loops and allow other telecommunications operators to use these connections. The local loop or last mile connections are the physical wire connections between the telephone exchange’s central office to the customer’s premises usually owned by the incumbent telephone company. The NCC further amended the “Administrative Rules forRegulations Governing Network Interconnection between Telecommunication Service Providers”among Telecommunications Enterprises in April 2007 which provides that we can only charge other local telephone service providers at cost for local loop services instead of on the basis of commercial negotiations.

Co-location

We have been declared by the Ministry of Transportation and Communicationsgovernmental authority as a dominant Type I service provider for fixed-line, 2G and mobile3G services. According to the Telecommunication Act, the Regulations Governingfor Administration on Fixed Network Telecommunications BusinessesBusiness and the Administrative Rules forRegulations Governing Network Interconnection between Telecommunication Service Providers,among Telecommunications Enterprises, if any other service provider requests forco-location, we must negotiate with them, unless otherwise provided by laws or regulations. As of the end of 2013,2015, we are currentlyhad been co-locating 27 Point of Interface, or POI sites and 2 cable stations with other Type I fixed-line service providers and 119 POI sites with other Type I mobile service providers.

Ownership Limitations

The laws of the Republic of ChinaROC limit foreign ownership of our common shares. Prior to March 1, 2006, the Ministry of Transportation and Communications,MOTC, as the competent authority under the Telecommunications Act, had the power to prescribe the limits on foreign ownership of our common shares. After the formation of the NCC on March 1, 2006, the NCC replaced the Ministry of Transportation and CommunicationsMOTC as the competent authority under the Telecommunications Act pursuant to the Organization Law. On July 18, 2006, the Ministry of Transportation and CommunicationsMOTC and the NCC reached an agreement where the Ministry of Transportation and CommunicationsMOTC will have the authority to adjust foreign ownership limits only after negotiations with the NCC. On June 14, 2007, we applied to both the NCC and the Ministry of Transportation and Communications,MOTC, asking for an increase in direct and indirect foreign ownership cap of our common shares. After consultation with the NCC, the Ministry of Transportation and CommunicationsMOTC raised our foreign ownership cap of direct and indirect shareholdings from 49% to 55%. Our foreign ownership limitation of total direct shareholdings remained at 49%.

Under the current Telecommunications Act, the Chairman of a Type I service provider is required to be a citizen of the Republic of China.

Fair Trade Act

The requirements and restrictions under the Telecommunication Act regarding price control, IP peering, equal access and accounting separation regulates certain competitive activities among telecommunication industries and aims to reduce the occurrence of anti-competition activities.

By comparison to the Telecommunications Act, the Fair Trade Act, or the FTA, plays a more comprehensive role in regulating all matters relating to competition between enterprises. The Fair Trade Act seeks to deter and prevent anti-competitive conduct by granting the Fair Trade Commission’s powers to investigate and to impose penalties.

The Fair Trade Act is administered and enforced by the Fair Trade Commission, or the FTC, which has independent administration rights granted to it under the Fair Trade Act and is empowered to impose disciplinary actions for fair trade matters. The Fair Trade Commission may initiate an investigation either on its own account in accordance with its discretion granted by the Fair Trade Act or upon receipt of a complaint.

Regulation on TelecommunicationTelecommunications Enterprise with Monopoly Status

The term “monopoly” used in the FTA refers to the circumstance where an enterprise conducts its business operation in a relevant market without facing any competition or where an enterprise is able to dominate the relevant market and block competition in the market. If there are two or more enterprises within the same market that do not engage in any price competition with each other, the whole group of non-competing enterprises should be deemed as a single monopoly enterprise in the market.

According to the FTA, an enterprise or a group of enterprises will not be considered as monopolistic enterprise(s) if none of the following circumstances exists:

 

the market share of the enterprise in a relevant market reaches one-half of the market;

 

the combined market share of two enterprises in a relevant market reaches two-thirds of the market; and

 

the combined market share of three enterprises in a relevant market reaches three-fourths of the market.

If the market share of any respective enterprise does not reach one-tenth of the relevant market or if the amount of the enterprise’s total sales in the preceding fiscal year is less than one billion NT dollars,the amount which the authority

announces, such enterprise shall not be considered as a monopolistic enterprise in the relevant market. Notwithstanding the above, the FTC has the ultimate discretion to consider an enterprise as a monopolistic enterprise upon any other events evidencing such enterprise’s capability to affect the supply and demand in relevant market or eliminate competition.

Under the FTA, any enterprise with monopoly status is prohibited from engaging in any of the following activities:

 

directly or indirectly, by using any unfair method to prevent any other enterprises from competing;

 

improperly set, maintain or change the price for goods or the remuneration for services;

 

forcing the enterprise’s trading counterpart to give preferential treatment without justification; or

 

abusing its market power.

According to the FTC’s Explanation on Regulations Governing Telecommunication Industry, a telecommunicationtelecommunications enterprise with monopoly status is likely to be involved with the following activities regulated by the FTA: conducting predatory pricing, price squeezing, cross-subsidies, price discrimination, blocking access to essential facilities, inappropriate preference or differential treatment and entering intolong-term agreements to restrict the ability to change counterparties.

If the FTC finds an enterprise liable for violation of regulations governing monopoly, the FTC could impose a monetary fine of not more than NT$100,000,000 each time. If the FTC finds such violation is serious, it may further impose a monetary fine exceeding the NT$100,000,000 but up to 10% of the total sales of the enterprise in the preceding fiscal year. The responsible person of such enterprise may be sentenced to imprisonment of not more than three years.

Regulations on Combination Between TelecommunicationTelecommunications Enterprises

The term “merger” used in the FTA refers to any of the following circumstances:

 

where an enterprise and another enterprise are merged into one;

 

where any enterprise holds or acquires more than one-thirds of total voting shares or capital of another enterprise;

 

where any enterprise is assigned by or leases from another enterprise the whole or the major part of the business or properties of such other enterprise;

 

where any enterprise operates jointly with another enterprise on a regular basis or is entrusted by another enterprise to operate the latter’s business; or

 

where any enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise.

If any merger between or among multiple enterprises falls within any of the following circumstances, a prior approval granted by the FTC shall be required:

 

as a result of the merger, the enterprise will own at least one-third of the total market share;

 

there is any enterprise involved with the merger has one-fourth of the market share; or

 

the aggregate sales amount for the preceding fiscal year of one of the enterprises and the entities controlled by or affiliated with such enterprise involved with the merger exceeds the threshold amount publicly announced by the FTC from time to time.

Once the telecommunicationtelecommunications enterprise files the merger application with the FTC, the FTC will evaluate the pros and cons of the merger by weighing the potential economic efficiency against the disadvantage of reduced competition. If the FTC finds the potential economic efficiency generated from the merger should be

able to offset the disadvantage of reduced competition caused, the FTC will grant the approval for the merger. Furthermore, the FTC may, when granting an approval, impose certain conditions or undertakings on the applicants to ensure that the overall economic benefit to be generated from the merger outweighs the disadvantage of the reduction in competition.

Regulations on Concerted Action (Cartel) in Telecommunication Industry

The term “concerted action (cartel)” as used in the FTA means the conduct of any enterprise, by means of contract, agreement or any other form of mutual understanding, with any other competing enterprise, to jointly determine the price of goods or services, or to limit the terms of quantity, technology, products, facilities, trading counterparts, or trading territory with respect to such goods and services, and thereby to restrict each other’s business activities. The FTC may assume a concerted action exists based on the market condition, the feature of goods or services, cost and profit, and the economic feasibility for enterprises to conduct concerted action. Notwithstanding the above, the term concerted action as used in the FTA is limited to any horizontal concerted action at the same production and/or marketing stage that would affect the market function of production, trade in goods, or supply and demand of services. Under the FTA, the enterprises are prohibited from engaging in any concerted actions unless the FTC holds the concerted action may be beneficial to overall economy and public interest.

According to the FTC’s Explanation on Regulations Governing Telecommunication Industry, a telecommunicationtelecommunications enterprise may be able to involve with the following concerted actions: entering into common pricing agreement, restriction of output and market segregation, concerted refusal to deal, or entering into agreement for exchange of information.

If the FTC finds an enterprise liable for violation of regulations governing concerted action (cartel), the FTC could impose a monetary fine of not more than NT$100,000,000 each time. If the FTC finds such violation is serious, it may further impose a monetary fine exceeding the NT$100,000,000 but up to 10% of the total sales of the enterprise in the preceding fiscal year. The responsible person of such enterprise may be sentenced to imprisonment of not more than three years.

Regulations on Unfair Competition in Telecommunication Industry

The FTA prohibits any enterprise from conducting any of the following activities that may restrict competition or impede fair competition:

 

forcing another enterprise to discontinue supply, purchase or other business transactions with a particular enterprise for the purpose of injuring such particular enterprise;

 

treating another enterprise discriminatively without justification;

 

forcing the trading counterpart(s) of its competitor(s) to do businesspreventing competitors from participating or engaging in competition by inducing customers with itself by way of coercion, inducement with interest,low price or other improper means;illegal inducements;

 

forcing another enterprise to refrain from competing in price, or to take part in a merger, or a concerted action, or to perform vertical restrictions by coercion, inducement with interest, or other improper methods;

acquiring undisclosed information of another enterprise regarding the production and sales, information concerning trading counterparts or other technology related secret by way of coercion, inducement with interest, or other improper means; or

 

setting improper restrictions on its trading counterparts’ business activity as the condition to reach business engagement.

According to the FTC’s Explanation on Regulations Governing Telecommunication Industry, the telecommunicationtelecommunications enterprise may be involved with the following activities that may restrict competition or impede fair competition: conducting vertical trading restraint, boycott, discrimination, improper sales discount, sales with gift or lottery or tie-in sales.

If any enterprise violates the regulations governing unfair competition, the FTC may order it to cease therefrom, rectify its conduct or take necessary corrective action within the time prescribed in the order; in

addition, the FTC may assess upon such enterprise an administrative fine of not less than NT$100,000 nor more than NT$50,000,000. Should such enterprise fail to cease therefrom, rectify the conduct or take any necessary corrective action after the lapse of the prescribed period, the FTC may continue to order such enterprise to cease therefrom, rectify the conduct or take any necessary corrective action within the time prescribed in the order, and each time may successively assess thereupon an administrative fine of not less than NT$200,000 nor more than NT$100,000,000 until its ceasing therefrom, rectifying its conduct or taking the necessary corrective action.

Regulations on the Representations or Symbol Used by TelecommunicationTelecommunications Enterprise on Goods or in Advertisement

The FTA prohibits any enterprise from making or using false or misleading representations or symbol as to price, quantity, quality, content, production process, production date, valid period, method of use, purpose of use, place of origin, manufacturer, place of manufacturing, processor, or place of processing on goods, or any items which attract customers or in advertisements, or in any other way making known to the public.

If an enterprise violates the applicable provisions under the FTA that prohibit false or misleading representations, the FTC may order it to cease therefrom, rectify its conduct or take necessary corrective action within the time prescribed in the order; in addition, the FTC may assess upon such enterprise an administrative fine. Should such enterprise fail to cease therefrom, rectify the conduct or take any necessary corrective action after the lapse of the prescribed period, the FTC may continue to order such enterprise to cease therefrom, rectify the conduct or take any necessary corrective action within the time prescribed in the order, and each time may successively assess thereupon an administrative fine until its ceasing therefrom, rectifying its conduct or taking the necessary corrective action.

Other Regulations

In addition to the competitive activities expressly regulated by the FTA, the enterprise shall further be prohibited from conducting any fraudulent activity or significantly unfair activity that may impact the trade order.

The FTC may order any enterprise that violates any of the provisions of the FTA to cease therefrom, rectify its conduct or take necessary corrective action within the time prescribed in the order; in addition, the FTC may assess upon such enterprise an administrative fine of not less than NT$50,000 nor more than NT$25,000,000. Should such enterprise fail to cease therefrom, rectify the conduct or take any necessary corrective action after the lapse of the prescribed period, the FTC may continue to order such enterprise to cease therefrom, rectify the conduct or take any necessary corrective action within the time prescribed in the order, and each time may successively assess thereupon an administrative fine of not less than NT$100,000 nor more than NT$50,000,000 until its ceasing therefrom, rectifying its conduct or taking the necessary corrective action.

If the FTC finds an enterprise liable for violation of regulations governing monopoly or concerted action (cartel), the FTC could impose a monetary fine of up to 10% of the total sales of the enterprise in the preceding fiscal year.

Administrative Fee Law

According to the Administrative Fee Law, central and local governments, government agencies and schools are empowered to collect administrative fees from us and other telecommunications services providers for the telecommunications facilities built on public roads and properties. Under the Administrative Fee Law, Urban Road Act and Local Road Act, road authorities of municipal governments may collect usage fees from users of local roads, including us, for establishing lines along with the local roads. The fee schedule is set up in the Standard for Usage Fees of Local Roads.

Under the Public Road Law, administrative authorities of public roads may collect usage fees from the users of public roads. According to the Rules Governing Collection of Usage Fees on Public Roads, the relevant collection agencies, including agencies designated by the Ministry of Transportation and CommunicationsMOTC and municipal governments, depending on the types of public roads, may collect usage fees from users, including us, for establishing lines along with the public roads.

Personal Data Protection

On May 26, 2010, the President of the Republic of China announced theThe amendment of the Personal Information Protection Act, or PIPA, which replaced the former Computer-Processed Personal Data Protection Act, or CPPDPA, and became fully effective on October 1, 2012, except for its Articles 6 and 54 that await further determination by the Executive Yuan. Under the PIPA, every individuals or governmental or non-governmental agencies, including us, should be subject to certain requirements and

restrictions for collecting, processing or using personal data. The definition of “personal data” is extended to cover a broad scope, including name, birthday, ID, special features, fingerprints, marriage status, family, education, occupation, medical records, medical history, generic information, sex life, health examination report, criminal records, contact information, financial status, social activities, and any other data which is sufficient to directly or indirectly identify a specific person. If we fail to comply with the PIPA, we may be subject to serious punishment for civil claims, criminal offenses and administrative liabilities: the ceiling of the aggregate compensation amount for damages payable in a single case will be up to NT$200 million or the actual value of loss arising from our violation provided the amount of actual value of such loss is higher than NT$200 million; the defendant may be subject to an imprisonment of up to five years; and the penalty for administrative liabilities will be up to NT$500,000 for each violation, and may be imposed consecutively if such violation continues.

Statute of Chunghwa Telecom Co., Ltd.

The Executive Yuan, on April 27, 2012, proposed a motion for the abolishment of the Statute of Chunghwa Telecom Co., Ltd. for legislative approval. We cannot determine when this motion will be approved by the Legislative Yuan. Under Republic of China law, the Statute of Chunghwa Telecom Co., Ltd will continue in effect until theThe Legislative Yuan formally approvesapproved the motion on December 9, 2014 and the President of the Republic of China pronouncesROC pronounced the abolishment of the law.

Approval of Ministry of Transportation and Communications

While the continued application of the Statute of Chunghwa Telecom Co., Ltd. remains unclear and it may be abolished in the near future, under that statute we are required to obtain approval of the Ministry of Transportation and Communications for:

the adoption of and any changes tolaw effective from December 24, 2014. The abolishment has no material impact on our articles of incorporation and board of directors organization rules;

company.

any changes to our authorized capital and any issuance of our common shares;

any changes to primary tariffs for Type I services; and

any changes to operational procedures of Type I services.

Employee Subscription Rights for New Issues of Our Common Shares

In accordance with the Statute of Chunghwa Telecom Co., Ltd., our employees have rights to subscribe for not more than 10% of a new issuance of our common shares in accordance with subscription rules which were to be announced by the Ministry of Transportation and Communications. However, no such rules were ever announced. In addition, under the Republic of China Company Act, unless exempted by the relevant government authorities, a Republic of China company must give its employees pre-emptive rights to subscribe between10-15% of any new issue of shares by us. The pre-emptive subscription rights do not apply to issuance of restricted shares by a public company to its employees.

C. Organizational Structure

Set forth below is a diagram indicating our organization structure as of March 31, 2014.2016.

 

LOGO

LOGO

D. Property, Plant and Equipment

Please refer to “—B. Business Overview” for a discussion of our property, plant and equipment.

ITEM 4A.UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5.ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and the notes to such statements included in this annual report.

For the convenience of readers, NT dollar amounts used in this section for, and as of, the year ended December 31, 20132015 have been translated into U.S. dollar amounts using US$1.00=NT$29.83,32.79, set forth in the statistical release of the Federal Reserve Board on December 31, 2013.2015. The U.S. dollar translation appears in parentheses next to the relevant NT dollar amount.

Overview

A number of recent and expected future developments have had, and in the future may have, a material impact on our financial condition and results of operations. These developments include:

 

changes in our revenue composition and sources of revenue growth;

 

tariff adjustments;

 

capital expenditures as a result of technological improvements and changes in our business;

 

personnel expenses;

 

taxation; and

 

effect of adopting Taiwan-IFRSsTaiwan IFRSs on our dividends and employee bonuses.

Each of these developments is discussed below.

Changes in our revenue composition and sources of revenue growth

Our domestic fixed communications business revenues are derived primarily from the provision of local, domestic long distance, broadband access, leased line service, MOD, and other domestic services including information and communication technologies,ICT, cloud services, corporate solution services, billing handling services and the leasing of real estate properties. In addition, we also derive fixed-line revenues from providing interconnection services to other carriers. Our revenues from mobile communications business are principally derived from the provision of mobile services, sales of mobile handsets, tablets and data cards and other mobile other services. Our revenues from internet business are generated principally from HiNet internet service, internet VAS, data communication services, internet data center, and other internet services including information and communication technologiesICT and cloud services. Our revenues from international fixed communications business are derived primarily from international long distance, international leased line, international data services, satellite services, and other international services. Our other revenues are principally derived from non-telecom services.

The table below sets forth the revenues from our principal lines of business as a percentage of total revenues for the periods indicated.

 

  Year Ended December 31   Year Ended December 31 
          2012                 2013           2013 2014 2015 

Revenues:

       

Domestic fixed communications business

   34.4 32.2   32.2 31.8 31.3

Mobile communications business

   45.5   48.5     48.5   48.8   49.6  

Internet business

   11.2   11.2     11.2   11.5   11.1  

International fixed communications business

   6.9   6.9     6.9   6.8   6.7  

Others

   2.0   1.2     1.2   1.1   1.3  
  

 

  

 

   

 

  

 

  

 

 

Total

   100.0  100.0   100.0 100.0 100.0
  

 

  

 

   

 

  

 

  

 

 

Our domestic fixed communications business has been an important source of revenue over the last twothree years. We derive domestic fixed communications from the provision of ADSLFTTx and FTTxADSL access services that provides customers with data access lines. The percentage of total revenues derived from domestic fixed communication decreased in 2013both 2014 and 2015 mainly due to tariff reductions for ADSL and FTTx services and the decline of domestic long distance and local call service revenue because of mobile and VoIP substitution.substitution, and reductions in tariffs for FTTx and ADSL services. We believe that domestic fixed communications business will continue to generate a significant portion of our revenues.

Revenues from our mobile communications business made a major contribution to our revenues over the last twothree years. We have experienced a significant increase in revenues generated by our mobile value-added servicesVAS due to the popularity of smart phonesmartphone and increase in mobile internet subscribers. In addition, the increased popularity of smart phones also boosted our handset sales. As a result, we believe that our mobile communications business will continue to generate a significant portion of our revenues.

Our internet business was another important source of revenues over the last twothree years. We derived internet business revenues from the provision of HiNet internet service and internet value-added services.VAS. The percentage

of revenues from internet services within total revenues remained flat inincreased from 2013 while internet services revenue declinedto 2014, primarily due to the tariff reductionrevenue growth in IDC and ICT areas by our subsidiary, CHIEF Telecom Inc., or CHIEF, as well as in government-related internet VAS. The percentage of revenues from internet services along withwithin total revenues decreased from 2014 to 2015, mainly due to the ADSLdecrease in VAS revenue generated from information services of the land administration system that we established for the Land Administration Department of local governments, and FTTx tariff reduction.the decrease was primarily affected by the downturn in the property market.

We derived our international fixed communications revenues mainly from international long distance telephone services, international leased line services and international data services. The revenuesRevenues from our international fixed communications business as a percentage of our total revenues remained flatslightly decreased from 20122013 to 2013, while2015, because our international long distance telephone services revenue continued to decline due to VoIP substitution.

Our other revenues decreased from 20122013 to 20132014, primarily due to lower property sales by our subsidiary, Light Era, Developmentand lower government-related ICT revenues by our subsidiary, Chunghwa System Integration Co., Ltd. Our other revenues increased from 2014 to 2015, and the increase was mainly due to operating growth derived from one of our subsidiaries, Chunghwa Precision Test Tech. Co., Ltd., a semiconductor testing company.

Tariff adjustments

We adjust our tariffs and offer promotional packages from time to time primarily in response to market conditions. We also from time to time are required to adjust our pricing in line with domestic regulations.

The NCC passed a resolution on December 21, 2006 adopting a price reduction plan requiring the continuous reduction in telecommunication tariffs over three years. Minimum reductions of 4.88% for fixed-line to mobile call tariffs, 4.88% for the tariffs of our highest monthly rate plan, 4.88% for mobile prepaid calling card tariffs and 5.35% for ADSL tariffs must be made each year. On January 29, 2010, the NCC announced a new tariff reduction plan starting on April 1, 2010 to March 31, 2013. The percentage of decrease set by NCC wasDCPI—4.816% for IP Peering fees, domestic leased-line fees, ADSL access fees and long distance tariffs, andDCPI—5.00% for fees for mobile calls to local fixed-lines and other networks and domestic mobile SMS, whereDCPI is the year-over-year change of the consumer price index of previous year released by the Directorate-General of Budget, Accounting and Statistics of the Executive Yuan. On February 7, 2013, the NCC announced a new plan for tariff reductions in wholesale tariffs for IP peering and domestic leased line services, and in monthly fees for fixed-line broadband access services (excluding fiber-to-the-home, or FTTH, and fiber-to-the-building, or FTTB) over a period of four years starting on April 1, 2013, which are subject to a reduction byDCPI—5.1749%. TheDCPI for 2012 that was used for the tariff reduction starting from April 1, 2013 was 1.93%; and theDCPI for 2013 that was used for the tariff reduction starting from April 1, 2014 was 0.79%; and theDCPI for 2014 that was used for the tariff reduction starting from April 1, 2015 was 1.2%; and theDCPI for 2015 that was used for the tariff reduction starting from April 1, 2016 was -0.31%. While mobile tariffs will not be regulated in this round, according to the revised Administrative Rules for Network Interconnection, the mobile interconnection fees should be reduced from the current NT$2.15 per minute to NT$1.15 per minute, over the period of four years starting from January 5, 2013.

On January 1, 2011,

Besides mandatory tariff reduction mentioned above, we voluntarily implemented the NCC’s changetariff adjustments in policy for collecting the tariffs of fixed-line-to-mobile calls from mobile service providers to fixed communications service providers. As a result, our fixed communications business now has the right to set and collect the tariffs for fixed-line-to-mobile phone calls.

On June 22, 2011, we implemented a discounted tariff along with broadband speed upgrade for our broadband service, under which we provided a 30% or more discountand mobile businesses in the past few years to subscribers of 20 Mbps, 50 Mbps or 100 Mbps broadband access services. We further reducedconsolidate our ADSL tariffs by approximately 20% starting from 2012 in order to attract more broadband customers. In April 2013, we implemented another discounted tariffmarket share. See “Item 4. Information on the Company—B. Business Overview” for our ADSL and fiber broadband service. In October 2013, we implemented another discounted tariff along with broadband speed upgrade for our broadband service of 60 Mbps and 100 Mbps.

In addition, in 2011, there were complaints from the general public regarding our mobile data network congestion. To address the situation, we adopted measures such as offering a 20% discount of the mobile data monthly fees from August 2011 to the end of 2012 for customers whose monthly data usage volume was less than one gigabyte.

As requested by the Legislative Yuan and NCC, we implemented a discounted tariff for telecommunication services from Kinmen, Matsu and Penghu Islands to Taiwan in April 1, 2011. We further applied one single tariff to all the telecommunication services for the entire country since January 2012.

We expect to continue to adjust tariffs and offer a variety of promotional packages from time to time in response to increasing competition and in order to take advantagediscussions of our pricing power from economies of scale. We may also be required to adjust our pricing due to changes in domestic regulations.voluntary tariff adjustments.

Capital expenditures as a result of technological improvements and changes in our business

In recent years, we have focused on modernizing and upgrading our mobile services network and on developing our FTTx network, which enables transmission of digital information at a high bandwidth over fiber loops. In particular, we have enhanced our telecommunications services through:

 

continuing to accelerate LTE network construction to improve coverage nationwide and to enhance capacity in dense urban areas after the launch of 4G mobile broadband services in May 2014;

the implementation of a network modernization program, including a gradual transfer from our public switched telephone network to a system based on internet protocol, to remain at the forefront of new technologies;

 

the development and deployment of Green IDCenvironmentally friendly IDCs for meeting the new demands of co-location and cloud computing services;

 

the deployment of a high-capacity long-haul reconfigurable optical add drop multiplexing systemOTN, and a nationwide internet protocol backbone network with hundreds of Gbps switching routers for internet and managed IP services; and

 

the expansion and upgrade of our mobile services network as well as WiFi/FemtocellWi-Fi to improve indoor mobile network coverage and transmission speed for mobile internet; and

accelerating LTE network construction to launch 4G services in July 2014.internet.

Our long-term goal is to optimize our capital expenditures by focusing on investing in innovative products and services with attractive return profiles. We evaluate our investment opportunities by benchmarking them against internal return requirements. We are upgrading our public switched telephone network to a next-generation network, which will have more capacity, greater upgrade flexibility, and increased operational efficiencies. We have also devoted resources toward the effective upgrade of our 3G mobile network to HSPA+/Dual carrier HSPA+, accelerating the construction of 4G network, and the continuing build-out of our FTTx infrastructure. In addition, we are planning to deploy green internet Data Centers and service delivery network for the innovative services, such as cloud computing, fixed mobile convergence services and multi-screen digital convergence services.

PersonnelPersonnel expenses

Personnel expenses constitute a significant portion of our operating costs and expenses. In 20122013, 2014 and 2013,2015, personnel expenses represented 25.9%25.0%, 25.5% and 25.0%26.1% of our total operating costs and expenses, respectively, and pension costs represented 1.8%, 1.9% and 1.9% of our total operating costs and expenses, for each year.respectively. The table below sets forth information regarding our personnel expenses and as a percentage of our total operating costs and expenses for the periods indicated.

 

  Year Ended December 31   Year Ended December 31 
  2012 2013   2013 2014 2015 
  (in billions of NT$, except percentages)   (in billions of NT$, except percentages) 

Personnel expenses:

                 

Salaries

   24.3     14.2 24.9     13.9   24.9     13.9 24.9     13.6 25.5     14.1

Insurance

   2.3     1.3   2.4     1.3     2.4     1.3   2.6     1.4   2.6     1.4  

Pension

   3.1     1.8   3.3     1.8     3.3     1.8   3.4     1.9   3.4     1.9  

Other(1)

   14.7     8.6   14.5     8.0     14.5     8.0   15.7     8.6   15.8     8.7  
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total personnel expenses

   44.4     25.9  45.1     25.0   45.1     25.0 46.6     25.5 47.3     26.1
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total operating costs and expenses

   171.4     100.0  180.4     100.0   180.4     100.0 182.4     100.0 181.3     100.0

 

(1)Includes employee bonuses.

According toIn accordance with ROC laws and regulations, we offset the decrease of retainedunappropriated earnings arising from the impact of first adoption of Taiwan-IFRSsTaiwan IFRSs with earnings generated in 2013 before we made any appropriation of earning. As a result, retainedunappropriated earnings in 2013 for earnings appropriation purposes decreased, which affected dividends to our shareholders and bonuses to our employees. In order to compensate

for the decreased employee bonuses, at our board of directors meeting held in March 2014, our directors approved to appropriate a one-time bonus to our employees. See “—Effect of adopting Taiwan-IFRSsTaiwan IFRSs on our dividends and employee bonuses” below.

At the time of our privatization, we settled all of our then existing defined benefit pension obligations in full. After completing our privatization on August 12, 2005, all of our continuing employees were deemed to have commenced employment as of August 12, 2005 for seniority purposes under our pension plans in effect after privatization. Under applicable Republic of ChinaROC regulations, upon our privatization, the Ministry of Transportation and CommunicationsMOTC assumed the obligation to make annuity payments to all of our employees that retired before our privatization.

Taxation

The income tax rate for profit-seeking enterprises is 17% in the Republic of China.ROC. We benefit from tax incentives, including tax credits of up to 15% of some of our research and development expenses in accordance with the Statute for Innovating Industries. We also qualify for tax benefits at a rate of 5% to 15% of our investment amount for qualified equipment and technology under the Statute for Upgrading Industries. However, due to the expiration of the Statute for Upgrading Industries at the end of 2009, we will no longer receive tax credits for new investments in automation, employee training expenditures incurred, and equipment and technology purchased after January 2010.

In 1997, the Income Tax Law of the Republic of ChinaROC was amended to integrate corporate income tax and stockholder dividend tax to eliminate the double taxation effect for resident stockholders of Taiwan companies. Under the amendment, all retainedafter-tax earnings generated from January 1, 1998 and not distributed to stockholders as dividends in the following year are assessed with a 10% retainedunappropriated earnings tax. See “Item 10. Additional Information—E. Taxation—Republic of ChinaROC Taxation—Dividends”. Under IFRSs, the 10% tax on unappropriated earnings is accrued during the year the earnings arise and adjusted to the extent that distributions are approved by the stockholders in the following year. According toIn accordance with ROC laws and regulations, we offset the decrease of retainedunappropriated earnings arising from the impact of first adoption of Taiwan-IFRSsTaiwan IFRSs with earnings generated in 2013 before we made any appropriation of earnings in 2014, therefore, the accrued 10% retainedunappropriated earnings tax in 2013 was lower than that in 2012.2014. In 2014, due to the reversal of the 10% unappropriated earnings tax accrued in 2013, which was much lower than that accrued in 2014, net unappropriated earnings tax accrued in 2014 was higher than that accrued in 2015. As a result, our effective tax rate decreased from 14.7%19.3% in 20122014 to 13.2%17.5% in 2013.2015.

Effect of adopting Taiwan-IFRSsTaiwan IFRSs on our dividends and employee bonuses

Beginning on January 1, 2013, we have adopted Taiwan-IFRSsTaiwan IFRSs for reporting our annual and interim consolidated financial statements in the ROC in accordance with the requirements of the FSC. At the same time, we have adopted IFRSs, which has certain significant differences from Taiwan-IFRSs,Taiwan IFRSs, for reporting our annual and interim consolidated financial statements with the SEC, including this annual report and future annual reports on Form 20-F. See “Item 3. Key Information—A. Selected Financial Data”.

Our dividends for 2013 and thereafter will behave been calculated based on Taiwan-IFRSs.Taiwan IFRSs since 2013. According to local regulations, our retainedunappropriated earnings before earnings distributions for the year ended December 31, 2013 needs to first offset the decrease of retainedunappropriated earnings on the date of transition to Taiwan-IFRSsTaiwan IFRSs (January 1, 2012), which led to a decrease in earnings available for our dividends and employee bonuses compared to prior years. As a result of these decreases in our dividends and employee bonuses, in March 2014, our board of directors approved an additional distribution to our shareholders from additional paid-in capital in the amount of NT$16.6 billion and a one-time additional bonus to our employees in the amount of NT$0.7 billion. We expect theThe NT$16.6 billion additional distributions to our shareholders to bewere approved at our annual general stockholders’ meeting scheduled on June 24, 2014 and such amount was subsequently paid in August 2014.

Our financial statements prepared under Taiwan IFRSs have not been included in this annual report and do not form a part of this annual report.

Critical Accounting Policies

Summarized below are our accounting policies that we believe are both important to the portrayal of our financial results and involve the need for management to make estimates about the effect of matters that are

uncertain in nature. Actual results may differ from these estimates, judgments and assumptions. Certain accounting policies are particularly critical because of their significance to our reported financial results and the possibility that future events may differ significantly from the conditions and assumptions underlying the estimates used and judgments made by our management in preparing our financial statements. The following discussion should be read in conjunction with the consolidated financial statements and related notes, which are included in this annual report.

Revenue Recognition

RevenuesRevenue from the sale of goods areis recognized when the goods are delivered and titles of the goods are transferred, andhave passed, at which time all the following conditions are satisfied at the:satisfied:

 

TheWe have transferred to the buyer the significant risks and rewards of ownership of the goods are transferred to the buyer;goods;

 

We no longer retain neither continuing managerial involvement to the degree that usually associated with ownership ornor effective control over the goods sold;

 

The amount of the revenuesrevenue can be measured reliably;

 

It is probable that the economic benefits associated with the transaction will flow to us; and

 

The costs incurred or to be incurred in respect of the transaction can be measured reliably.

Revenue is measured at the fair value of the consideration received or receivable and represents amounts for goods sold in the normal course of business, net of sales discounts and volume rebates. For trade notes and accounts receivables due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest.

Usage revenues from fixed-line services (including local, domestic long distance and international)international long distance telephone services), cellular services, internet and data services, and interconnection and call transfer fees from other telecommunications companies and carriers are billed in arrears and are recognized based upon seconds or minutes of traffic processed when the services are provided in accordance with contract terms.

Other revenues are recognized as follows: (a) one-time subscriber connection fees (on fixed-line services) are deferred and recognized over the average expected customer service periods, (b) monthly fees (on fixed-line services, mobile, internet and data services) are accrued every month, and (c) prepaid services (fixed-line, mobile, internet and data services) are recognized as income based upon actual usage by customers or when the right to use those services expires.customers.

Where we enter into transactions which involve both the provision of air time bundled with products such as 3G data card and handset,handsets, total consideration received from products and air time in these arrangements are allocated and measured using units of accounting within the arrangement based on their relative fair values limited to the amount that is not contingent upon the delivery of products or services. Relative fair values are based on the selling prices of 3G data cards and handsets on a standalone basis and the monthly fees provided in the subscription contracts.

Services revenue is recognized when service is provided.

Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract.

Dividend income from investments is recognized when the shareholder’s right to receive payment has been established.established, under the premises when it is probable that the economic benefits related to the transactions will flow to us and that the revenue can be reasonably measured.

Interest income from a financial asset is recognized when it is probable that the economic benefits related to the transactions will flow to us and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

Impairment of Trade notes and Accounts Receivable

When there is objective evidence showing indications of impairment, as a result of one or more events that occurred after the initial recognition of the accounts receivable, we will consider the estimation of future cash flows. The amount of impairment will be measured onas the difference between the carrying amount and the present value of estimated future cash flows discounted by the original effective interest rates of the financial assets. However, as the impact from the discount ofdiscounting short-term receivables is not material; therefore,material, the impairment of short-term receivables is based onmeasured at the difference between the carrying amount and the estimated undiscounted estimated future cash flows. Where the actual future cash flows are less than expected, a material impairment loss may arise.

We implemented some measures which have improved the collectability of our accounts receivable. These procedures, which include enhanced credit assessments, strengthened overall risk management and improvements in bill collection practices, have reduced our exposure to uncollected receivables.

We maintain an allowance for doubtful accounts for estimated losses that result from the inability of our customers to make required payments. When determining the allowance, we consider the probability of recoverability based on past customercustomers default experience and their credit status, and economic and industrial factors. Credit risks are assessed based on historical write-offs, net of recoveries, and an analysis of the aged accounts receivable balances with allowances generally increasing as the receivable ages. Accounts receivable may be fully reserved for when specific collection issues are known to exist, such as pending bankruptcy or catastrophes. The analysis of receivables is performed monthly, and the allowances for doubtful accounts are adjusted through expense accordingly.

Provision for inventory valuation and obsolescence

Inventories are stated at the lower of cost or net realizable value. Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made at the end of reporting period. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period. Estimates of net realizable value also take into consideration. Inventory write-downs are determined on an item by item basis, except for those similar items which could be categorized into the same groups. We use the inventory holding period and turnover as the evaluation basis for inventory obsolescence losses.

Estimated Useful Lives of Long-Lived Assets

A significant portion of our total assets consists of long-lived assets, primarily property, plant and equipment and definite-lived intangibles. We estimate the useful lives of property, plant and equipment and other long-lived assets with finite lives in order to determine the period of time over which depreciation and amortization expenseexpenses should be recorded. The useful lives are estimated at the time assets are acquired and are based on historical experience with similar assets as well as the anticipated technological evolution or other environmental changes. Further, we review the estimated useful lives of long-lived assets at the balance sheet

date. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization in the relevant periods. Alternatively, technological obsolescence could result in a write-down in the value of the assets to reflect impairment. We review these types of assets for impairment quarterly, or when events or circumstances indicate that the carrying amount may not be recoverable over the remaining life of an asset. In assessing impairments, we use estimated cash flows that take into account management’s estimates of future operations.

Control over Subsidiaries

Some entities are our subsidiaries although we only own less than 50% ownership interest in these entities. After considering our absolute size of holding in the entity and the relative size of and the dispersion of shares owned by the other shareholders, and the contractual arrangements between us and other investors, potential voting interests and the written agreement between shareholders, the management concluded that we have a sufficiently dominant voting interest to direct the relevant activities of the entity and therefore we have control over these entities.

Investments in Unconsolidated Companies

An associate is an entity over which we have significant influence and that is neither a subsidiary nor an interest in a joint venture. JointA joint venture arrangementsis a joint arrangement whereby we and other parties that involve the establishment of a separate entity in which venturers have joint control over the economic activity of the entity are referredarrangement and have rights to as joint venture.

The operating results and identifiablethe net assets of associates and joint venture are incorporated in these consolidated financial statementsthe arrangement.

Investments accounted for using the equity method of accounting.include investments in associates and interests in joint ventures. Under the equity method, an investment in an associate andor joint venture is initially recognized in the consolidated balance sheet at cost and adjusted thereafter to recognize our share of the profit or loss any impairment losses, and other comprehensive income of the associate and joint venture as well as the distribution received.

When we subscribe for additional new shares of the associate and joint venture at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of our proportionate interest in the associate and joint venture. We record such a difference as an adjustment to investments with the corresponding amount charged or credited to additional paid-in capital. When the adjustment should be debited to additional paid-in capital but the additional paid-in capital recognized from investments accounted for by the equity method is insufficient, the shortage is debited to retained earnings.

Any excess of the cost of acquisition over our share of the fair value of the identifiable net assets liabilities and contingent liabilities of an associate and joint venture recognized at the date of acquisition is recognized as goodwill, which is included inwithin the carrying amount of the investment and shall not be amortized. Any excess of our share of the net fair value of the identifiable assets and liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss.

We assess 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 entire carrying amount of the investment, including goodwill, is tested for impairment as a single asset by comparing its recoverable amount with its carrying amount. We measure the impairment based on the projected future cash flow of the investees, the underlying assumptions for which had been formulated by such investees’ internal management team, taking into account sales growth and capacity utilization. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.

Our other equity investments are classified as available-for-sale, or AFS, financial assets or AFS, including: a) listed stocks, and emerging market stocks, and unlisted stocks. Among these investments, those that are tradedhave a quoted market price in an active market that are statedclassified as AFS and measured at fair value at the end of each reporting period; b) equity investmentsthe others that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. If, in a subsequent period, the fair value of the financial assets can be reliably measured, the financial assets are remeasured at fair value. The difference between the carrying amount and the fair value is recognized in profit or loss.

Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency exchange rates, interest income calculated using the effective interest method and dividends on AFS equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-saleAFS financial assets are recognized in other comprehensive income. Whenincome and will be reclassified to profit or loss when the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss.

When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the period.impaired.

The process of assessing whether a particular investment’s net realizable value is less than its carrying cost requires a significant amount of judgment. We periodically evaluate these investments based on quoted market prices, if available, the financial condition of the investee company, economic conditions in the industry and our intent and ability to hold the investment for a long period of time. If quoted market prices are not available, we

estimate the fair value using the recoverable amounts in consideration of the financial condition of the investee

company. This information may be based on information that we request from the investee companies and may not be subject to the same disclosure and audit requirements as required of non-foreign private issuers, and as such, the reliability and accuracy of the information may vary. If we deem the fair value of an investment to be less than the carrying value based on the above factors, and the decline in value is deemed to be other than temporary, we record the difference as impairment in the period of occurrence. In 20122013, 2014 and 2013,2015, we recognized impairment losses of NT$20366 million, NT$23 million and NT$66107 million (US$2.23.3 million), respectively, for the investments classified as AFS financial assets.

Impairment of long-lived assets and intangible assets

We assess the impairment of long-lived assets and intangible assets whenever triggering events or changes in circumstances indicate that the asset may be impaired and carrying value may not be recoverable. Indications we consider important which could trigger an impairment review include, but are not limited to, the following:

 

External sources of information:

 

during the period, an asset’s market value has declined significantly more than what would be expected as a result of the passage of time or normal use.

 

significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.

 

market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.

 

the carrying amount of the net assets of the entity is more than its market capitalization.

 

Internal sources of information:

 

evidence is available of obsolescence or physical damage of an asset.

 

significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used.

 

evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

When an indication of impairment is identified for long-lived assets and intangible assets other than goodwill, 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, as if no impairment loss had been recognized.

Goodwill represents the excess of the consideration paid for business acquisition over the fair value of identifiable net assets acquired. Goodwill is tested for impairment at least annually, or if an event occurs or circumstances change which indicates that the fair value of goodwill is below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed.

In 20122013, 2014 and 2013,2015, we determined that partialsome of our telecommunication equipment and miscellaneous equipment were impaired and recognized an impairment loss of NT$301 million and NT$254 million, NT$64 thousand, and NT$138 million (US$4.2 million) respectively.

In 2012,2013 and 2015, we determined that partssome of our investment properties were impairedproperties’ recoverable amount which represented the fair value less costs to sell of some land and buildings was higher than the carrying amount and recognized anreversals of impairment loss of NT$1,261 million. In 2013, based on the evaluation of fair value, some impaired investment properties increased in value246 million and therefore we reversed the impairment losses of NT$246 million. In 2012, we also recognized impairment losses of NT$5142 million for definite-lived intangible assets.(US$4.3 million), respectively.

Goodwill amounting to NT$18 million arising from the business combination of a subsidiary, Chunghwa Investment Co., Ltd., or CHI, was fully impaired for the year ended December 31, 2013 because CHI underwent organizational and operational downsizing, and the goodwill was considered no longer exist.

Pension Benefits

Payments to defined contribution retirement benefit plans are recognized as expensesan expense when employees rendered services entitling them to the contributions.

ForDefined benefit costs (including service cost, net interest and remeasurement) under the defined benefit retirement benefit plans the cost of providing benefits isare determined using the Projected Unit Credit Method with actuarial calculations being carried out at the year end.projected unit credit method. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability.

Service cost (including current service cost and gains or losses on settlements) and net interest on the net defined benefit liability (asset) are recognized as employee benefits expense in the period they occur. Remeasurement, comprising (a) actuarial gains and losses, the effect of the changes to the asset ceiling (if applicable)losses; and (b) the return on plan assets, (excluding interest)excluding amounts included in net interest on the net defined benefit liability (asset), is reflected immediately in the balance sheet with a charge or credit recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss and past service cost is recognized in profit or loss in the period of a plan amendment. loss.

Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are categorized as follows:

service cost (including current service cost, past service cost, as well as gains and losses on curtailments and settlements);

net interest expense or income; and

remeasurement.

The retirement benefit obligation recognized in the consolidated balance sheet(asset) represents the actual deficit or surplus(surplus) in our defined retirement benefit plans. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans.

Curtailment or settlement gains or losses on the defined benefit plan are recognized when the curtailment or settlement occurs.

Accounting for Income Taxes

Income tax expense represents the sum of the tax currently payable and deferred tax.

The current tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statementstatements of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Income tax (10%) on undistributed earnings is accrued during the period the earnings arise and adjusted to the extent that distributions are approved by the stockholders in the following year. Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. If the temporary difference arises from the initial recognition, other than in a business combination, of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit, the resulting deferred tax asset or liability is not recognized. In addition, a deferred tax liability is not recognized on taxable temporary difference arising from initial recognition of goodwill.

Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, unused loss carry forward and unused tax credits from purchase of machinery, equipment and technology, and research and development expenditures to the extent that it is probable that taxable profits will be available against which those deductible temporary differences loss carryforwards, unused tax credits from purchases of machinery, equipment and technology, research and development expenditures, and personnel training expenditures can be utilized.

Deferred tax liabilities are recognized for taxable temporary

differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where we are able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the balance sheet date, and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. A previously unrecognized deferred tax asset is also reviewed at the end of each reporting period and recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which we expect at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively.income.

Our Financial Reporting Obligations

Our ongoing financial reporting in our Form 20-F annual reports and interim financial reporting furnished to the SEC on Form 6-K had been based on U.S. GAAP through fiscal year 2007. Beginning with our first quarter interim financial report furnished on Form 6-K and our Form 20-F annual report for fiscal year 2008, we prepared our financial statements under ROC GAAP, with reconciliations of net income and balance sheet differences of our consolidated financial statements to U.S. GAAP. Beginning in 2013, we adopted Taiwan IFRSs for our reporting obligations in the ROC, including our annual consolidated financial statements and our interim quarterly unaudited consolidated financial statements beginning in the first quarter of 2013. While we have adopted Taiwan IFRSs for ROC reporting obligations, we prepared financial statements under IFRSs for certain filings with the SEC, including our annual reports on Form 20-F for the year ended December 31, 2013 and thereafter. Following our adoption of IFRSs for the SEC filing purposes, we are no longer required to provide any reconciliation of our consolidated financial statements with U.S. GAAP.

A. Operating Results

The following table sets forth our revenues, operating costs and expenses, income from operations and other financial data for the periods indicated.

 

  Year Ended December 31   Year Ended December 31 
          2012                 2013               2013           2014           2015     
  NTS NTS   US$   NT$   NT$   NT$   US$ 
  (in billions)   (in billions) 

Revenues:

             

Domestic Fixed Communications

   76.1   73.5     2.5     73.5     72.1     72.5     2.2  

Mobile communications

   100.8   110.6     3.7     110.6     110.7     114.9     3.5  

Internet

   24.8   25.4     0.9     25.4     26.0     25.8     0.8  

International fixed communications

   15.3   15.8     0.5     15.8     15.3     15.5     0.5  

Others

   4.4   2.7     —       2.7     2.5     3.1     0.1  
  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total revenues

   221.4    228.0     7.6     228.0     226.6     231.8     7.1  
  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Operating costs

   141.5    147.3     4.9     147.3     148.4     148.1     4.5  
  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Operating expenses:

             

Marketing

   22.2    25.2     0.8     25.2     26.1     25.1     0.8  

General and administrative

   4.0    4.2     0.2     4.2     4.4     4.5     0.1  

Research and development

   3.7    3.7     0.1     3.7     3.5     3.6     0.1  
  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total operating expenses

   29.9    33.1     1.1     33.1     34.0     33.2     1.0  
  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Other income and expenses

   (1.6  0.1     —       0.1     0.6     (0.1   —    
  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Income from operations

   48.4    47.7     1.6     47.7     44.8     50.4     1.6  

Other income, net

   1.6    1.4     —       1.4     1.8     1.6     —    
  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Income before income tax

   50.0    49.1     1.6     49.1     46.6     52.0     1.6  

Income tax expense

   7.4    6.5     0.2     6.5     9.0     9.1     0.3  
  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Consolidated net income

   42.6    42.6     1.4     42.6     37.6     42.9     1.3  
  

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Attributable to:

             

Stockholders of the parent

   41.5    41.5     1.4     41.5     37.0     42.1     1.3  

Non-controlling interests

   1.1    1.1     —    

Noncontrolling interests

   1.1     0.6     0.8     —    

The following table sets forth our revenues, operating costs and expenses, income from operations and other financial data as a percentage of our total revenues for the periods indicated.

 

  Year Ended December 31   Year Ended December 31 
          2012                 2013                   2013                 2014                 2015         
  (as percentages of total revenues)   (as percentages of total revenues) 

Revenues:

       

Domestic fixed communications

   34.4 32.2   32.2 31.8 31.3

Mobile communications

   45.5   48.5     48.5   48.8   49.6  

Internet

   11.2   11.1     11.2   11.5   11.1  

International fixed communications

   6.9   7.0     6.9   6.8   6.7  

Others

   2.0   1.2     1.2   1.1   1.3  
  

 

  

 

   

 

  

 

  

 

 

Total revenues

   100.0  100.0   100.0 100.0 100.0
  

 

  

 

   

 

  

 

  

 

 

Operating costs

   63.9  64.6   64.6 65.5 63.9
  

 

  

 

   

 

  

 

  

 

 

Operating expenses:

       

Marketing

   10.0    11.1     11.1   11.5   10.8  

General and administrative

   1.8    1.8     1.8   2.0   1.9  

Research and development

   1.7    1.6     1.6   1.5   1.6  
  

 

  

 

   

 

  

 

  

 

 

Total operating expenses

   13.5    14.5     14.5   15.0   14.3  
  

 

  

 

   

 

  

 

  

 

 

Other income and expenses

   (0.7  —       —     0.3   (0.1
  

 

  

 

   

 

  

 

  

 

 

Income from operations

   21.9    20.9     20.9   19.8   21.7  

Other income, net

   0.7    0.6     0.6   0.8   0.7  
  

 

  

 

   

 

  

 

  

 

 

Income before income tax

   22.6    21.5     21.5   20.6   22.4  

Income tax expense

   3.4    2.8     2.8   4.0   3.9  
  

 

  

 

   

 

  

 

  

 

 

Consolidated net income

   19.2  18.7   18.7 16.6 18.5
  

 

  

 

   

 

  

 

  

 

 

Attributable to:

       

Stockholders of the parent

   18.7    18.2     18.2 16.3 18.2

Minority interests

   0.5    0.5  

Noncontrolling interests

   0.5 0.3 0.3

Each of our operating segments is managed separately because each represents a strategic business unit that serves a different market. We measure our segment performances mainly based on revenues and income before tax.

The year ended December 31, 20132015 compared with the year ended December 31, 20122014

Revenues

Our revenues increased by 3.0%2.3% from NT$221.4226.6 billion in 20122014 to NT$228.0231.8 billion (US$7.67.1 billion) in 2013.2015. This increase was primarily due to the increase in revenues generated from mobile communications.

Domestic fixed communications

Domestic fixed communications revenues accounted for 34.4%31.8% and 32.2%31.3% of our revenues in 20122014 and 2013,2015, respectively. Our domestic fixed-line revenues decreasedincreased by 3.5%0.7% from NT$76.172.1 billion in 20122014 to NT$73.572.5 billion (US$2.52.2 billion) in 20132015 primarily due to the general migration to the use of mobilegrowth in ICT revenues generated by enterprises and internet services.government, which was partially offset by a decrease in local and domestic long distance telephone revenues.

Local telephone services.Our local telephone revenues decreased from NT$40.935.6 billion in 20122014 to NT$37.833.6 billion (US$1.31.0 billion) in 20132015 with a 7.5%9.1% decline in traffic volume from 14.411.6 billion minutes in 2012 2014

to 12.9 billion10.5billion minutes in 2013.2015. The decline in traffic volume was primarily due to the traffic migration from

fixed-line services to mobile and internet telephone services. We expect this trend to continue as broadband and mobile services become more popular in Taiwan.

Domestic long distance telephone servicesservices.. Our domestic long distance telephone revenues decreased by 8.0%5.7% from NT$3.83.3 billion in 20122014 to NT$3.53.1 billion (US$0.1 billion) in 2013 with a 2.0% decline in traffic volume from 3.4 billion minutes in 2012 to 3.3 billion minutes in 2013, and the application of a higher tariff in January 2012 before the tariff reduction. See “Item 4. Information on the Company—B. Business Overview” for the discussion of the change in the domestic long distance tariff. The decline in traffic volume2015. This decrease was mainly due to the traffic migration to mobile services and the increased use of VoIP applications.

Broadband accessaccess..The number of our FTTx customers increased from approximately 3.1 million in 2014 to approximately 3.4 million in 2015. The number of our ADSL customers decreased from 1.81.4 million in 20122014 to 1.61.1 million in 20132015 due to the customers’ migration to our FTTx services. The number of our FTTx customers increased from approximately 2.7 million in 2012 to approximately 3.0 million in 2013. Despite our effort to migrate our customers to higher ARPU FTTx services, revenuesRevenues generated from broadband access remained the same of approximatelyslightly increased from NT$19.1 billion in 2014 to NT$19.3 billion (US$0.6 billion) in both 2012 and 20132015, mainly due to the 4.4% mandatory tariff reduction starting from April 1, 2013 as required by the NCC.our successful migration strategy mentioned above.

Domestic leased line. Our tariffs for overall leased line services have continued to decreaseddecrease due to the competition from other fixed-line operators, as well as the continued migration of domestic leased line customers to high speed broadband services. Revenues generated from domestic leased line services decreased from NT$5.54.6 billion in 20122014 to NT$5.14.4 billion (US$0.20.1 billion) in 2013.2015.

MOD. Revenues generated from our MOD services increaseddecreased by 15.0%3.0% from NT$1.92.6 billion in 20122014 to NT$2.22.5 billion (US$0.1 billion) in 2013.2015. This increasedecrease was due to the increaseadjustment in our cooperation schemes with channel providers. The new schemes bring down our operating expenses while also impacting our revenues at the same time. We expect this structural shift to enhance our IPTV margins in the number of MOD subscribers and the increase in the ARPU.mid-to-long term.

Others. Other revenues increased by 17.1%39.6% from NT$4.96.9 billion in 20122014 to NT$5.89.6 billion (US$0.20.3 billion) in 2013.2015. This increase was mainly due to the increased corporate customersnumber of our ICT solution servicesprojects generated by enterprises and the increased sales of high definition TV.government.

Mobile communications

Revenues from our mobile communications business segment accounted for 45.5%48.8% and 48.5%49.6% of our revenues in 20122014 and 2013,2015, respectively. Revenues from our mobile communications business segment increased by 9.7%3.8% from NT$100.8110.7 billion in 20122014 to NT$110.6114.9 billion (US$3.73.5 billion) in 2013.2015. This increase was principally due to the growth ofin mobile VAS revenues and mobile handsets sales revenues and was partially offset by thea decline ofin mobile voice telecommunication revenues over years.revenues. The decrease ofin mobile voice telecommunication traffic was mainly due to the migration to free VoIP applications.

Mobile services. Revenues from our mobile services accounted for 32.8%34.2% and 33.6%34.9% of our revenues in 20122014 and 2013,2015, respectively. Revenues from our mobile services increased by 5.7%4.4% from NT$72.577.5 billion in 20122014 to NT$76.780.9 billion (US$2.62.5 billion) in 20132015 due to thean increase in mobile VAS revenues from NT$20.534.8 billion in 20122014 to NT$28.439.6 billion (US$1.01.2 billion) in 2013,2015, which was partially offset by thea decline ofin mobile voice telecommunication revenues.

Sales of mobile handsets, tablets and data cards. Revenues from our sales of mobile handsets, tablets and data cards accounted for 12.5% and 14.5%14.3% of our revenues both in 20122014 and 2013, respectively.2015. Revenues from our sales of mobile handsets, tablets and data cards increased by 19.7%2.2% from NT$27.632.5 billion in 20122014 to NT$33.133.2 billion (US$1.11.0 billion) in 2013.2015. This increase was principally due to the increasedan increase in sales of smart phones.devices such as iPhone.

Internet

Internet revenues accounted for 11.2%11.5% and 11.1% of our revenues in 20122014 and 2013,2015, respectively. Revenues from our internet services increaseddecreased slightly by 2.7%0.8% from NT$24.826.0 billion in 20122014 to NT$25.425.8 billion (US$0.9 billion)

(US$0.8 billion) in 20132015 due to (1) a 9.5% increasedecrease in VAS revenue generated from information services of the land administration system that we established for the Land Administration Department of local governments, and the decrease was primarily affected by the downturn in the number of subscribers to HiNet FTTx which has higher ARPU and (2) a 4.4% increase in internet VAS revenues. As of December 31, 2013, approximately 83.1% of our broadband customers were also HiNet subscribers, using HiNet as their ISP.property market.

International fixed communications

International fixed communications revenues accounted for 6.9%6.8% and 7.0%6.7% of our revenues in 20122014 and 2013,2015, respectively. Our international fixed communications revenues increased by 2.8%1.0% from NT$15.3 billion in 20122014 to NT$15.815.5 billion (US$0.5 billion) in 2013.2015. This increase was mainly due to the increase in revenuesderived from one of our overseas subsidiaries, and from international leased line services and international data services.

International long distance telephone services.services. Our international long distance telephone revenues decreased by 2.6%7.5% from NT$11.510.4 billion in 20122014 to NT$11.29.6 billion (US$0.40.3 billion) in 20132015 due to the migration to VoIP-based international long distance service providers and free VoIP applications.

International leased line and international data services. Our international leased line and international data revenues increased by 12.1%13.1% from NT$2.53.2 billion in 20122014 to NT$2.93.6 billion (US$0.1 billion) in 2013.2015. The increase was mainly due to our expansion to the overseas market,markets such as Japan, Hong Kong, Singapore, Thailand and Indonesia,Cambodia and the increased demand for our international leased line, IP Transit and VPN services.

International ICT and various managedother services. Our international ICT servicesand other revenues increased by 50.1% from multinational corporations.NT$1.0 billion in 2014 to NT$1.6 billion (US$47.4 million) in 2015. The increase was mainly due to increased revenues generated from the wholesale of international long distance minutes derived from one of our overseas subsidiaries, Chunghwa Telecom Singapore Pte., Ltd.

Others

Other revenues accounted for 2.0%1.1% and 1.2%1.3% of our revenues in 20122014 and 2013,2015, respectively. Our other revenues decreasedincreased by 38.9%22.3% from NT$4.42.5 billion in 20122014 to NT$2.73.1 billion (US$0.1 billion) in 2013.2015. The decreaseincrease was mainly due to lower total property sales value byoperating growth derived from one of our subsidiary, Light Era Developmentsubsidiaries, Chunghwa Precision Test Tech. Co., Ltd., in 2013 compared with 2012.a semiconductor testing company.

Operating Costs

Operating costs include depreciation and amortization expenses, personnel expenses, cost of goods sold, interconnection and service expenses, costs of materials and maintenance and spectrum usage and license fees.

Our operating costs increaseddecreased by 4.1%0.2% from NT$141.5148.4 billion in 20122014 to NT$147.3148.1 billion (US$4.94.5 billion) in 2013.2015. This increasedecrease was primarily due to a decrease of NT$2.8 billion (US$0.1 billion) in interconnection and service expenses, and a decrease of NT$1.4 billion (US$42.4 million) in depreciation expenses. The decrease was partially offset by an increase of NT$7.42.3 billion (US$0.2 billion)68.6 million) in ICT costs, an increase of NT$1.0 billion (US$31.3 million) in cost of goods sold which was due to the increased salesand an increase of smart phones. The increaseNT$0.8 billion (US$25.2 million) in our operating costs was partially offset by a decrease of NT$2.0 billion (US$0.01 billion) in interconnection and serviceamortization expenses.

Operating Expenses

Our operating expenses increaseddecreased by 10.5%2.5% from NT$29.934.0 billion in 20122014 to NT$33.133.2 billion (US$1.11.0 billion) in 2013.2015. This increasedecrease was primarily due to an increasea decrease in marketing expenses.

Marketing

Our marketing expenses, which includesinclude personnel expenses, expenses relating to advertising and marketing-related activities and provision for bad debt, increaseddecreased by 13.3%4.1% from NT$22.226.1 billion in 20122014 to NT$25.225.1 billion (US$

(US$0.8 billion) in 2013.2015. This increasedecrease was primarily due to a decrease of outsourcing expenses in 2015 and the NT$1.5 billion reversal of bad debts allowancevoluntary retirement program implemented in 2012, the NT$0.3 billion (US$0.01 billion) provision of bad debts allowance2014, which resulted in 2013 and an increase of NT$1.1 billion (US$0.04 billion)a higher pension expense in expenses relating to personnel and marketing-related activities due to business expansion of our subsidiary, Senao. See “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—Impairment of Accounts Receivable” for a discussion of our policy for bad debts allowance.2014.

General and administrative

Our general and administrative expenses increased by 4.2%2.3% from NT$4.04.4 billion in 20122014 to NT$4.24.5 billion (US$0.20.1 billion) in 2013.2015. This increase was primarily due to thean increase in personnel expenses and other administrative activities for service centers and channel expansion.bonuses to employees.

Research and development

Our research and development expenses remainedincreased by 3.2% from NT$3.73.5 billion in 2014 to NT$3.6 billion (US$0.1 billion) in 20122015. This increase was primarily due to an increase in personnel expenses for research and 2013.development. In 20122014 and 2013,2015, we did not capitalize any research and development expenses as intangible assets arising frombecause there were no research and development expenses related to development or from the development phase of an internal project.project in 2014 and 2015.

Operating Costs and Expenses by Business Segment

 

 Domestic Fixed
Communications
 Mobile
Communications
 Internet International
Fixed
Communications
 Others Adjustment Total  Domestic Fixed
Communications
 Mobile
Communications
 Internet International
Fixed
Communications
 Other Adjustment Total 

For the year ended December 31, 2013

       
 (in billions of NT$) 

For the year ended December 31, 2015

       

Operating costs and expenses

 75.0   92.4   20.4   17.0   7.4   (31.8 180.4   71.0   98.9   20.6   16.5   9.2   (34.9 181.3  

Depreciation and amortization

 19.0   8.1   3.1   1.6   0.4    —     32.2   17.5   10.4   3.6   1.5   0.4    —     33.4  

For the year ended December 31, 2012

       

For the year ended December 31, 2014

       

Operating costs and expenses

 76.3   81.4   19.1   16.2   8.1   (29.7 171.4   72.6   96.9   21.3   17.5   8.5   (34.4 182.4  

Depreciation and amortization

 19.2   8.5   2.7   1.5   0.3    —     32.2   18.6   9.9   3.4   1.8   0.4    —     34.1  

Domestic fixed communications

Our domestic fixed communications costs and expenses decreased by 1.7%2.2% from NT$76.372.6 billion in 20122014 to NT$75.071.0 billion (US$2.52.2 billion) in 2013,2015, primarily due to a decrease of NT$1.02.1 billion (US$ 0.030.1 billion) in intersegment interconnection costs, a decrease of NT$1.1 billion (US$32.0 million) in depreciation and serviceamortization expenses, a decrease of NT$0.7 billion (US$18.9 million) in personnel expenses, and a decrease of NT$0.90.7 billion (US$0.03 billion)20.1 million) in bonus, andmaterial expenses. The decrease in our operating costs was partially offset by an increase of NT$0.62.7 billion (US$0.020.1 billion) in costs of corporate solution services and ICT costs.

Mobile communications

Our mobile communications operating costs and expenses increased by 13.4%2.1% from NT$81.496.9 billion in 20122014 to NT$92.498.9 billion (US$3.13.0 billion) in 2013.2015. This increase was primarily due to an increase of NT$6.2 billion (US$0.2 billion) in costs of mobile handsets sold, an increase of NT$2.82.4 billion (US$0.1 billion) in leased linesline expenses, an increase of NT$1.0 billion (US$30.5 million) in cost of goods sold, and internet accessan increase of NT$0.5 billion (US$16.2 million) in depreciation and amortization expenses resulting from the increased leased lines4G mobile broadband construction and higher speed ratelicense fees. The increase in our operating costs was partially offset by a decrease of our mobile internet services. In addition, the provision of bad debt increased by NT$1.31.6 billion as a result of the NT$1.2 billion reversal of bad debts allowance(US$47.6 million) in 2012 whereas NT$0.1 billion bad debts allowance was provided in 2013.interconnection costs.

Internet

Our internet operating costs and expenses increaseddecreased by 6.9%2.9% from NT$19.121.3 billion in 20122014 to NT$20.420.6 billion (US$0.70.6 billion) in 2013.2015. This increasedecrease was primarily due to a decrease of NT$0.6 billion (US$16.5 million) in internet VAS expenses and a decrease of NT$0.5 billion (US$16.2 million) in ICT costs. The decrease in our operating costs was partially offset by an increase of NT$0.40.6 billion (US$0.02 billion)17.1 million) in depreciationmaintenance and amortization expenses resulting from the increased cloud computing related facilities, an increase of NT$0.4 billion (US$0.01 billion) in leased line expenses for the promotion of the broadband access speed, and an increase of NT$0.2 billion (US$0.01 billion) in employee benefitrental expenses.

International fixed communications

Our international fixed communications costs and expenses increaseddecreased by 4.9%5.6% from NT$16.217.5 billion in 20122014 to NT$17.016.5 billion (US$0.60.5 billion) in 2013.2015. The increasedecrease was primarily due to an increasea decrease of NT$0.40.6 billion (US$0.01 billion)18.6 million) in settlement payments for international long distance calls, an increaseintersegment interconnection costs, a decrease of NT$0.10.3 billion (US$38.8 million) in depreciation and amortization expenses, a decrease of NT$0.2 billion (US$6.1 million) in personnel expenses and a decrease of NT$0.2 billion (US$7.3 million) in rental expenses andfor international communications equipment. The decrease in our operating costs was partially offset by an increase of NT$0.10.5 billion (US$ 317.7 million) in ICT costs.operating costs and expenses from our subsidiaries, Chunghwa Telecom Singapore Pte., Ltd, and Donghwa Telecom Co., Ltd. due to the business growth of these two entities.

Others

The costs and expenses from our other business decreasedincreased by 8.9%9.4% from NT$8.18.5 billion in 20122014 to NT$7.49.2 billion (US$0.20.3 billion) in 2013.2015. The decreaseincrease was primarily due to lower total property sales value byan increase in personnel expenses from our subsidiary, Light Era DevelopmentHonghwa. The increase was partially offset by a decrease in personnel costs and ICT costs of Chunghwa Telecom Co., Ltd., in 2013 compared to 2012.

Other Income and Expenses

We recorded net other expensesincome of NT$1.60.6 billion in 20122014 and net other incomeexpenses of NT$0.1 billion (US$2.03.2 million) in 2013.2015, respectively. The difference between 20122014 and 20132015 was primarily due to the fact that we recognized an impairment lossgain on disposal of NT$1.3 billion for investment properties in 2012 and then reversed the impairment of NT$0.20.6 billion (US$8.2 million) in 2013. See “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—Impairment of long-lived assets, intangible assets” for a discussion the impairment.2014 by our subsidiary, Light Era.

Income from Operations and Operating Margin

As a result of the foregoing, our income from operations decreasedincreased by 1.5%12.4% from NT$48.444.8 billion in 20122014 to NT$47.750.4 billion (US$1.61.5 billion) in 2013.2015. Our operating margin decreasedincreased from 21.9%19.8% in 20122014 to 20.9%21.7% in 2013.2015.

The following table sets forth certain information regarding our operatingrevenues and income before income tax by business segment for the periods indicated.

 

 Domestic Fixed
Communications
 Mobile
Communications
 Internet International
Fixed
Communications
 Others Adjustment Total  Domestic Fixed
Communications
 Mobile
Communications
 Internet International
Fixed
Communications
 Other Adjustment Total 
 (in billions of NT$)  (in billions of NT$) 

For the year ended December 31, 2013

       

For the year ended December 31, 2015

       

Revenues from external customers

 73.5   110.6   25.4   15.8   2.7    —     228.0   72.5   114.9   25.8   15.5   3.1    —     231.8  

Intersegment service revenues

 18.4   5.7   4.4   2.1   1.2   (31.8  —     21.4   3.5   4.7   2.1   3.2   (34.9 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 91.9   116.3   29.8   17.9   3.9   (31.8 228.0   93.9   118.4   30.5   17.6   6.3   (34.9 231.8  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Interest income

  —      —      —      —     0.5    —     0.5�� 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Segment income before income tax

 17.3   23.7   9.4   0.9   (2.2  —     49.1   23.3   19.4   9.9   1.1   (1.7  —     52.0  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

For the year ended December 31, 2012

       

For the year ended December 31, 2014

       

Revenues from external customers

 76.1   100.8   24.8   15.3   4.4    —     221.4   72.1   110.7   26.0   15.3   2.5    —     226.6  

Intersegment service revenues

 17.0   6.6   2.9   2.2   1.0   (29.7  —     19.7   5.3   4.7   2.3   2.4   (34.4 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 93.1   107.4   27.7   17.5   5.4   (29.7 221.4   91.8   116.0   30.7   17.6   4.9   (34.4 226.6  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Interest income

  —      —      —      —     0.7    —     0.7  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Segment income before income tax

 15.7   25.8   8.6   1.3   (1.4  —     50.0   19.5   19.3   9.6   0.2   (2.0  —     46.6  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

As a result of the foregoing, segment income before tax for our domestic fixed communications business increased by 10.6%18.9% from NT$15.719.5 billion in 20122014 to NT$17.323.3 billion (US$0.60.7 billion) in 2013;2015; segment income before tax for our mobile communications business decreasedincreased by 8.3%0.4% from NT$25.819.3 billion in 20122014 to NT$23.719.4 billion (US$0.80.6 billion) in 2013;2015; segment income before tax for our internet business increased by 9.9% 3.9%

from NT$8.69.6 billion in 20122014 to NT$9.49.9 billion (US$0.3 billion) in 2013;2015; segment income before tax for our international fixed communications business decreasedincreased by 32.2%486.4% from NT$1.30.2 billion in 20122014 to NT$0.91.1 billion (US$0.03 billion) in 2013;2015; and segment loss for our other business segments increaseddecreased by 51.7%16.3% from NT$1.42.0 billion in 20122014 to NT$2.21.7 billion (US$0.10.05 billion) in 2013.2015.

Non-operating Income and Expenses

Our othernon-operating income decreased from NT$1.61.8 billion in 20122014 to NT$1.41.6 billion (US$0.05 billion) in 2013.2015. This decrease was primarily due to a decrease in interest incomeforeign currency exchange gains and was partially offset by an increase in share of the profit of associates and joint venture accounted for using equity method.impairment losses on available-for-sale financial assets.

Income Tax

Our income tax was NT$7.49.0 billion and NT$6.59.1 billion (US$0.20.3 billion) in 20122014 and 2013,2015, respectively. Our effective tax rate was 14.7%19.3% in 20122014 and 13.2%17.5% in 2013.2015. The decrease ofin our effective tax rate from 20122014 to 20132015 was primarily due to a decrease in the accrued 10% tax on unappropriated earnings. See “Item 5. Operating and Financial Review and Prospects—Overview—Taxation” for a discussion of the change in tax rate.

Net Income

As a result of the foregoing, our net income attributable to stockholders of the parent was NT$37.0 billion and NT$42.1 billion (US$1.3 billion) in 2014 and 2015, respectively. Our net margin increased from 16.3% in 2014 to 18.2% in 2015.

The year ended December 31, 2014 compared with the year ended December 31, 2013

Revenues

Our revenues decreased by 0.6% from NT$228.0 billion in 2013 to NT$226.6 billion in 2014. This decrease was primarily due to the decrease in revenues generated from domestic fixed communications.

Domestic fixed communications

Domestic fixed communications revenues accounted for 32.2% and 31.8% of our revenues in 2013 and 2014, respectively. Our domestic fixed-line revenues decreased by 2.0% from NT$73.5 billion in 2013 to NT$72.1 billion in 2014 primarily due to the general migration to the use of mobile services and the increased use of VoIP applications.

Local telephone services.Our local telephone revenues decreased from NT$37.8 billion in 2013 to NT$35.6 billion in 2014 with a 10.6% decline in traffic volume from 12.9 billion minutes in 2013 to 11.6 billion minutes in 2014. The decline in traffic volume was primarily due to the traffic migration from fixed-line services to mobile and internet telephone services. We expect this trend to continue as broadband and mobile services become more popular in Taiwan.

Domestic long distance telephone services.Our domestic long distance telephone revenues decreased by 4.6% from NT$3.5 billion in 2013 to NT$3.3 billion in 2014. This decrease was mainly due to the traffic migration to mobile services and the increased use of VoIP applications.

Broadband access.The number of our FTTx customers increased from approximately 3.0 million in 2013 to approximately 3.1 million in 2014. The number of our ADSL customers decreased from 1.6 million in 2013 to 1.4 million in 2014 due to the customers’ migration to our FTTx services. Despite our effort to migrate our customers to higher ARPU FTTx services, revenues generated from broadband access remained the same of approximately NT$19.1 billion in both 2013 and 2014 mainly due to the mandatory tariff reduction required by the NCC and our promotional packages and discounts provided for existing customers.

Domestic leased line. Our tariffs for overall leased line services have continued to decreased due to the competition from other fixed-line operators, as well as the continued migration of domestic leased line customers to high speed broadband services. Revenues generated from domestic leased line decreased from NT$5.1 billion in 2013 to NT$4.6 billion in 2014.

MOD. Revenues generated from our MOD services increased by 15.8% from NT$2.2 billion in 2013 to NT$2.6 billion in 2014. This increase was due to the increase in the number of MOD subscribers.

Others. Other revenues increased by 18.7% from NT$5.8 billion in 2013 to NT$6.9 billion in 2014. This increase was mainly due to the increased corporate customers of our ICT solution services.

Mobile communications

Revenues from our mobile communications business segment accounted for 48.5% and 48.8% of our revenues in 2013 and 2014, respectively. Revenues from our mobile communications business segment increased by 0.1% from NT$110.6 billion in 2013 to NT$110.7 billion in 2014. This increase was principally due to the growth of mobile VAS revenues and was partially offset by the decline of mobile voice telecommunication revenues and mobile handsets sales revenues. The decrease of mobile voice telecommunication traffic was mainly due to the migration to free VoIP applications.

Mobile services. Revenues from our mobile services accounted for 33.6% and 34.2% of our revenues in 2013 and 2014, respectively. Revenues from our mobile services increased by 1.0% from NT$76.7 billion in 2013 to NT$77.5 billion in 2014 due to the increase in mobile VAS revenues from NT$28.4 billion in 2013 to NT$34.8 billion in 2014, which was partially offset by the decline of mobile voice telecommunication revenues.

Sales of mobile handsets, tablets and data cards. Revenues from our sales of mobile handsets, tablets and data cards accounted for 14.5% and 14.3% of our revenues in 2013 and 2014, respectively. Revenues from our sales of mobile handsets, tablets and data cards decreased by 2.0% from NT$33.1 billion in 2013 to NT$32.5 billion in 2014. This decrease was principally due to lower high-tier smartphones sales by our subsidiary, Senao.

Internet

Internet revenues accounted for 11.2% and 11.5% of our revenues in 2013 and 2014, respectively. Revenues from our internet services increased by 2.2% from NT$25.4 billion in 2013 to NT$26.0 billion in 2014 due to the revenue growth in IDC and ICT areas by our subsidiary, CHIEF, as well as in government-related internet VAS.

International fixed communications

International fixed communications revenues accounted for 6.9% and 6.8% of our revenues in 2013 and 2014, respectively. Our international fixed communications revenues decreased by 2.8% from NT$15.8 billion in 2013 to NT$15.3 billion in 2014. This decrease was mainly due to lower international long distance revenue because of increased market competition.

International long distance telephone services. Our international long distance telephone revenues decreased by 7.3% from NT$11.2 billion in 2013 to NT$10.4 billion in 2014 due to the migration to VoIP-based international long distance service providers and free VoIP applications.

International leased line and international data services. Our international leased line and international data revenues increased by 12.0% from NT$2.9 billion in 2013 to NT$3.2 billion in 2014. The increase was mainly due to our expansion to the overseas market such as Japan, Hong Kong, Singapore, Thailand and Cambodia and the increased demand for our international leased line and VPN.

Others

Other revenues accounted for 1.2% and 1.1% of our revenues in 2013 and 2014, respectively. Our other revenues decreased by 4.5% from NT$2.7 billion in 2013 to NT$2.5 billion in 2014. The decrease was mainly due to lower property sales by our subsidiary, Light Era Development Co., Ltd., and lower government-related ICT revenues by our subsidiary, Chunghwa System Integration Co., Ltd.

Operating Costs

Operating costs include depreciation and amortization expenses, personnel expenses, cost of goods sold, interconnection and service expenses, costs of materials and maintenance and spectrum usage and license fees.

Our operating costs increased by 0.7% from NT$147.3 billion in 2013 to NT$148.4 billion in 2014. This increase was primarily due to an increase of NT$1.9 billion in depreciation expense from 4G mobile broadband construction, 3G maintenance and cloud and IDC equipment investment, and amortization expense from the 4G mobile broadband license fee, and an increase of NT$1.3 billion in personnel expenses which resulted from voluntary retirement program and business expansion. The increase in our operating costs was partially offset by a decrease of NT$2.0 billion in interconnection and service expenses.

Operating Expenses

Our operating expenses increased by 3.0% from NT$33.1 billion in 2013 to NT$34.0 billion in 2014. This increase was primarily due to an increase in marketing expenses.

Marketing

Our marketing expenses, which include personnel expenses, expenses relating to advertising and marketing-related activities and provision for bad debt, increased by 3.9% from NT$25.2 billion in 2013 to NT$26.1 billion in 2014. This increase was primarily due to an increase in personnel expenses resulted from the increase of employees for our newly established subsidiary, Honghwa, and an increase of other expenses in marketing-related activities due to business expansion.

General and administrative

Our general and administrative expenses increased by 5.3% from NT$4.2 billion in 2013 to NT$4.4 billion in 2014. This increase was primarily due to the increase in personnel expenses which resulted from voluntary retirement program and other administrative activities for service centers and channel expansion.

Research and development

Our research and development expenses decreased by 5.3% from NT$3.7 billion in 2013 to NT$3.5 billion in 2014. This decrease was primarily due to the decrease in personnel expenses for research and development. In 2013 and 2014, we did not capitalize any research and development expenses as intangible assets because there were no research and development expenses related to development or the development phase of an internal project in 2013 and 2014.

Operating Costs and Expenses by Business Segment

  Domestic Fixed
Communications
  Mobile
Communications
  Internet  International
Fixed
Communications
  Other  Adjustment  Total 
  (in billions of NT$) 

For the year ended December 31, 2014

       

Operating costs and expenses

  72.6    96.9    21.3    17.5    8.5    (34.4  182.4  

Depreciation and amortization

  18.6    9.9    3.4    1.8    0.4    —      34.1  

For the year ended December 31, 2013

       

Operating costs and expenses

  75.0    92.4    20.4    17.0    7.4    (31.8  180.4  

Depreciation and amortization

  19.0    8.1    3.1    1.6    0.4    —      32.2  

Domestic fixed communications

Our domestic fixed communications costs and expenses decreased by 3.2% from NT$75.0 billion in 2013 to NT$72.6 billion in 2014, primarily due to a decrease of NT$2.5 billion in interconnection expenses, and a decrease of NT$0.4 billion in depreciation expenses, and was partially offset by an increase of NT$0.8 billion in ICT costs.

Mobile communications

Our mobile communications operating costs and expenses increased by 4.9% from NT$92.4 billion in 2013 to NT$96.9 billion in 2014. This increase was primarily due to an increase of NT$1.8 billion in depreciation expense and amortization expense from 4G mobile broadband construction and license fee, an increase of NT$1.9 billion in leased lines and internet access expenses resulting from the increased leased lines and higher speed rate of our mobile internet services, an increase of NT$0.3 billion in personnel expense and an increase of NT$0.2 billion in electricity charge.

Internet

Our internet operating costs and expenses increased by 4.3% from NT$20.4 billion in 2013 to NT$21.3 billion in 2014. This increase was primarily due to an increase of NT$0.6 billion in international IP transit, an increase of NT$0.3 billion in depreciation expenses resulting from the increased cloud computing related facilities, and an increase of NT$0.2 billion in leased line expenses.

International fixed communications

Our international fixed communications costs and expenses increased by 2.7% from NT$17.0 billion in 2013 to NT$17.5 billion in 2014. The increase was primarily due to an increase of NT$0.5 billion in settlement payments for international long distance calls.

Others

The costs and expenses from our other business increased by 14.9% from NT$7.4 billion in 2013 to NT$8.5 billion in 2014. The increase was primarily due to an increase in pension cost resulted from voluntary retirement program, and increase of personnel cost and other cost and expenses from our subsidiaries, Chunghwa Precision Test Tech. Co., Ltd. and Honghwa.

Other Income and Expenses

We recorded net other income of NT$0.1 billion in 2013 and NT$0.6 billion in 2014, respectively. The difference between 2013 and 2014 was primarily due to the gain on disposal of investment properties of NT$0.6 billion in 2014 by our subsidiary, Light Era Development Co., Ltd.

Income from Operations and Operating Margin

As a result of the foregoing, our income from operations decreased by 6.0% from NT$47.7 billion in 2013 to NT$44.8 billion in 2014. Our operating margin decreased from 20.9% in 2013 to 19.8% in 2014.

The following table sets forth certain information regarding our revenues and income before income tax by business segment for the periods indicated.

  Domestic Fixed
Communications
  Mobile
Communications
  Internet  International
Fixed
Communications
  Other  Adjustment  Total 
  (in billions of NT$) 

For the year ended December 31, 2014

       

Revenues from external customers

  72.1    110.7    26.0    15.3    2.5    —      226.6  

Intersegment service revenues

  19.7    5.3    4.7    2.3    2.4    (34.4 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  91.8    116.0    30.7    17.6    4.9    (34.4  226.6  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Segment income before income tax

  19.5    19.3    9.6    0.2    (2.0  —      46.6  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

For the year ended December 31, 2013

       

Revenues from external customers

  73.5    110.6    25.4    15.8    2.7    —      228.0  

Intersegment service revenues

  18.4    5.7    4.4    2.1    1.2    (31.8 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  91.9    116.3    29.8    17.9    3.9    (31.8  228.0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Segment income before income tax

  17.3    23.7    9.4    0.9    (2.2  —      49.1  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

As a result of the foregoing, segment income before tax for our domestic fixed communications business increased by 12.7% from NT$17.3 billion in 2013 to NT$19.5 billion in 2014; segment income before tax for our mobile communications business decreased by 18.4% from NT$23.7 billion in 2013 to NT$19.3 billion in 2014; segment income before tax for our internet business increased by 1.2% from NT$9.4 billion in 2013 to NT$9.6 billion in 2014; segment income before tax for our international fixed communications business decreased by 78.6% from NT$0.9 billion in 2013 to NT$0.2 billion in 2014; and segment loss for our other business segments decreased by 9.5% from NT$2.2 billion in 2013 to NT$2.0 billion in 2014.

Non-operating Income and Expenses

Our non-operating income increased from NT$1.4 billion in 2013 to NT$1.8 billion in 2014. This increase was primarily due to the increase in foreign currency exchange gains, income from Piping Fund, and share of the profit of associates and joint venture accounted for using equity method and was partially offset by a decrease in interest income.

Income Tax

Our income tax was NT$6.5 billion and NT$9.0 billion in 2013 and 2014, respectively. Our effective tax rate was 13.2% in 2013 and 19.3% in 2014. The increase of our effective tax rate from 2013 to 2014 was primarily due to an increase in the accrued 10% tax on unappropriated earnings. See “Item 5. Operating and Financial Review and Prospects—Overview—Taxation” for a discussion of the change in tax rate.

Net Income

As a result of the foregoing, our net income attributable to stockholders of the parent was NT$41.5 billion (US$1.4 billion)and NT$37.0 billion in 20122013 and 2013.2014, respectively. Our net margin decreased from 18.7% in 2012 to 18.2% in 2013.2013 to 16.3% in 2014.

B. Liquidity and Capital Resources

Liquidity

The following table sets forth the summary of our cash flows for the periods indicated:

 

  Year Ended December 31   Year Ended December 31 
  2012 2013   2013   2014   2015 
  NT$ NT$ US$   NT$   NT$   NT$   US$ 
  (in billions)   (in billions) 

Net cash provided by operating activities

   65.6   75.3   2.5     75.3     71.4     76.3     2.3  

Net cash used in investing activities

   (18.6 (49.1 (1.6   (49.1   (27.3   (30.4   (0.9

Net cash used in financing activities

   (42.5 (42.5 (1.4   (42.5   (35.1   (39.2   (1.2

Effect of exchange on rate change

   —      —      —    

Effect of exchange rate changes

   —       —       —       —    

Net increase (decrease) in cash and cash equivalents

   4.5   (16.3 (0.5   (16.3   9.0     6.7     0.2  

Cash and cash equivalents at end of year

   30.9   14.6   0.5     14.6     23.6     30.3     0.9  

Our primary source of liquidity is cash flow from operations, which represents operating profit adjusted for non-cash items, primarily depreciation and amortization and changes in current assets and liabilities. Notes 22 and 23 to our consolidated financial statements, included elsewhere in this annual report, provide additional details as to our bank loans. We believe that our working capital is sufficient to meet our present cash flow requirements.

In 2015, we generated NT$76.3 billion (US$2.3 billion) in net cash from operating activities as compared to NT$71.4 billion in 2014. The increase was primarily due to an increase in income from our operations, an increase in cash inflows from accounts receivables, an increase in amortization expense, and a decrease in cash outflows relating to income tax from operating activities.

In 2014, we generated NT$71.4 billion net cash from operating activities as compared to NT$75.3 billion in 2013. The decrease was primarily due to the decrease in income from operation, the decrease in cash inflows relating to accounts receivables, and the increase in cash outflows relating to income tax and other payables from operating activities.

In 2013, we generated NT$75.3 billion (US$2.5 billion) net cash from operating activities as compared to NT$65.6 billion in 2012. The increase was primarily due to the decrease in cash outflows relating to payment of employee bonuses and income tax, accounts receivable and payable from operating activities, and a NT$2.0 billion procurement of land by our property development subsidiary in 2012 for construction, which was further discussed in “Item 4. Information on the Company—B. Business Overview—Property, plant and equipment”.

Historically, net cash from operating activities has been sufficient to cover our capital expenditures, including ongoing expansion and modernization of our networks.

In 2015, net cash used in investing activities was NT$30.4 billion (US$0.9 billion), an increase from NT$27.3 billion in 2014. The change was primarily due to a one-time payment of NT$10.0 billion (US$0.3 billion) in 2015 for acquiring the 4G mobile broadband spectrum in the auction held by the NCC, which payment was partially offset by a net decrease of NT$7.5 billion (US$0.2 billion) for acquisition of property, plant and equipment.

In 2014, net cash used in investing activities was NT$27.3 billion, a decrease from NT$49.1 billion in 2013. The change was primarily due to the one-time payment of NT$39.1 billion in 2013 for acquiring the 4G mobile broadband spectrum in the auction held by the NCC, which was partially offset by a net decrease of NT$19.7 billion of time deposits and negotiable certificate of deposit with maturities of more than three months.

In 2013, net cash used in investing activities was NT$49.1 billion, (US$1.6 billion), an increase from NT$18.6 billion in 2012. The changeincrease was primarily due to the one-time payment of NT$39.1 billion (US$1.3 billion) cost ofin 2013 for acquiring the 4G mobile broadband spectrum in 2013.the auction held by the NCC.

In 2013,2015, our net cash used in financing activities totaled NT$42.539.2 billion (US$1.41.2 billion), which mainly reflected NT$35.937.7 billion (US$1.41.1 billion) in dividends paid during that period.

In 2014, our net cash used in financing activities totaled NT$35.1 billion, which mainly reflected NT$18.5 billion of payment of dividends during that period and NT$5.616.6 billion (US$0.2 billion) of cash distribution from our capital surplus to our stockholders.

In 2012,2013, our net cash used in financing activities totaled NT$42.5 billion, which mainly reflected NT$42.435.9 billion of payment of dividends during that period.period and NT$5.6 billion of cash distribution from our capital surplus to our stockholders.

Capital Resources

We have historically financed our capital expenditure requirements with our cash flows from operations and some bank loans. In future years, we expect to have capital expenditure requirements for the ongoing expansion and upgrade of our networks, including 3G/HSPA/HSPA+/Dual cell HSPA+,4G mobile broadband, FTTx, Wi-Fi/femtocellWi-Fi and service platforms, and future construction of LTE to migrate mobile and data service customers to higher contribution platforms. We also expect to make dividend payments on an ongoing basis. See “Item 8. Financial Information—A.A”. Consolidated Statements and Other Financial Information”. Furthermore, we may require working capital from time to time to finance purchases of materials for our maintenance and other overhead expenses. We expect to primarily rely on cash generated from operations and, to a lesser extent, loans from commercial banks to meet our planned capital expenditures, make our planned dividend payments, repay debts and fulfill other commitments over the next twelve months.

As of December 31, 2013,2015, our primary source of liquidity was NT$14.630.3 billion (US$0.50.9 billion) in cash and cash equivalents. In addition, the unused line of credit for unsecured and secured bank loans amounted to NT$8.541.3 billion (US$0.31.3 billion) and NT$0.60.2 billion (US$20.16.1 million), respectively, as of December 31, 2013.2015.

As of December 31, 2013,2015, our subsidiary, Chief Telecom,Chunghwa Sochamp Technology Inc., had short-term unsecured loans in the amount of NT$50.060.0 million (US$1.71.8 million) at an interest rate at 1.27%rates ranging from 2.15% to 2.40%.

As of December 31, 2013,2015, our subsidiary, CHIEF, had short-term unsecured loans of NT$50.0 million (US$1.5 million) at an interest rate of 1.29%.

As of December 31, 2015, our subsidiary, Light Era, Development Co., Ltd. had long-term secured loans in the amount of NT$1.71.6 billion (US$57.048.8 million) with interest rates ranging from 1.15% to 2.10%, with NT$0.3 billion due in 2014, NT$1.3 billion due in 2015, and NT$0.1 billion due in 2017. Light Era also had a short-term unsecured loan in the amount of NT$100.0 million (US$3.4 million) with2018 at an interest rate at 1.18% as of December 31, 2013.1.11%.

As of December 31, 2013,2015, our subsidiary Chunghwa Precision Test Technology Co., Ltd., had a short-term unsecuredlong-term secured loan of NT$45.0 million0.1 billion (US$1.56.1 million) withdue in 2029 at an interest rates ranging from 1.50% to 1.52%.

Asrate of December 31, 2013, our subsidiary Chunghwa Sochamp Technology Inc. had short-term unsecured loans of NT$59.4 million (US$2.0 million) at interest rates ranging from 2.00% to 2.395%1.36%.

As part of the government’s effort to upgrade the existing telecommunication infrastructure, we and other public utility companies were required by the ROC government to contribute a total of NT$1.0 billion to a Piping Fund, administered by the Taipei City Government. This fund is used to finance various telecommunication infrastructure projects. We accounted for the contribution as other financial assets on our consolidated balance sheets.

Note 4041 to our consolidated financial statements included elsewhere in this annual report provides a description of the assets that are pledged as collateral for long-term bank loans and contract deposits.

Capital Expenditures

Substantially all of our capital expenditures in 20122013, 2014 and 20132015 were made for operations in the Republic of China.ROC. We have financed our capital expenditures using cash flow from operations and bank loans. The following table sets forth a summary of our capital expenditures for the periods indicated.

 

  Year Ended December 31   Year Ended December 31 
  2012 2013   2013 2014 2015 
  (NT$ in billions, except
percentages)
   (NT$ in billions, except percentages) 

Capital Expenditures:

                 

Domestic fixed communications business

   19.6     59 20.4     56   20.4     56 16.2     50 10.2     41

Mobile communications business

   7.2     22   9.2     25     9.2     25   9.6     30   8.6     34  

Internet business

   3.4     10   4.6     13     4.6     13   4.4     14   4.8     19  

International fixed communications business

   2.4     7   1.6     4     1.6     4   1.5     4   1.0     4  

Others

   0.7     2   0.6     2     0.6     2   0.9     2   0.5     2  
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total capital expenditures

   33.3     100  36.4     100   36.4     100 32.6     100 25.1     100
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

The following table sets forth a summary of our planned capital expenditures for the year ending December 31, 2014.2016.

 

  Year Ending
December 31,
2014
   Year Ending
December 31,
2016
 
  (NT$ in billions,
except percentages)
   

(NT$ in billions,

except percentages)

 

Capital Expenditures:

        

Domestic fixed communications business

   21.5     53.6   12.6     41.3

Mobile communications business

   9.3     23.2     9.4     30.8  

Internet business

   6.7     16.7     5.6     18.2  

International fixed communications business

   1.9     4.7     2.2     7.1  

Others

   0.7     1.8     0.8     2.6  
  

 

   

 

   

 

   

 

 

Total capital expenditures

   40.1     100   30.6     100.0
  

 

   

 

   

 

   

 

 

We expect our total capital expenditures to be approximately NT$40.130.6 billion in 2014. We expect our capital expenditures to slightly decrease in 2015 and 2016. Our capital expenditures for 20142016 are planned to be allocated to the launch of new businesses, including our 4G LTE network deployment, FTTx network expansion, access bandwidth enhancement, service platforms, cloud computing, including cloud data center construction and submarine cables. We expect to finance these capital expenditures with our cash flows from operations and bank loans.

Inflation

We do not believe that inflation in Taiwan has had a material impact on our results of operations in 20122013, 2014 and 2013.2015.

C. Recent Accounting Pronouncements

Transition toMajor differences between IFRSs in 2013and Taiwan IFRSs

See “Item 3. Key Information—A. Selected Financial Data” for description about the adoption of new financial reporting standards.Taiwan IFRSs. While we have adopted Taiwan IFRSs for ROC reporting purposes, we adopt

IFRSs for certain filings with the SEC, including our annual reports on Form 20-F for the year ended December 31, 2013 and thereafter. Following our adoption of IFRSs for SEC filing purposes, we are no longer required to prepare any reconciliation of our consolidated financial statements with U.S. GAAP.

Taiwan IFRSs differs from IFRSs in certain significant respects, including to the extent that any new or amended standards or interpretations applicable under IFRSs may not be timely endorsed by the FSC. For example, as of the date of this annual report, the FSC has not endorsed any accounting pronouncements issued by the International Accounting Standards Board after January 1, 2011.2014. Therefore, these pronouncements will not be applicable to Taiwan IFRSs until endorsed by the FSC. Some of the major differences between IFRSs and Taiwan IFRSs that are relevant to us as of the date of this annual report are set forth below.

 

The “income taxes on undistributedunappropriated earnings” should be recognized at the year of earnings under IFRSs, while it should be recognized at the year of distribution under Taiwan IFRSs.

 

Prior to incorporation, according to the laws and regulations applicable to state-owned enterprises in Taiwan, we recorded revenue from fixed-line service at the time the connection service was performed or the prepaid card was sold. Upon incorporation, net assets greater than capital stock was credited as additional paid-in capital. Part of our additional paid-in capital was from unearned revenues from fixed-line services as of that date. Under IFRSs, following the revenue recognition guidance, the above service revenue should be treated as deferred income and recognized over the time when the service is continuously provided or as consumed. Therefore, upon our first adoption of IFRSs, we should retrospectively decrease additional paid-in capital while increase retainedunappropriated earnings on the transition date of January 1, 2012. There is no difference in the recognition of unearned revenues or deferred income between IFRSs and Taiwan IFRSs. However, according to the guidance released by the Taiwan Stock Exchange Corporation, or TWSE in March 2012, which is a part of Taiwan IFRSs, the additional paid-in capital under ROC GAAP that is not specifically promulgated under Taiwan IFRSs should not be adjusted on the transition date of January 1, 2012. Therefore, we retain such additional paid-in capital under Taiwan IFRSs.

It is difficult for us to evaluate the precise impact of the adoption of Taiwan IFRSs and IFRSs on our financial statements, because the FSC may issue new rules governing the adoption of Taiwan IFRSs and as other laws and regulations may be amended with the adoption of Taiwan IFRSs.

Upon our first adoption of IFRSs, we are required to apply IFRSs retrospectively unless otherwise exempted from certain applications and to present the opening balance sheet on the transition date of January 1, 2012 with adjusted opening balances prepared under IFRSs. Any transactions after the transition date are accounted for in accordance with IFRSs.

Other recent accounting pronouncements under IFRSs

For a summary of new standards, amendments and interpretations issued under IFRSs but not effective for 20132015 and which have not been adopted early by us, see noteNote 5 to our consolidated financial statements included elsewhere in this annual report.

For a summary of standardsC. Research and exceptions applied by us in connection with the transition to IFRSs starting in 2013, see note 43 to our consolidated financial statements included elsewhere in this annual report.

D. Research, Development, Patents and Licenses

Research and Development

Our research and development efforts are focused on the development of advanced network services and operation technologies as well as the development of core technologies for the domestic telecommunications market. For 20122013, 2014 and 2013,2015, our research and development expenses were both NT$3.7 billion, NT$3.5 billion and NT$3.6 billion (US$0.1 billion), or approximately 1.7%1.6%, 1.5% and 1.6% of our revenues, respectively.

As of March 31, 2014,2016, we have more than 2,546had 2,276 researchers focusing on the following areas:

 

wireless communication;SDN or network function virtualization technology and services;

 

Enterprise cloud management solutions;

High speed fixed broadband networks;

 

network management;

business management information;

billing information;

informationMobile broadband intelligent networks and communication security;

business and marketing strategy;

convergence services;

 

business solution;IoT solutions;

 

intent of things;Ultra broadband or high pixel density video services; and

 

cloud computing.Digital identity and enterprise security.

We

With our consistent investment in research and development, we have developed a number of advanced network services, operation technologies and applicationsVAS which successfully support our business operations and value-added services,expansion, including our xDSL/FTTx deployment, internet-based call center, e-commerce platform,security, mobile internet services, global standard for mobile communications billing system, a new telecommunicationspayment, smart Home, enterprise ICT solution, cloud business and operation service system for all business units of our company, government public key infrastructure, a leased line testing and monitoringsupporting system, and anvarious IoT services, such as ITS, iEN, intelligent transportation system.video surveillance, or IVS, and the solution of industry 4.0. As of December 31, 2013,2015, we have been granted 518747 domestic patents and 11063 foreign patents.

E.D. Trend Information

See “—Overview” for a discussion of the most significant recent trends that have had, and in the future may have, a material impact on our results of operations, financial condition and capital expenditures. In addition, see discussions included in this Item for a discussion of known trends, uncertainties, demands, commitments or events that we believe are reasonably likely to have a material effect on our net operating revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

F.E. Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that are material to investors.

G.F. Tabular Disclosure of Contractual Obligations

Set forth below are our total contractual obligations as of December 31, 2013.2015.

 

   Payments Due by Period 
   Total   Less than
1 Year
   1-3 years   3-5 years   More than
5 years
 
   (NT$ in billions) 

Contractual Obligations(1)

          

Short-term loans

   0.3     0.3     —       —       —    

Long-term loans

   1.7     0.3     1.3     0.1     —    

Obligations related to ST-2 satellite

   2.4     0.2     0.4     0.4     1.4  

Operating leases(2)

   11.2     3.1     3.6     2.8     1.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   15.6     3.9     5.3     3.3     3.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   Payments Due by Period 
   Total   Less than
1 Year
   1-3 years   3-5 years   More than
5 years
 
   (NT$ in billions) 

Contractual Obligations(1)

          

Short-term loans

   0.1     0.1     —       —       —    

Long-term loans

   1.7     —       1.6     —       0.1  

Obligations related to ST-2 satellite

   2.0     0.2     0.4     0.4     1.0  

Operating leases(2)

   10.0     3.2     4.0     1.6     1.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   13.8     3.5     6.0     2.0     2.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)Unfunded defined benefit obligation is not included as the schedule of payments is difficult to determine. We made pension contributions of approximately NT$2.62.4 billion (US$0.1 billion) in 20132015 and expected to made pension contributions of approximately NT$2.611.3 billion (US$0.10.3 billion) in 2014.2016. See note 27Note 28 to our consolidated financial statements for additional details regarding our pension plan.
(2)Operating leases obligations are described in note 35Note 36 to our consolidated financial statements included elsewhere in the annual report.

As of December 31, 2013,2015, we had remaining commitments under non-cancelable contracts with various parties, including acquisition of lands and buildings of NT$3.7 million0.6 billion (US$0.119.7 million), and acquisition of telecommunications equipment of NT$31.314.0 billion (US$1.00.4 billion), unused letters of credit of NT$0.2 billion (US$6.8 million) and contracts for printing bills, envelopes and marketing gifts of NT$29 million (US$1.0 million).

H. Foreign Exchange

Our revenues and costs and expenses are largely denominated in NT dollars. Our principal expenses denominated in foreign currencies are capital expenditures on telecommunications equipment and settlement payments for the use of networks of carriers in foreign countries for outgoing international calls. Settlement receipts have been a principal source of foreign currency for us. While future fluctuations of the NT dollar against foreign currencies could impact our financial condition and results of operations, we have not yet been materially affected in the past.

G. Safe Harbor

See “Forward-Looking Statements in This Annual Report May Not Be Realized.”

 

ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Our articles of incorporation provides for a board of directors consisting of seven to fifteen directors bestowed with a three-year tenure. The following table sets forth the name, age position and tenureposition of each of our directors and such person’s position as of March 31, 2014.2016. There is no family relationship among any of these persons. 11 of theseThese directors were elected at our annual general stockholders’ meeting held on June 25, 2013 and have terms from June 25, 2013 tountil June 24, 2016,2016. Pursuant to the ROC Company Act, a person may serve as our director in his or her personal capacity or as the representative of another legal entity. A director who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the other two were reelected on August 23 and September 1, 2013, respectively.replacement director may serve the remainder of the term of office of the replaced director. All of our non-independent directors are representatives of the MOTC.

 

Name

  Age   

Position

Lih-Shyng Tsai

   6365    Chairman, chief executive officer and director

Mu-Piao Shih

   6163    President and director

Yu-Fen Hong

   5759    Director

Yi-Bing Lin

   5355    Director

Chung-Yu Wang(1)

   6971    Director

Zse-Hong Tsai(1)

   5355    Director

Chung-Fern Wu(1)

   5759    Director

Shih-Peng Tsai

   6567    Director

Su-Ghen Huang

51Director

Tain-Jy Chen(1)

63Director

Yun-Tsai Chou(1)

48Director

Hui-Ling WuChih-Ku Fan

62Director

Chich-Chiang Fan

   

49

61

46

58

63


65
  

Director

Director

Director

Director

Director

 

(1)Independent director.

Lih-ShyngLih-Shyang Tsai is the chairman, chief executive officer and director of our company starting January 28, 2014. Dr. Tsai is also a director of NXP Semiconductors N.V. and a director of USI Corporation. Dr. Tsai was the chairman and chief executive officer of TSMC Solar Ltd. and TSMC Solid State Lighting Ltd. from 2011 to 2013. From June 2009 to July 2011, Dr. Tsai served as2013, and the president of TSMC’s new business department.department from June 2009 to July 2011. Dr. Tsai holds a Ph.D. degree in Material Science and Engineering from Cornell University.

Mu-Piao Shihis the president and acting chief financial officerdirector of our company. Mr. Shih wasserved as a senior executive vice president of our company from August 2011 to April 1, 2013. Mr. Shih was2013, an executive vice president of our company and the manager of our Mobile Business Group from September 2009 to August 2011. Mr. Shih served as2011, an assistant vice president and a deputy manager of our Mobile Business Group from March 2005 to September 2009. He also served as2009, and the senior chief engineer of our Mobile Business Group from October 2001 to March 2005. Mr. Shih holds a master’s degree in Electronic Engineering from the National Taiwan University.

Yu-Fen Hongis a director of our company. Ms. Hong is currently the director of the accounting department at the Ministry of Transportation and Communications.MOTC. She holds an MBA degree from the National Chiao Tung University in Taiwan.

Yi-Bing Linis a director of our company. Dr. Yi-Bing Lin received his bachelor’s degree from the National Cheng Kung University in Tainan, Taiwan in 1983, and his Ph.D. from the University of Washington in Seattle in 1990. From 1990 to 1995, he was a research scientist with Bellcore (Telcordia). He then joined the National Chiao Tung University, or NCTU, in Taiwan where he remains. In 1996, he served as the deputy director of Microelectronics and Information Systems Research Center at the NCTU. Between 1997 and 1999, Dr. Lin was chairman of the Department of Computer Science & Information Engineering at the NCTU. Since 2000, he has also been appointed as an adjunct research fellow at the Academia Sinica. Between 2004 and 2006, Dr. Lin was appointed the vice president of the office of research and development at the NCTU. From 2007 to February 22, 2011, Dr. Lin has served as the dean of the College of Computer Science at the NCTU. From February 23, 2011 to December 31, 2013, he was the vice president of NCTU. Starting from 2014, he becameis the political deputy minister of Ministry of Science and Technology of the Executive Yuan. He holds a Ph.D. degree in Computer Science and Engineering from the University of Washington in Seattle.

Chung-Yu Wangis currently an independent director of our company and also the former chairman of China Steel Corporation. He is also an independent director of CTBC Bank Co., Ltd., an independent director of CTBC Financial Holding Co., Ltd. and a director of Harmony Biotech Co., Ltd. He graduated from Chung Yuan Christian University with a bachelor’s degree in Chemical Engineering. Mr. Wang received a certificate of senior management course from Harvard Business School.

Zse-Hong Tsaiis an independent director of our company. Dr. Tsai is also currently a professor of electrical engineering at the National Taiwan University. His research interest includes broadband networking, performance evaluation and telecommunication regulations. Dr. Tsai holds a Ph.D. degree and a master’s of science degree in Electrical Engineering from the University of California, Los Angeles, and a bachelor’s of science degree in Electrical Engineering from the National Taiwan University.

Chung-Fern Wuis an independent director of our company. Dr. Wu is also a director of the Taipei Exchange (formerly known as Gre Tai Securities Market), a director of Taiwan Cooperative Financial Holding Co., Ltd. and an independent director of Taiwan Sugar Corporation. Dr. Wu is also currently a professor of Accounting at the National Taiwan University. She holds an MBA degree in finance and a bachelor’s degree in accounting from the National Taiwan University. She started her career as a practicing CPA in Taiwan and a Systems Analyst in U.S.A. She started her academic career as an assistant professor in the Fisher School of Accounting, University of Florida after receiving her Ph.D. degree in Accounting and Information Management from the Anderson Graduate School of Management, University of California, Los Angeles.

Shih-Peng Tsaiis a director of our company. Mr. Tsai is currently a representative of the Member’s Convention of the Chunghwa Telecom Workers Union. Mr. Tsai graduated from Ta Tung Junior Technological College of Commerce.

Su-Ghen Huangis a director of our company. Ms. Huang is also currently the director of the Department of Planning of the Directorate General of Budget, Accounting and Statistics at the Executive Yuan. Ms. Huang served as our supervisor before June 25, 2013. Ms. Huang holds a bachelor’s degree in Accounting from the Furen University in Taiwan.

Tain-Jy Chenis an independent director of our company. Dr. Chen is also an independent director of TECO Electric and Machinery Co., Ltd., an independent director of AU Optronics Corp. and an independent director of MediaTek Inc. Dr. Chen is currently a professor of Department of Economics at the National Taiwan University. He was the Minister of Council for Economic Planning and

Development from 2008 to 2009 and the President of Chung-Hua Institution for Economic Research from 2002 to 2005. Dr. Chen holds a Ph.D. degree in Economics from Pennsylvania State University, University Park, U.S.A.

Yun-Tsai Chouis an independent director of our company. Dr. Chou currently directs research and development for five research centers at the public policy think tank 21st Century Foundation: Digital Convergence, Bio-Agriculture, Global Health, Innovative Governance, and Knowledge Economy. She is currently an associatea professor ofin the Department of Graduate Program teaching Social InformaticsInformation Management at the Yuan Ze University in Taiwan. Dr. Chou holds a Ph.D. degree in Public Policy from George Washington University, U.S.A.

Hui-Ling WuChih-Ku Fanis a director of our company. Ms. WuMr. Fan is also currently the directordeputy administrative minister of the General Affairs Department at the Ministry of Transportation and Communications. Ms. WuMOTC. Mr. Fan holds a bachelor’sPh.D. degree in political sciencetransportation technology and management from the National Taiwan University.Chiao Tung University in Taiwan.

Chich-Chiang Fanis a director of our company. Dr. Fan assumed chairmanship of Yuanta Commercial Bank Company Ltd. starting from March 2015, after his term as the chairman of Taiwan High Speed Rail Corporation starting from March 2014.2014 to 2015. Dr. Fan is also the chairman of Taiwan Futures Exchange starting from July 2010, after his term as the chairman of the Taiwan Depository & Clearing Corporation from 2008 to 2010. From 2001 to 2008, he was the chairman of TransAsianTransAsia Airways Corporation, and chaired the Association of Airfreight

Forwarding& Logistics from 2005 to 2008. He was also the chairman of Askey Computer Corp. from 2001 to 2006. From 1997 to 2001, he served as the chairman of the Fuhwa Securities Corp. Dr. Fan received a Ph.D. degree from the University of Cambridge, UK, in 1993.

The following people served as directors and supervisors on our board during 2013 but are no longer serving with us due to resignations or replacements.

Yen-Sung Lee was the chairman, chief executive officer and director of our company from April 1, 2013 to January 28, 2014. Dr. Lee was the president of our company from August 29, 2012 to April 1, 2013, and served as a senior executive vice president supervising the marketing and IT department from September 2008 till August 29, 2012. Prior to that, Dr. Lee was the manager of our Enterprise Business Group from February 2007 to September 2008. Dr. Lee holds a Ph.D. degree in Information Engineering from National Chiao Tung University in Taiwan.

Shyue-Ching Lu was a director of our company. Dr. Lu was the chief executive officer, a director and chairman of our company from August 2008 to April 1, 2013. Dr. Lu served as our president from May 1996 until he was appointed our chairman in August 2008. Prior to that, Dr. Lu was the director general of the Department of Posts and Communications of the Ministry of Transportation and Communications from 1993 to 1994 and the deputy director general of the Directorate General of Telecommunications from 1994 to 1996. Dr. Lu holds a Ph.D. degree in electrical engineering from the University of Hawaii and a bachelor’s degree in Engineering from the National Cheng Kung University in Taiwan.

Jeng-Fang Jong was a director of our company. Mr. Jong is also a director of Personnel Department at the Ministry of Transportation and Communications. Mr. Jong received his bachelor’s degree from the National Taiwan College of Education.

Gordon S. Chen was a director of our company. Dr. Chen is an emeritus professor in Finance Department of Chung Yuan Christian University. Dr. Chen has more than 28 years of services in financial sector. He gained profound financial expertise and banking experience from several government positions, including chairman of TWSE Corporation and chairman of Taiwan Certificate Authority Corporation. Dr. Chen obtained a Ph.D. degree from the National Taiwan University, a master’s degree in Public Finance from National Chengchi University and a bachelor’s degree in Economics at the Chinese Culture University.

Shih-Wei Pan was a director of our company. Dr. Pan is also currently the minister of the Ministry of Labor. Dr. Pan holds a Ph.D. degree in Industrial and Labor Relations from Cornell University.

I-chuan Liou was a supervisor of our company. Mr. Liou was the general director of Department of Education, Science and Culture of the Executive Yuan. He holds a master’s degree in Education from National Taiwan Normal University.

I-Hwa Wu was a supervisor of our company. Ms. Wu is also the vice president of Chunghwa Post Co., Ltd. She holds a bachelor’s degree in Commerce of the National Taiwan University.

Jih-Chu Lee was a director of our company from June 25, 2013 to August 15, 2013. Dr. Lee is currently the Chairman of Taiwan Financial Holdings Co., Ltd. and Bank of Taiwan. Before this position, Dr. Lee was the Chairman of Chunghwa Post Co., Ltd. Dr. Lee was a professor of Department of Economics of National Chengchi University in Taiwan. Furthermore, she once held important positions in many government departments, including vice chairman of Financial Supervisory Commission and a legislator of the Legislative Yuan. Dr. Lee holds a Ph.D. degree in Economics from the National Taiwan University.

The following table sets forth the name, age position and tenureposition of each of our executive officers and such person’s position as of March 31, 2014.2016. There is no family relationship among any of these persons.

 

Name

  Age   

Position

Mu-Piao ShihBo-Yung Chen

   6152    Acting chiefChief financial officer and senior executive vice president

Chi-Mau Sheih

   6061    Senior executive vice president

Cheng-Kann Wu

Hsiu-Gu Huang

   

65

61


62
  

Senior executive vice president

Fu-Kuei Chung

62Senior executive vice president

Yuan-Kuang Tu

   5860    President of business group

Ming-Yuan Lee

   6264    President of business group

Kuo-Feng Lin

   58President of business group

Fu-Kuei Chung

60    President of business group

Kuang-Yao Chang

57President of business group

Tai-Feng Leng

65President of business group

Feng-Yue HungMing-Ching Cheng

   64    President of business group

Shyang-Yih Chen

   6263President of business group

Hong-Chan Ma

59    President of business group

Bo-Yung Chenis our chief financial officer and senior executive vice president starting from May 2014. Mr. Chen is also a director of Senao International Co., Ltd. He served as the chief financial officer of TSMC Solid State Lighting from 2012 to 2014. Prior to that, he was the chief financial officer and the operation general manager of Ralink Technology Corp. from 2008 to 2011. He also served as the senior vice president of Silicon Integrated Systems Corp. from 2004 to 2008. Mr. Chen holds a master’s degree in Business Administration from University of Pittsburgh.

Chi-Mau Sheihis a senior executive vice president of our company.president. Mr. Sheih is also a director of Senao International Co., Ltd. Mr. Sheih was an executive vice president and the manager of our Southern Taiwan Business Group from March 2007 to June 2010. Prior to that, he was an executive vice president of our company and the manager of our Central Taiwan Business Group from September 2006 to March 2007. He served as the senior managing director of our Network Department from September 2001 to January 2004. He also served as2007, and an assistant vice president of our company and a deputy manager of our Central Taiwan Business Group from January 2004 to September 2006. Mr. Sheih holds a master’s degree in Business Administration from the National Taiwan University.

Cheng-Kann Wu is a senior executive vice president of our company. Mr. Wu was the chief audit executive of our company from July 2011 to August 2012. Prior to that, he served as the deputy manager of our Northern Taiwan Business Group from March 2008 to July 2011. He also served as the managing director of our Accounting Department from July 2004 to March 2008. Mr. Wu holds a master’s degree in Management Science from the National Chiao Tung University

Hsiu-Gu Huangis a senior executive vice president of our company.president. Mr. Huang is also a director of China Airlines Co., Ltd. He served as the president of our Enterprise Business Group from September 2008 to May 2013. Prior to that, he was2013, and an assistant vice president of our company and a deputy manager of our Enterprise

Business Group from January 2007 to September 2008. Mr. Huang holds a master’s degree in Management Science from the National Chiao Tung University in Taiwan.

Fu-Kuei Chungis a senior executive vice president. Before being promoted to this position, he previously served as the president of our Data Communications Business Group from March 2012 to August 2015, a deputy manager of our Data Communications Business Group from September 2010 to March 2012, and the senior managing director of our Corporate Planning Departing from May 2009 to August 2010. Mr. Chung holds the master’s degree in Information Management from National Taiwan University.

Yuan-Kuang Tuis the president of our Enterprise Business Group and concurrently is the president of the International Business Group of our company. Dr. Tu served as the president of Northern Taiwan Business Group. Dr. Tu is also a director of Senao International Co., Ltd. He served asGroup from March 2012 to February 2015, the president of Chunghwa Telecom Laboratories from May 2009 to March 2012, the senior managing director of our Corporate Planning Department from May 2007 to May 2009, and a vice president of Chunghwa Telecom Laboratories from March 2006 to April 2007. HeDr. Tu holds a Ph.D. degree in Electrical Engineering from National Taiwan University.

Ming-Yuan Leeis the president of our Southern Taiwan Business Group since November 2013. Prior to that, he served as a vice president of our Southern Taiwan Business Group from July 2012 to November 2013

and as the deputy manager of our Southern Taiwan Business Group from May 2007 to July 2012. Mr. Lee holds a master’s degree in Telecommunications from the National Chiao Tung University in Taiwan.

Kuo-Feng Linis the president of our Mobile Business Group. Mr. Lin is also a director of Next Generation Mobile Networks Ltd. Mr. Lin served as a deputy manager of our Mobil business group from October 2009 to May 2012. Prior to that, he served as the manager of Taipei Branch, Mobile Business Group from April 2006 to October 2009. Mr. Lin holds a bachelor’s degree in Electronic Engineering from National Taipei Institute of Technology.

Fu-Kuei ChungMing-Ching Chengis the president of our Northern Taiwan Business Group. Mr. Cheng is also a director of Senao International Co., Ltd. Before being promoted to this position, Mr. Cheng served as a vice president of Mobile Business Group from July 2012 to February 2015. Mr. Cheng holds a bachelor’s degree in Electrical Engineering from the Provincial Kaohsiung Institute of Technology.

Shyang-Yih Chenis the president of our Telecommunication Laboratories and concurrently is the president of our Telecommunication Training Institute. Mr. Chen served as a senior executive vice president of our company from August 2014 to August 2015, the president of our Telecommunication Training Institute from March 2012 to August 2014, and an executive vice president of our company and the president of the Data Communication Business Group from September 2006 to March 2012. Mr. Chen holds a master’s degree in Electrical Engineering from National Taiwan University.

Hong-Chan Ma is the president of our Data Communications Business Group. He is also a director of Chunghwa Telecom Vietnam Co., Ltd. Before promotingbeing promoted to this position, he previously served as a deputy manager of our Data Communications Business Group from September 2010 to 2012 March and the senior managing director of our Corporate Planning Departing from May 2009 to August 2010. Mr. Chung holds the master’s degree in Information Management from National Taiwan University.

Kuang-Yao Changis the president of our Enterprise Business Group. Mr. Chang served as a vice president of our Telecommunication Laboratories from July 2012 to May 2013. Dr. Chang holds a Ph.D. degree in information engineering from the National Taiwan University in Taiwan.

Tai-Feng Leng is the president of the International Business Group. Miss Leng is also a director of Chief Telecom Inc., Donghwa Telecom Co., Ltd. and Chunghwa Telecom Singapore Pte., Ltd. Miss LengMa served as the deputy manager of our International Business Group from July 2004 to December 2007 and as the senior managing directorvice president of our Marketing Department from October 2001September 2012 to July 2004. Miss LengAugust 2015. Mr. Ma holds a master’s degree in Management Science from the National Chiao Tung University in Taiwan.

The following person served as our executive officer during 2015 but is no longer serving with us due to replacement.

Feng-Yue Hung iswas the president of our Telecommunication Laboratories. Mr. Hung served as the president of our Telecommunication Training Institute from December 2010 to March 2012. Prior to that, he served as the deputy manager of our Enterprise Business Group from September 2008 to December 2010 and served as the Director of our Information Technology Department from January 2006 to September 2008. Mr. Hung holds a master’s degree in Electronic from National Chiao Tung University.

Shyang-Yih Chen is the president of our Telecommunication Training Institute. Mr. Chen served as an executive vice president of our company and the manager of the Data Communication Business Group from September 2006 to March 2012. Prior to that, he served as the deputy manager of our Data Communication Business Group from January 2005 to September 2006. Mr. Chen holds a master’s degree in Electrical Engineering from National Taiwan University.

The following people served as our executive officers during 2013 but are no longer serving with us due to resignations or replacements.

Shu Yeh was our chief financial officer and senior executive vice president from February 2010 to February 2014. Dr. Yeh was also a director of Chunghwa Investment Co., Ltd. Dr. Yeh served as an independent director of our company from June 2007 to January 2010. Dr. Yeh also served as a professor of accounting at National Taiwan University. Dr. Yeh holds a Ph.D. degree in accounting from the University of California, Los Angeles, a master’s degree in professional accounting from the University of Texas at Austin, and a bachelor’s degree in Economics from the National Taiwan University.

Min-Hsuan Lin was the president of our Southern Taiwan Business Group since June 2010. Prior to that, he served as an assistant vice president of our company and a deputy manager of our Southern Taiwan Business Group from September 2009 to June 2010. He also served as the manager of the Tainan Branch Office from May 2007 to September 2009. He also served as the manager of the Fong-Shan Branch Office from February 2006 to May 2007, and he also served as the managing director of the Marketing Department of our Southern Taiwan Business Group from August 2004 to February 2006. Mr. Lin holds a bachelor’s degree in Transportation and Communication Management Science from the National Cheng Kung University.

B. Compensation

The board of directors has set up a compensation committee to be responsible for drafting, approving and periodically reviewing the compensation proposals for the directors and managers. See “C. Board Practices” for a discussion of our compensation committee.

 

the chairman of our board of directors may receive a fixed monthly income of NT$330,000342,900 and a non-fixed income, including but not limited to performance-related bonuses or other rewards, which may not exceed his fixed income. The chairman will not receive any additional compensation for his role as a director;

 

our president may receive a fixed monthly income of NT$305,000335,250 and a non-fixed income, including but not limited to performance-related bonuses or other rewards, which may not exceed his fixed income. The president will not receive any additional compensation for his role as a director;

 

independent directors who concurrently serve in military, public office or hold teaching or administrative post may receive a fixed monthly compensation of NT$8,000, and those who do not concurrently serve in military or public office or hold teaching or administrative post may receive a monthly compensation of NT$50,000;60,000; and

 

directors and supervisors who serve in military, public office or hold teaching or administrative post may receive a monthly compensation of NT$8,000, and those directors and supervisors who do not serve in military and public office or hold teaching or administrative post may receive a monthly compensation of NT$30,000.

Any compensation above the stipulated amounts in the compensation plan for our directors, and supervisors, including but not limited to profit-based bonuses, received by our directors and supervisors who are serving as representatives of the Ministry of Transportation and CommunicationsMOTC or other legal persons will be collected by the Ministry of Transportation and CommunicationsMOTC or the legal persons they represent, respectively. Our chairman and president to our board of directors, Lih-Shyng Tsai and Mu-Piao Shih, respectively, do not receive monthly compensation for acting as our directors because they receive salaries as employees.

The compensation plan was put into practice on January 1, 2006. The aggregate amount of compensation to our directors supervisors and executive officers in 20122013, 2014 and 20132015 was NT$140,141,488108,996,925, NT$152,242,029 and NT$108,996,925126,799,952 (US$3,653,936.5)3,867,031), respectively. The aggregate amount of compensation in 20132015 includes a NT$73,527,99471,724,889 (US$2,464,766.8)2,187,401) salary payment for directors supervisors and executive officers, a NT$10,215,4424,653,280 (US$342,455.3)141,912) pension payment for executive officers, a NT$19,303,48944,851,783 (US$647,116.6)1,367,849) bonus accrued for directors and supervisors and a NT$5,950,00030,118,331 (US$199,463.6)918,521) bonus accrued for executive officers. The 2013 bonusSee “Item 10. Additional Information—B. Memorandum and Articles of Incorporation—Dividends and Distributions” for our directorsa discussion of the distribution of bonuses and supervisors may not exceed 0.2%earnings.

All of our distributable earnings and must be approved at our 2014 annual general stockholders’ meeting.

Our non-independent directors are legal representatives of the MOTC. The bonus in the amount of NT$ 16,432,08139,222,554 (US$550,857.6)1,196,174) were paid directly to the MOTC in 20132015 because such earnings distributions are not the individual income of these directors. Independent directors will not receive any earnings distributions. The bonus in the amount of NT$2,871,408 (US$96,259.1) were paid directly to our juridical supervisors, National Development Fund of the Executive Yuan and Chunghwa Post Co., Ltd., in 2013, because such earnings distributions are not the individual income of legal representatives.

Pursuant to ROC disclosure rules, we have disclosed the compensation range of our directors supervisors and senior management for the fiscal year ended December 31, 20132015 as follows, excluding bonus accrued for legal entities:

 

Total Compensation

  

Directors

Below NT$2,000,000

  Gordon S. Chen, Wen-TsanYu-Fen Hong, Yi- Bing Lin, Jih-Chu Lee, Jennifer Yuh-Jen Wu, Hui-Ling Wu, Jeng-Fang Jong, Shih-Wei Pan, Su-Ghen Huang(1), Yu-Fen Hong,Yi-Bing Lin, Chich-Chiang Fan, Tain-Jy Chen,Yun-Tsai Chou, Shih-PengZse-Hong Tsai, Chung-Yu Wang, Chung-Fern Wu, Zse-HongShih-Peng Tsai, Su-Ghen Huang, Tain-Jy Chen, Yun-Tsai Chou, Chich-Chiang Fan, Jian-Yu Chen(3), Chih-Ku Fan

NT$2,000,000 to NT$4,999,999

  None

NT$5,000,000 to NT$9,999,999

  Yen-Sung LeeLih-Shyng Tsai(2)(1), Mu-Piao Shih(3), Shyue-Ching Lu(4)(2)

Total

  2014 people

 

(1)As compensationsalary for serving as our supervisor and director.chief executive officer.
(2)As salary for serving as our president and chief executive officer.president.
(3)As salary for serving asThis person has ceased to be a director of our senior executive vice president and president and as bonuses for serving as our employee.
(4)As salary for serving as our chief executive officer, as compensation for serving as our director after retiring from position as our chief executive officer, and as retirement pension payment.

Total Compensation

Supervisors

Below NT$2,000,000

I-Chuan Liou, Su-Ghen Huang, I-Hwa Wu

NT$2,000,000Company due to NT$4,999,999

None

NT$5,000,000 to NT$9,999,999

None

Total

3 peoplereplacement in February 2015.

 

Total Compensation

  

Senior Management

Below NT$2,000,000

  None

NT$2,000,000 to NT$4,999,999

  Chi-Mao Hsieh, Cheng-Kann Wu,Bo-Yung Chen, Chi-Mau Sheih, Hsiu-Gu Huang, Yuan-Kuang Tu, Ming-Yuan Lee, Kuo-Feng Lin,Fu-Kuei Chung, Kuang-Yao Chang, Tai-Feng Leng,Shyang-Yih Chen, Hong-Chan Ma, Feng-Yue Hung Shyang-Yih Chen, Shu Yeh(2), Ming-Ching Cheng

NT$5,000,000 to NT$9,999,999

  None

Over NT$10,000,000

Min-Hsuan LinKuang-Yao Chang(1)(3)

Total

  1312 people

 

(1)Including retirement pension payment.
(2)This person has ceased to be a member of our senior management of our Company due to replacement in August 2015.
(3)This person has ceased to be a member of our senior management of our Company due to retirement in March 2015.

We accrued NT$6,251,1395,498,852 (US$209,558.8)167,699.1) pension expense for executive officers mentioned above in 2013.2015. See “Item 5. Operating and Financial Review and Prospects—Overview—Provisions for pension payments to our employees”Personnel expenses” and note 27Note 28 to our consolidated financial statements included elsewhere in this annual report for descriptions about our pension plans. We do not have any service contracts with any directors providing for any benefits upon termination of employment.

C. Board Practices

Thirteen directors were elected in 2013 for three-year terms. Pursuant to the ROC Company Act, the directors may be removed from office at any time by a resolution adopted at a stockholders’ meeting. The chairman of our board of directors is elected by our directors. Our chairman presides at all meetings of our board of directors and also has the authority to act as our representative. We have not entered into any contract with any of our directors by which our directors are expected to receive benefits upon termination of their employment. Under the Article 12 of our articles of incorporation, our supervisors has been replaced by an audit committee, which is composed entirely of independent directors, starting from our 7th term of board of directors to be elected at our 2013 annual general stockholders’ meeting, pursuant to Paragraph 1, Article 14-4 of the Securities and Exchange Act. We no longer have supervisors after the beginning of our 7th term of our board of directors.

Our articles of incorporation provides for a board of directors consisting of seven to fifteen directors,one-fifth of whom shall be expert representatives. Pursuant to the ROC Company Act, the ROC Securities and Exchange Act and Article 12-1 of our articles of incorporation provides for the election of, starting from the fifth stockholders’ meeting, at least three independent directors out of the 7-to-15-member board. The term “independent director” may have a different meaning when used in Taiwan than in other jurisdictions. We have used a nominating process, with the stockholders choosing the independent directors from the list of nominees. Accordingly, we have elected five independent directors in the annual general meeting on June 25, 2013. With respect to certain material decisions to be made by our company as specified in the ROC Securities and Exchange Act, including the adoption or amendment to our internal control system, material loans or guarantees, the issuance of equity-type securities, matters in which directors have personal interests, the appointment and discharge of auditors, approval of financial reports, the appointment and discharge of financial, accounting or internal auditing officers and other matters prescribed by the ROC Financial Supervisory Commission,FSC, the dissenting opinion or qualified opinion of an independent director is required to be noted in the minutes of the board of directors’ meeting.

Our audit committee was established in September 2004 in accordance with the rules set forth in the NYSE Listed Company Manual, and was comprised of three independent directors. See “Item 16G. Corporate Governance—Audit Committee”. Starting from the date of the annual general meeting in June 2013, we have established a new audit committee that replaces our supervisors and our old audit committee in accordance with Paragraph 1, Article 14-4 of the ROC Securities and Exchange Act and our articles of incorporation, and as a result, we simultaneously comply with the relevant rules of the NYSE Listed Company Manual and the relevant rules and regulations in the ROC. Therefore, we no longer have supervisors after the beginning of our 7th term of our board of directors. In addition, the number of members, or independent directors, in the audit committee, increases from three to five according to the resolution of our board meeting.

Under the ROC Company Act, a person may serve as our director in his personal capacity or as the representative of another legal entity. A director who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. Except for our five independent directors, all of our directors are representatives of the Ministry of Transportation and Communications.MOTC.

The business address of our directors and executive officers is the same as our registered address.

Our audit committee should approve and deal following matters: (i) the adoption or amendment of the internal control system pursuant to Article 14-1 of the Securities and Exchange Act; (ii) the assessment of the effectiveness of the internal control system; (iii) the adoption or amendment, pursuant to Article 36-1 of the Securities and Exchange Act, of procedures governing material financial or operational actions, such as acquisition or disposal of assets and derivatives trading, loaning of funds to others, and endorsements or guarantees for others; (iv) a matter relating to the personal interest of a director; (v) a material asset or derivatives transaction; (vi) the offering, issuance, or private placement of any equity-related securities; (vii) a matter relating to significant loan, endorsement or guarantee arrangement; (viii) the designation or dismissal of an

attesting CPA, or the compensation given thereto; (ix) the appointment or discharge of a financial, accounting, or internal auditing officer; (x) annual and semi-annual financial reports; (xi) the first and third quarter financial reports; (xii) communicating with our independent auditor; (xiii) negotiating the conflicts over our financial reports between our management and independent auditor; (xiv) discussing and reporting other financial information and required disclosure under the Securities Exchange Act of 1934 with our management and independent auditor; (xv) accounting firm’s annual audit and non-audit service items; (xvi) performing one-self review each year; (xvii) evaluating the fairness and (xvii)rationality of merger and acquisition transactions; and (xviii) any other material matter so required by the Company or the competent authorities. Our board of directors has concluded that Chung-Fern Wu is our audit committee financial expert.

In addition to our audit committee, we also have a corporate strategy committee. Our corporate strategy committee may be composed of five to seven directors. Currently, there are fivesix directors in the Committee. It is responsible for reviewing and advising on the budgets, capital requirements, financial forecasts, matters related to investments, business license matters, corporate reorganization, development plans and other major issues affecting our development. The conclusions of the corporate strategy committee are considered at a subsequent board of directors meeting.

The board of directors passed a resolution on November 8, 2005 to set up a compensation committee. The Article 14-6 of ROC Securities and Exchange Act requires all listed companies to establish a compensation committee for directors, supervisors and managers’ compensation, which includes salary, stock options and other rewards, as well as authorizes the Competent Authority (i.e., Financial Supervisory Commission)FSC) to enact a regulation on the authorities of the compensation committee and the qualifications of its members. Our board of directors passed a resolution to amend the organization of our compensation committee on August 13, 2013. The compensation committee is composed of three independent directors (Chung-Yu Wang, Chung-Fern Wu and Tain-Jy Chen) and is responsible for drafting, approving and periodically reviewing the compensation proposals for the directors and managers. See “Item 10. Additional Information—B. Memorandum and Articles of Incorporation—Directors”Directors and Audit Committee”.

In November 2003, the SEC approved changes to the New York Stock Exchange’sNYSE’s listing standards related to the corporate governance practices of listed companies. Under these rules, listed foreign private issuers, like us, must disclose any significant ways in which their corporate governance practices differ from those followed by New York Stock Exchange-listedNYSE-listed non-foreign private issuers under the New York Stock Exchange’sNYSE’s listing standards. See “Item 16G. Corporate Governance”. A copy of the significant differences between our corporate governance practices and New York Stock ExchangeNYSE corporate governance rules applicable to non-foreign private issuers is also available on our websitehttp://www.cht.com.tw.www.cht.com.tw. The information contained on our website is not a part of this annual report.

D. Employees

The following section sets forth information regarding the employees.

As of December 31, 2013,2015, we had 32,18732,734 employees on a consolidated basis. Approximately 99% of our employees were based in the Republic of China.ROC. The following table is a breakdown of our employees from 20112013 to 20132015 on a consolidated basis.

 

  2011   2012   2013   2013   2014   2015 

Employees

            

Technical

   14,768     14,494     15,177     15,177     15,217     15,467  

Operations

   12,283     14,214     15,267     15,267     15,640     15,558  

Administrative

   1,721     1,724     1,743     1,743     1,739     1,709  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   28,772     30,432     32,187     32,187     32,596     32,734  
  

 

   

 

   

 

   

 

   

 

   

 

 

The following table is a breakdown of our employees of Chunghwa Telecom Co., Ltd. from 20112013 to 2013 on a non-consolidated basis.2015.

 

  2011   2012   2013   2013   2014   2015 

Employees

            

Technical

   13,959     13,840     13,951     13,951     13,773     13,540  

Operations

   9,336     9,170     8,958     8,958     8,464     8,312  

Administrative

   1,369     1,341     1,313     1,313     1,298     1,289  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   24,664     24,351     24,222     24,222     23,535     23,141  
  

 

   

 

   

 

   

 

   

 

   

 

 

As of December 31, 2013,2015, approximately 75%76.34% of our employees of Chunghwa Telecom Co., Ltd. had university, graduate or post-graduate degrees. To improve our operational efficiency by reducing personnel costs, we offered a number of voluntary retirement programs between June 1, 2000 and December 31, 2013,2014, which resulted in a reduction of approximately 13,75214,386 employees.

As of December 31, 2013,2015, approximately 99% of our employees on a non-consolidated basis were members of our principal labor union. Our collective agreement sets forth work rules, grievance procedures and provides for union participation in performance evaluations and promotion decisions. Our union members also occupy a majority of the seats on our employee welfare and pension fund committees. We will continue to maintain a good relationship with our labor union. We strive to have good communication with our employees and the labor union by inviting representatives of our labor union to attend various meetings related to the performance of our employees.

Pursuant to our articles of incorporation, our employees are entitled to 2% to 5% of the distributable earnings as employee bonuses. Our practice in the past to determine the amount of the bonus has been based on the operating results. In the third quarter of 2013,2015, we distributed an aggregate bonus to our employees of NT$1.5 billion (US$0.1 billion)46.1 million).

E. Share Ownership

As of March 31, 2014,2016, our directors and executive officers personally held an aggregate 640,359841,996 shares of our common shares, representing around 0.01% of our outstanding common shares. The following table sets forth information with respect to the beneficial ownership of our common shares as of March 31, 20142016 by each of our directors and executive officers.

 

Name

  Number   % 

Shih-PengLih-Shyng Tsai

   *400,000     *  

Mu-Piao Shih

   *71,218     *  

Chi-Mau SheihYu-Fen Hong

   *—  —  

Yi-Bing Lin

—  —  

Chung-Yu Wang

—  —  

Zse-Hong Tsai

—  —  

Chung-Fern Wu

—  —  

Shih-Peng Tsai

15,961     *  

Cheng-Kann WuSu-Ghen Huang

   —  —  

Tian-Jy Chen

25,768*

Yun-Tsai Chou

—  —  

Chih-Ku Fan

—  —  

Chih-Chiang Fan

—  —  

Bo-Yung Chen

—  —  

Chi-Mau Sheih

72,054*

Shyang-Yih Chen

78,840     *  

Hsiu-Gu Huang

   *18,698     *  

Yuan-Kuang Tu

   *81,305     *  

Ming-Yuan Lee

   **

Kuang-Yao Chang

*5,188     *  

Kuo-Feng Lin

   **

Tai-Feng Leng

*42,771     *  

Fu-Kuei Chung

   *19,093     *  

Feng-Yue HungMing-Ching Cheng

   *11,100     *  

Shyang-Yih ChenHong-Chan Ma

   *—       *—    

 

*Stockholder beneficially owns less than 1.0% of our outstanding common shares.

Employee Stock Subscription Program

Under the Statute of Chunghwa Telecom Co., Ltd. and our articles of incorporation, we must reserve up to 10% to 15% of any new shares for subscription by our employees whenever we issue new shares for cash, except for any issuances of restricted stock to employees.unless otherwise approved by the central competent authority.

Our consolidated subsidiary, Senao, is publicly traded on the TWSE and resolved to grant the stock options plan for its employees to purchase common stock of Senao. As of December 31, 20122013, 2014 and 2013,2015, participants in Senao’s stock incentive plan had outstanding stock options to purchase 1.19.9 million, 9.0 million and 9.97.8 million common shares of Senao, respectively.

In 2015, our consolidated subsidiary, CHIEF, which has been a public company since November 17, 2015, granted stock options to its employees entitling them to purchase common stock of CHIEF. As of December 31, 2015, participants in CHIEF’s stock incentive plan had outstanding stock options to purchase 2.0 million common shares of CHIEF.

Our another consolidated subsidiary, Chunghwa Precision Test Tech Co., Ltd., or CHPT, a non-listed company,which was listed on the General Stock Market of the Taipei Exchange (formerly known as Gre Tai Securities Market) since March 24, 2016, granted the stock options to its employees to subscribe for common shares of CHPT.CHPT in December 2008. As of December 31, 2012 , participants in CHPT’s stock incentive plan had outstanding stock options to purchase 0.9 million common shares of CHPT. The registration of 0.8 million of employee stock options exercised in 2013, has been completed,2014 and others were expired. As of December 31, 2013,2015, CHPT has no outstanding employee stock options.

ITEM 7.ITEM 7.MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Stockholders

The following table sets forth information known to us with respect to the beneficial ownership of our shares (i) as of March 31, 2014,2016, the most recent practicable date and (ii) as of certain recordbook closure dates in each of the preceding three years, for the stockholders known by us to own at least 5.0% of our outstanding common shares. Beneficial ownership is determined in accordance with the SEC’s rules.

 

  As of March 31, 2011   As of March 31, 2012   As of March 31, 2013   As of March 31, 2014   As of March 31, 2013   As of March 31, 2014   As of March 31, 2015   As of March 31, 2016 

Name

  number   %   number   %   number   %   number   %   number   %   number   %   number   %   number   % 

The ROC government(1)(2)

   2,957,318,085     38.12     2,885,164,257     37.19     3,000,346,630     38.68     3,099,602,788     39.96     3,000,346,630     38.68     3,099,602,788     39.96     3,095,559,716     39.90     3,123,092,684     40.11  

The Ministry of Transportation and Communications

   2,737,718,976     35.29     2,737,718,976     35.29     2,737,718,976     35.29     2,737,718,976     35.29  

The MOTC

   2,737,718,976     35.29     2,737,718,976     35.29     2,737,718,976     35.29     2,737,718,976     35.29  

Fubon Life Assurance Co., Ltd(2)

   *     *     428,621,087     5.53     467,321,087     6.02     450,471,087     5.81     467,321,087     6.02     450,471,087     5.81     449,451,087     5.79     449,451,087     5.79  

 

*Less than 5%.
(1)Includes shares held through the Ministry of Transportation and CommunicationsMOTC and other government-controlled entitiesentities.
(2)The information as of January 15, 2011, July 27, 2011, July 19, 2012, and July 18, 2013, July 18, 2014, and July 19, 2015, the latest book closure date, which were the most recent practicable dates for us to obtain complete ownership information.

As of March 31, 2014,2016, 25 record holders held 25,336,52236,917,631 ADSs (each representing ten common shares), which represents approximately 3.3%4.8% of our total outstanding common shares. Because many of these ADSs were held by brokers or other nominees, we cannot ascertain the exact number of beneficial shareholders with addresses in the United States.

None of our shareholders has different voting rights from other shareholders. See “Item 10. Additional Information—B. Memorandum and Articles of Incorporation—Voting Rights”. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

B. Related Party Transactions

We have not extended any loans or credit to any of our directors or executive officers, and we have not provided guarantees for borrowings by any of these persons. We have not entered into any fee-paying contract with any of these persons for them to provide services not within his or her capacity as a director or executive officer of our company, except that three of our directors who are also our employees receive salaries from our company in their capacity as our employees.

Please refer to “Item 4. Information on the Company—A. History and Development of the Company” for a discussion of our alliances, acquisitions and investments. Please refer to notesNotes 3, 15, 16 and 3940 to our consolidated financial statements included elsewhere in this annual report for descriptions of Chunghwa’s subsidiaries, investments accounted for using equity method, and related party transactions.

On April 1, 2007, Chunghwa entered into an agreement with Senao making Senao the exclusive distributor of mobile handsets to Chunghwa’s retail outlets. Under the terms of the agreement, Senao also provides mobile handset sales services in Chunghwa’s retail outlets, exclusively sells Chunghwa’s SIM cards in Senao’s own retail stores, and gets commission, subsidies of handset sold and warranties from Chunghwa. For the year ended December 31, 2013,2015, Senao received NT$12.410.1 billion (US$415.5308.2 million) from Chunghwa. Chunghwa also sells mobile handsets and data cards to Senao. For the year ended December 31, 2013,2015, Chunghwa sold mobile handsets and data cards to Senao that amounted to NT$0.40.9 billion (US$12.126.5 million).

Honghwa contracted with Chunghwa to provide on-site sales services in Chunghwa’s retail stores andon-site equipment installation services to Chunghwa’s customers. Chunghwa paid Honghwa approximately NT$3.5 billion (US$0.1 billion) in 2015 for these services.

Chunghwa acquired network equipment and related supplies from Chunghwa System Integration for approximately NT$2.01.2 billion (US$67.135.6 million) in 2013.2015.

Chunghwa paid Taiwan International Standard Electronics approximately NT$1.80.9 billion (US60.7(US$26.9 million) in 20132015 for the purchase of telecommunications exchange facilities and related supplies, and the maintenance expenses.

Terms and conditions of the foregoing transactions with related parties were not significantly different from transactions with non-related parties. When no similar transactions with non-related parties can be referenced, terms and conditions were determined in accordance with mutual agreements.

C. Interests of Experts and Counsel

Not applicable.

 

ITEM 8.FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

See Item 18 for a list of all consolidated financial statements filed as part of this annual report onForm20-F.

Except as described in “Item 4. Information on the Company—B. Business Overview—Legal Proceedings,” weWe are not currently involved in material litigation or other proceedings that may have or have had in the recent past, significant effects on our financial position or profitability.profitability, see “Item 4. Information on the Company—B. Business Overview—Legal Proceedings.”

For our policy on dividend distributions, see “Item 10. Additional Information—B. Memorandum and Articles of Incorporation—Dividends and Distributions”. The following table sets forth the dividends declared on each of our common shares and in the aggregate for each of the years ended December 31, 2009, 2010,from 2011 2012 and 2013.to 2015. All of these dividends were paid, in the fiscal year following the period with respect to which the dividends relate.

 

  Dividends Per
Common Share(1)
   Total
Dividends(1)
   Dividends Per
Common Share(1)
   Total Dividends(1) 
  NT$   NT$ in billions   NT$   NT$ in billions 

Year ended December 31, 2009

   4.06     39.4  

Year ended December 31, 2010

   5.52     42.8  

Year ended December 31, 2011

   5.46     42.4     5.46     42.4  

Year ended December 31, 2012(2)

   4.63     35.9     4.63     35.9  

Year ended December 31, 2013(3)

   2.39     18.5     2.39     18.5  

Year ended December 31, 2014

   4.86     37.7  

Year ended December 31, 2015(4)

   5.49     42.6  

 

(1)Cash dividend unless otherwise indicated.

(2)In addition to the cash dividenddividends from retainedunappropriated earnings disclosed in the table above, we also made cash distributions from additional paid-in capital of NT$0.72 per share, which amounted to an aggregate of NT$5.6 billion.
(3)Dividends for 2013 were approved for distribution in the board meeting in March 2014 and are expected to be approved at our annual general stockholders’ meeting scheduled for June 24, 2014. In addition to the cash dividends from retainedunappropriated earnings disclosed in the table above, our board of directorswe also resolved to distributemade cash distributions from our additional paid-in capital of NT$2.14 per share, which amountsamounted to an aggregate of NT$16.6 billion. See “Item 5. Operating and Financial Review and Prospects—Overview—Effect of adopting Taiwan-IFRSsTaiwan IFRSs on our dividends and employee bonuses.”
(4)Dividends for 2015, which are calculated based on Taiwan IFRSs, were approved by the board of directors in March 2016 and are expected to be declared at our annual general stockholders’ meeting scheduled on June 24, 2016. The accumulated legal reserve that we had set aside in the past years has amounted to the aggregate par value of our outstanding share capital. Therefore, according to the relevant regulations, we are not required to appropriate profits as legal reserve starting from 2015. Our payout ratio was 99.41% in 2015 after the adjustment of unappropriated earnings and the reversal of special reserve.

We have historically distributed cash dividendsare committed to our stockholders equal to approximately 90% of our annual net income. Wemaximizing stockholder value and intend to maintain thisa sustainable dividend payout ratio in the future,policy, subject to a number of commercial factors, including the interests of our stockholders, cash requirements for

future capital expenditures and investments, as well as relevant industry and market practice. The amount of our net income determined for purposes of calculating our annual dividend payout will be calculated based on Taiwan IFRSs, which may differ from the amount of our net income determined in accordance with IFRSs.

B. Significant Changes

Other than as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of the annual consolidated financial statements included in this annual report.

 

ITEM 9.THE OFFER AND LISTING

A. Offer and Listing Details

Market Price Information for Our Common Shares

Our common shares have been listed on the TWSE since October 27, 2000. There is no public market outside Taiwan for our common shares. The table below shows, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the TWSE for our common shares. The closing price for our common shares on the TWSE on March 31, 2014April 20, 2016 was NT$93.7109.00 per share.

A capital reduction plan approved at the special stockholders’ meeting on August 14, 2008 was executed in 2009. The last trading date for our old shares was March 2, 2009. Trading of our shares was suspended in the TWSE from March 3 to March 19, 2009. Trading of our new shares commenced on March 20, 2009. The amount of the capital reduction was NT$19,115,553,820, corresponding to 1,911,555,382 common shares of total listed common shares—a reduction ratio of 16.46705301419%. Every thousand shares were converted to 835.329469858 shares. For the fractional common shares resulting from the capital reduction, we paid the stockholder cash based on the closing price on March 2, 2009, which was NT$54.9, rounded off to the nearest whole NT dollar. After the capital reduction, the share price was restated in accordance with Article 67-1 of the Operating Rules of the TWSE Corporation.

Another capital reduction plan approved at the general shareholders’ meeting on June 19, 2009 was executed in 2009. The last trading date for our old shares was January 20, 2010. Trading of our shares was suspended in the TWSE from January 21 to February 7, 2010. Trading of our new shares commenced on February 8, 2010. The amount of the capital reduction was NT$9,696,808,180, corresponding to 969,680,818 common shares of total listed common shares—a reduction ratio of 9.09090909006%. Every thousand shares were converted to 909.0909090994 shares. For the fractional common shares resulting from the capital reduction, we paid the stockholder cash based on the closing price on January 20, 2010, which was NT$58.1, rounded off to the nearest whole NT dollar. After the capital reduction, the share price was restated in accordance with Article 67-1 of the Operating Rules of the TWSE Corporation.

An additional capital reduction plan approved at the general shareholders’ meeting on June 18, 2010 was executed in 2011. The last trading date for our old shares was January 6, 2011. Trading of our shares was suspended in the TWSE from January 7 to January 24, 2011. Trading of our new shares commenced on January 25, 2011. The amount of the capital reduction was NT$19,393,616,360, corresponding to 1,939,361,636 common shares of total listed common shares—a reduction ratio of 20%. Every thousand shares were converted to 800 shares. For the fractional common shares resulting from the capital reduction, we paid the stockholder cash based on the closing price on January 6, 2011, which was NT$73.1, rounded off to the nearest whole NT dollar. After the capital reduction, the share price was restated in accordance with Article 67-1 of the Operating Rules of the TWSE Corporation.

We did not execute any capital reduction plan during 2012 and 2013.

  Closing Price
Per Common Share(1)
   Average
Daily Trading
Volume
   Closing Price
Per Common Share(1)
   Average
Daily Trading
Volume
 
      High           Low             High           Low       
  NT$   NT$   (in thousands)   NT$   NT$   (in thousands) 

2009

   62.54     52.08     20,048  

2010

   78.94     57.37     13,142  

2011

   93.12     73.39     14,355     84.32     66.46     15,088  

2012

   89.91     78.08     11,753     81.42     70.70     11,753  

2013

   87.57     78.59     7,498  

2014

   89.35     81.59     6,307  

First Quarter

   89.13     80.31     22,153     84.85     81.59     7,704  

Second Quarter

   83.78     78.08     10,347     87.75     84.40     5,240  

Third Quarter

   88.87     83.38     8,355     89.07     86.50     7,097  

Fourth Quarter

   89.91     86.12     7,180     89.35     85.83     5,359  

2013

   96.70     86.78     7,498  

2015

   100.50     87.93     8,292  

First Quarter

   89.91     86.78     7,138     94.86     87.93     7,366  

Second Quarter

   96.53     87.35     7,717     94.67     90.97     6,177  

Third Quarter

   96.70     92.56     8,105     99.30     92.87     11,510  

Fourth Quarter

   94.60     90.60     7,005     100.50     97.30     7,942  

October

   94.60     90.60     10,653     100.50     98.50     10,152  

November

   93.30     91.40     5,658     100.50     97.30     7,528  

December

   93.40     91.80     4,642     99.90     97.80     6,301  

2014 (through April 21)

   94.50     90.10     6,962  

2016 (through April 20)

   111.00     98.20     10,251  

First Quarter

   93.70     90.10     7,704     110.50     98.20     10,744  

January

   92.80     91.70     7,947     103.00     98.20     12,362  

February

   92.00     90.10     8,699     105.50     103.00     10,804  

March

   93.70     91.30     6,689     110.50     105.00     9,517  

Second Quarter (through April 21)

   94.50     93.20     3,996  

April (through April 21)

   94.50     93.20     3,996  

Second Quarter (through April 20)

   111.00     107.00     7,365  

April (through April 20)

   111.00     107.00     7,365  

 

(1)The historical prices and volumes of our common shares traded on the Taiwan Stock ExchangeTWSE have been adjusted based on prior cash dividend payments, capital increases and capital reductions.

Market Price Information for Our American Depositary Shares

Our ADSs have been listed on the New York Stock ExchangeNYSE under the symbol “CHT” since July 17, 2003. The outstanding ADSs are identified by the CUSIP number 17133Q502. The table below shows, for the periods indicated, the

high and low closing prices and the average daily volume of trading activity on the New York Stock ExchangeNYSE for our ADSs. The closing price for our ADSs on the New York Stock ExchangeNYSE on April 21, 201420, 2016 was US$31.2234.29 per ADS. Each of our ADSs represents the right to receive ten shares.

 

  Closing Price Per ADS(1)   Average ADS
Daily Trading
Volume
   Closing Price Per ADS(1)   Average ADS
Daily Trading
Volume
 
          High                   Low                     High                   Low           
  US$   US$   (in thousands)   US$   US$   (in thousands) 

2009

   19.50     15.11     759  

2010

   26.05     17.40     590  

2011

   32.22     24.73     375     29.31     22.50     375  

2012

   30.85     26.30     355     28.06     23.93     355  

2013

   29.64     26.43     206  

2014

   29.99     26.50     111  

First Quarter

   29.43     26.56     716     28.05     26.50     170  

Second Quarter

   28.05     26.30     358     29.30     28.00     99  

Third Quarter

   30.09     27.84     188     29.99     28.41     90  

Fourth Quarter

   30.85     29.37     161     29.04     27.71     88  

2013

   32.58     29.06     206  

2015

   31.58     27.66     186  

First Quarter

   31.14     29.06     260     30.58     27.66     128  

Second Quarter

   31.13     29.25     179     31.09     29.54     116  

Third Quarter

   32.58     30.53     164     31.58     29.20     284  

Fourth Quarter

   32.09     30.68     226     31.18     29.40     213  

October

   32.09     31.00     324     31.18     30.26     292  

November

   31.49     30.68     175     31.04     29.80     200  

December

   31.28     30.70     167     30.59     29.40     146  

2014 (through April 21)

   31.28     29.13     155  

2016 (through April 20)

   34.62     29.57     261  

First Quarter

   30.84     29.13     170     34.22     29.57     257  

January

   30.84     29.27     202     31.12     29.57     330  

February

   30.28     29.13     178     31.90     30.65     261  

March

   30.72     30.02     131     34.22     31.99     197  

Second Quarter (through April 21)

   31.28     30.80     87  

April (through April 21)

   31.28     30.80     87  

Second Quarter (through April 20)

   34.62     33.25     268  

April (through April 20)

   34.62     33.25     268  

 

(1)The historical prices and volumes of our ADSs traded on the New York Stock ExchangeNYSE have been adjusted based on prior cash dividend payments, capital increases and capital reductions.

As of April 21, 2014,20, 2016, a total of 24,903,28936,967,631 ADSs and 7,757,446,545 common shares (including those represented by ADSs) were outstanding. With certain limited exceptions, holders of shares that are not Republic of ChinaROC persons are required to hold these shares through a brokerage or custodial account in the Republic of China.ROC.

B. Plan of Distribution

Not applicable.

C. Markets

The principal trading market for our common shares is the TWSE and the principal trading market for our ADSs is the New York Stock Exchange.NYSE.

D. Selling Stockholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

 

ITEM 10.ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Incorporation

Set forth below is information relating to our capital structure, including brief summaries of material provisions of our articles of incorporation, the Republic of ChinaROC Securities and Exchange Law, the Republic of ChinaROC Company Act, the Statute of Chunghwa Telecom Co., Ltd. and the Telecommunications Act, all as currently in effect. The following summaries are qualified in their entirety by reference to our articles of incorporation, the Republic of ChinaROC Securities and Exchange Law, the Republic of ChinaROC Company Act, the Statute of Chunghwa Telecom Co., Ltd. and the Telecommunications Act.

Objects and Purpose

The scope of business of Chunghwa Telecom Co., Ltd. as set forth in Article 2 of our articles of incorporation, includes (i) Telecommunicationstelecommunications Enterprise Type 1 and Type 2 businesses pursuant to the Telecommunications Act of the Republic of China,ROC, (ii) installation of the computer equipment and radio-frequency equipment whose operation is controlled by the telecommunication business, (iii) telecommunications equipment wholesale, retail and engineering businesses, (iv) design, engineering and operation of information software and hardware service businesses, (v) apparatus and electric appliance installation and construction business, (vi) television program production, distribution and commercial business, (vii) broadcasting program distribution and commercial business, (viii) the third party payment business, (ix) water pipe construction business, and (viii)(x) other businesses, except any business requiring a special permit or otherwise restricted by law or regulation.

General

Under our articles of incorporation, our authorized capital was NT$120,000,000,000 divided into 12,000,000,000 common shares, with par value of NT$10 per share. We have set aside 200,000,000 common shares from the aforementioned common shares for the conversionexercise of any future issuances of stock warrants, preferred shares with warrants, or convertible debt.and bonds with warrants. Our paid-in capital is NT$77,574,465,450 divided into 7,757,446,545 common shares. We currently do not have any other equity in the form of preferred shares, convertible bonds or otherwise outstanding as of the date of this annual report.

The Ministry of Transportation and Communications,MOTC, on behalf of the government of the Republic of China,ROC, owned approximately 35.29% of our outstanding common shares as of December 31, 2013.2015. The remainder of our outstanding shares is held by public stockholders and other investors.

Directors and Audit Committee

Our articles of incorporation provide for a board of directors consisting of seven to fifteen directors, and one-fifth of these directors shall be professionals of domain knowledge.knowledge. Under Article 12 of our articles of

incorporation, we shall establish an audit committee starting from our 7th term of our board of directors. As a

result, our new audit committee started from the date of the annual general meeting on June 25, 2013. See “Item 6. Directors, Senior Management and Employees—C. Board Practices.” Pursuant to Article 14-4 of the ROC Securities and Exchange Act, for a company that has established an audit committee, unless otherwise provided for by law, the provisions regarding supervisors in ROC Securities and Exchange Act, the ROC Company Act, and other laws and regulations shall apply mutatis mutandis to the audit committee.

Under the Republic of ChinaROC Company Act, our board of directors, in conducting our business, shall act in accordance with laws and regulations, our articles of incorporation and the resolutions adopted at the meetings of stockholders. Where any resolution adopted by our board of directors contravenes laws, our articles of incorporation and the resolutions adopted at the meetings of stockholders, thereby causing loss or damage to us, all directors taking part in the adoption of such resolution shall be liable to compensate us for such loss or damage; however, those directors whose disagreement appears on record or is expressed in writing shall be exempted from liability.

If our board of directors decides, by resolution, to commit any act in violation of any law or our articles of incorporation, any of our independent directors or any stockholder who has continuously held our shares for a period of one year or longer may request our board of directors to discontinue such act. One or more stockholders who have held more than 3% of our issued and outstanding shares for over a year may require an independent director to bring an action on our behalf against a director for losses suffered by us as a result of the director’s unlawful actions or failure to act by sending a written request to any of our independent directors. In addition, if our stockholders’ meeting resolves to institute an action against a director, we shall, within 30 days from the date of such resolution, institute such an action. In the case of a lawsuit between us and a director, an independent director shall act on our behalf, unless otherwise provided by law; and our stockholders meeting may also appoint some other person to act on our behalf in a lawsuit.

According to the Republic of ChinaROC Company Act, our board of directors owes fiduciary duty to us. Our directors are liable to compensate us if they breach their fiduciary duty. In addition, a director who has a personal interest in a matter to be discussed at the meeting of the board of directors, shall specify such conflict; if the conflict may cause damages to the company, the director shall abstain from voting on the matter, and shall not serve as a proxy and vote on behalf of another director.

According to our articles of incorporation, the remuneration of the directors shall be determined by the board of directors based on the participation and the contribution of each director in the business operation of the Company and referencing the regular standards of other corporations in the similar industry. Our articles of incorporation also provide that we may make compensation to all directors and such compensation shall not exceed 0.2% of our distributable earnings and may be approved only by a validly convened stockholders’ meeting. Our articles of incorporation do not impose a mandatory retirement age for our directors. Furthermore, our articles of incorporation do not impose a shareholding qualification for each director. According to our current internal Loan Procedures,Code of Ethics, we may not extend any loan to our directors.

Dividends and Distributions

At each annual general stockholders’ meeting, our board of directors submits to the stockholders for their approval any proposal for the distribution of dividend or the making of any other distribution to stockholders from our net income for 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 of the two, as determined by the stockholders at the meeting.

We are not permitted to distribute dividends or make other distributions to stockholders in any year in which we do not have any net income or retainedunappropriated earnings (excluding reserves). The Republic of ChinaROC Company Act

also requires that 10% of our annual net income, less prior years’ losses and outstanding tax, if any, be set aside as a legal reserve until the accumulated legal reserve equals our paid-in capital. We may also set aside special reserve as determined by our stockholders at a stockholders’ meeting. In addition, our articles of incorporation provide

that at least 50% of the remaining portion of the net income, less prior years’ losses, outstanding taxes, the legal reserve and any special reserve, plus undistributed retainedunappropriated earnings from prior years will be distributed as dividends to stockholders. Under our articles of incorporation, not less than 50% of the total amount of the distributed dividends must be in cash, but if the cash dividends to be distributed are less than NT$0.10 per share, the dividends may be distributed in the form of shares. Pursuant to our current articles of incorporation, prior to distributing any dividends to our stockholders, we were required to first distribute (i) between 2% and 5% of the distributable earnings to employees as bonuses and (ii) not more than 0.2% of the distributable earnings to directors as compensation. Also,According to the latest ROC Company Act amended as of May 20, 2015, earnings can no longer be distributed to employees. Rather, earnings may be distributed to shareholders, excluding employees and directors. To mitigate the impact on employees’ lost potential earnings, the amended ROC Company Act also provides that the company must stipulate a specific amount or percentage of profits to be distributed to employees as bonuses. The bonuses may, subject to a resolution of the board of directors, be distributed to employees in way of cash or shares. We will amend our Articles of Incorporation at our annual general stockholders’ meeting scheduled on June 24, 2016 to reflect the changes in ROC Company Act. We do not expect the changes to have a material impact on our financial results, because we have categorized employee bonuses as an expense instead of as distributable earnings since 2008 in accordance to a clarification letter issued by the Ministry of Economic Affairs of Taiwan for the explanation of Article 64 of the Business Accounting Law on January 24, 2007, starting from January 1, 2008, employee bonuses are now categorized as an expense instead of as distributable earnings.Law.

Under the Republic of ChinaROC Company Act, if we do not incur a loss, we are permitted to make distributions on a pro rata basis to our stockholders of additional common shares or cash by the legal reserve, the premium derived from the issuance of new shares and the income from endowments received by us. We are allowed to make the above distributions to our stockholders by legal reserve only if the legal reserve exceeds 25% of our paid-in capital. Furthermore, subject to the provision under our articles of incorporation, such distribution should firstly be made by the premium derived from the issuance of new shares.

Changes in Share Capital

Under the Republic of ChinaROC Company Act, any change in our authorized share capital requires an amendment to our articles of incorporation, which in turn requires approval at our stockholders’ meeting. Authorized but unissued common shares may be issued, subject to applicable Republic of ChinaROC law, upon terms as our board of directors may determine.

Preemptive Rights

Under the Republic of ChinaROC Company Act and our articles of incorporation, when we issue new shares for cash, existing stockholders who are listed onunless otherwise approved by the stockholders’ register as of the record date have preemptive rights to subscribe for the new issue in proportion to their existing shareholdings, unless the law orcentral competent authority, provides otherwise. Under our articles of incorporation, our employees except for the directors and executives involved with the approval and passage of the share issuance, have rights to subscribe for between 10% and 15% of the new issue, and we have rights to restrain the shares subscribes by employees from being transferred within a specific period of time, which should not be longer than two years. Except for the shares reserved in accordance with the ROC Company Act, we are required to inform our existing shareholders of their rights to subscribe for additional shares pro rata to their respective shareholding and to note that the shareholders will lose their pre-emptive right if they fail to subscribe for the new shares within the prescribed period. In the event that there is any new issue.share that has not been subscribed by the existing shareholders pursuant to their respective pre-emptive rights, we may offer such shares to other investors through public offering or private negotiation with any person designated by us.

In addition, in accordance with the Republic of China Securities and Exchange Law, a public company that intends to offer new shares for cash must offer to the public at least 10% of the shares to be sold except in certain limited circumstances. This percentage can be increased by a resolution passed at a stockholders’ meeting, held in accordance with the Company Act and our articles of incorporation which would diminish the number of new shares subject to the preemptive rights of existing stockholders.

Meetings of Stockholders

We are required by the Republic of ChinaROC Company Act and our articles of incorporation to hold a general meeting of our stockholders within six months following the end of each fiscal year, unless for specific legitimate reason or approved otherwise by the relevant authorities. Commencing from January 1, 2012, we must hold a general shareholders meeting within six months after the end of fiscal year and may not seek any extension for such meeting accordingly to newly amended Article 36 of Securities and Exchange Act. These meetings are generally held in Taipei, Taiwan. Special stockholders’ meetings may be convened by resolution of the board of directors or by the board of directors upon the written request of any stockholder or stockholders who have held

3% or more of the outstanding common shares for more than one year. Stockholders’ meetings may also be convened by an independent director. Notice in writing of general meetings of stockholders, stating the place, time and agenda must be dispatched to each stockholder at least 30 days, in the case of general meetings, and 15 days, in the case of special meetings, before the date set for each meeting. Except in certain circumstances described below, a majority of the holders of all issued and outstanding common shares present at a stockholders’ meeting constitutes a quorum for meetings of stockholders. Stockholders of 1% or more our issued and outstanding shares are entitled to submit one written proposal each year for consideration at our annual general stockholders’ meeting in accordance with the Republic of ChinaROC Company Act.

Voting Rights

As previously required by the Republic of ChinaROC Company Act, our articles of incorporation provide that a holder of common shares has one vote for each common share. Cumulative voting applies to the election of our directors. Separate ballots mayThe election of independent and non-independent directors should be held simultaneously while the ballots for the election of directors and independent directors are cast separately. According to Article 146-1 of the Insurance Act of the ROC, insurance companies that hold our shares may not be our directors or vote for the election of our directors.

In general, a resolution can be adopted by the holders of at least a majority of the common shares represented at a stockholders’ meeting at which the holders of a majority of all issued and outstanding common shares are present. Under the Republic of ChinaROC Company Act, the approval by at least a majority of the common shares represented at a stockholders’ meeting in which a quorum of at least two-thirds of all issued and outstanding common shares are represented is required for major corporate actions, including:

 

amendment to our articles of incorporation;

 

entering into, modification or termination of any contracts regarding leasing of all business, outsourcing of operations or joint operations;

 

transfer of the whole or substantial part of our business or assets;

 

taking over of the whole of the business or assets of any other company which would have significant impact on our operations;

 

distribution of any share dividend;

 

dissolution;

 

merger or spin-off; and

 

removing of directors.

Alternatively, the Republic of ChinaROC Company Act provides that in the case of a public company, such as us, a resolution may be adopted by the holders of at least two-thirds of the common shares represented at a meeting of stockholders at which holders of at least a majority of issued and outstanding common shares are present.

A stockholder may be represented at a general or special meeting by proxy if a valid proxy form is delivered to us five days before the commencement of the general or special stockholders’ meeting. Except for trust

enterprises or share registrar approved by the Securities and Futures Bureau of the Financial Supervisory Commission,FSC, where one person is appointed as proxy by two or more stockholders who together hold more than 3% of the total issued common shares, the votes of those stockholders in excess of 3% of the outstanding common shares shall not be counted. Alternatively, if the stockholder would like to exercise its voting right at a general or special meeting but cannot be present at the meeting in person, according to the regulations promulgated by the Financial Supervisory CommissionFSC on February 20, 2012, starting from our 2012 general meeting, we are required to set up an electronic voting mechanism for such stockholder to exercise voting right. The stockholder is not allowed to exercise voting right through electronic voting mechanism if such stockholder fails to revoke the granted proxy (if any) at least two days prior to the general or special meeting.

At the time of any vote, if a director of a public company has pledged more than half of the holding at the time the director was elected, such director will not be allowed to exercise the voting rights with respect to the

number of shares pledged providedin excess of the half of the number of shares that such director held in such public company at the time the director was elected. The maximum number of shares ineligible for voting pursuant to the provision above cannot exceed half of the number of shares that such director held in such public company at the time the director was elected. In addition, any shares that were ineligible for voting pursuant to the above provision would not count as being present for such vote.

Any stockholder who has a personal interest in the matter under discussion at a stockholders’ meeting, the outcome of which may impair our interests, shall not vote or exercise voting rights on behalf of another stockholder; however, the shares held by such stockholder may be counted as present.present for calculation of attendance quorum.

Holders of our ADSs generally will not be able to exercise voting rights on the common shares underlying ADSs on an individual basis.

C. Other Rights of Stockholders

Under the Republic of ChinaROC Company Act, dissenting stockholders are entitled to appraisal rights in certain major corporate actions, such as a planned transfer of the whole or part of the business or a proposed merger by us. A dissenting stockholder may request us to purchase back all of the shares owned by the stockholder at a fair price determined by mutual agreement or determined by the court if a mutual agreement cannot be reached. Stockholders may exercise their appraisal rights by serving notice in writing to us prior to the related stockholders’ meeting and/or by raising his objection at the stockholders’ meeting. Moreover, a stockholder has the right to file a petition in the court for annulment of any resolution adopted at a stockholders’ meeting where the procedures for convening the stockholders’ meeting or the method of adopting the resolutions at the meeting is contrary to law or our articles of incorporation. One or more stockholders who have held more than 3% of the issued and outstanding shares of a company continuously for more than one year may require an independent director to institute, on behalf of us, an action against a director. In addition, one or more stockholders who has/have continuously held 3% or more of the total number of the outstanding shares of our company for more than one year may require the board of directors to convene a special stockholders’ meeting by sending a written request to the board of directors.

The Republic of ChinaROC Company Act allows stockholders holding 1% or more of the total issued shares of a company to submit, during the period of time prescribed by us no less than 10 days, one proposal in writing for discussion at the general meeting of stockholders. It also provides that a company may adopt a nomination procedure for election of directors. We have adopted a nomination procedure for election of directors as stipulated in our articles of incorporation which provides that stockholders holding 1% or more of our total issued shares may submit to us a list of candidates for director, including independent director, along with relevant information and supporting documents.

Register of Stockholders and Record Dates

Our share registrar, Yuanta Securities Co., Ltd., maintains our register of stockholders at its offices in Taipei, Taiwan. Under the Republic of ChinaROC Company Act, and our articles of incorporation, we may, by giving advance public notice, set a record date and

close the register of stockholders for a specified period in order for us to determine the stockholders or pledgees that are entitled to rights pertaining to the common shares. The specified period starting from such record date (to determine the entitled stockholders or pledgees) required is as follows:

 

general stockholders’ meeting—60 days;

 

special stockholders’ meeting—30 days; and

 

relevant record date—date for distribution of dividends or other entitlements—5 days.

Annual Consolidated Financial Statements

At least ten days before the annual general stockholders’ meeting, our annual consolidated financial statements prepared in accordance with Taiwan-IFRSsTaiwan IFRSs must be available at our principal office in Taipei, Taiwan for inspection by the stockholders.

Transfer of Common Shares

Under the current ROC Company Act, a public company, such as our company, may issue individual share certificates, one master certificate or no certificate at all, to evidence common shares. In accordance with our articles of incorporation, all of our shares are currently issued and transferred in book-entry form instead of issuing physical share certificates. OnAfter the book closure date, the Taiwan Depository & Clearing Corporation, or the TDCC, will deliver the names and addresses of the shareholders as of the book closure date to our registrar, Yuanta Securities Co., Ltd. Only shareholders as of the book closure date can assert shareholder rights against us.

Acquisition of Our Own Common Shares

Under the Republic of ChinaROC Company Act, with minor exceptions, we cannot acquire our own common shares. Any common shares acquired by us, under certain of such minor exceptions, must be sold at the market price within six months after their acquisition.

In addition, under the Republic of China Securities and Exchange Act, a company whose shares are listed on the TWSE or traded on the GreTaiTaipei Exchange (formerly known as Gre Tai Securities MarketMarket) may, pursuant to a board resolution adopted by a majority consent at a meeting attended by more than two-thirds of the directors and pursuant to the procedures prescribed by the Securities and Futures Bureau of the Financial Supervisory Commission,FSC, purchase its shares for the following purposes on the TWSE, the GreTai Securities MarketTaipei Exchange or by a tender offer:

(1) for transfers of shares to its employees;

(2) for conversion into shares from bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by us; and

(3) for maintaining its credit and its stockholders’ equity, provided that the shares so purchased shall be cancelled thereafter.

The total shares purchased by us shall not exceed 10% of its total issued and outstanding shares. In addition, the total amount for purchase of the shares shall not exceed the aggregate amount of the retained earnings, the premium from shares issues and the realized portion of the capital surplus.

The shares purchased by us pursuant to items (1) and (2) above shall be transferred to the intended transferees within three years after the purchase; otherwise the same shall be cancelled. For the shares to be cancelled pursuant to item (3) above, we shall complete amendment registration for such cancellation within six months after the purchase.

The shares purchased by us shall not be pledged or hypothecated. In addition, we may not exercise any stockholders’ rights attaching to these shares. Under ROC Company Act, we may transfer the treasury stock to our employees and impose transfer restrictions on the shares up to two years.

Liquidation Rights

In the event of our liquidation, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed pro rata to the stockholders in accordance with the relevant provisions of the Republic of ChinaROC Company Act and our articles of incorporation.Act.

Substantial Stockholders and Transfer Restrictions

The Republic of ChinaROC Securities and Exchange Act currently requires for public companies that (i) each director, supervisor, manager, as well as their respective spouses, minor children and nominees, and substantial

stockholder (i.e., a stockholder who together with his or her spouse, minor children or nominees, holds more than 10% of the shares of a public company) to report any change in that person’s shareholding to the issuer of the shares on a monthly basis and (ii) each director, supervisor, manager or substantial stockholder holding such common shares for more than a six month period to report his or her intent to transfer any shares listed on the TWSE or traded on the GreTaiTaipei Exchange (formerly known as Gre Tai Securities MarketMarket) to the Securities and Futures Bureau of the Financial Supervisory CommissionFSC at least three days before the intended transfer, unless the number of shares to be transferred each day is lessno more than 10,000 shares. ADS holders holding more than 10% of our common shares, including common shares represented by ADSs, may be subject to the reporting obligation in above item (i).

In addition, the number of shares that can be sold or transferred on the TWSE or GreTaithe Taipei Exchange (formerly known as Gre Tai Securities MarketMarket) by any person subject to the restrictions described above on any given day may not exceed:

 

0.2% of the outstanding shares of the company in the case of a company with no more than 30 million outstanding shares;

 

0.2% of 30 million shares plus 0.1% of the outstanding shares exceeding 30 million shares in the case of a company with more than 30 million outstanding shares; or

 

in any case, 5% of the average daily trading volume (number of shares) on the TWSE or the GreTai Securities MarketTaipei Exchange for the ten consecutive trading days preceding the reporting day on which day the director, supervisor, manager or substantial stockholder or their respective spouse, minor child or nominee reports the intended share transfer to the Securities and Futures Bureau.

These restrictions do not apply to block trading, auction sale, purchase by auction, after-hour trading and sales or transfers of our ADSs. However, these restrictions will apply to sales of common shares upon withdrawal.

D.C. Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those described elsewhere in this annual report.

E.D. Exchange Controls

Foreign Investment and Exchange Controls in Taiwan

We have extracted from publicly available documents the information presented in this section. Please note that citizens of the People’s Republic of ChinaPRC and entities organized in the People’s Republic of ChinaPRC are subject to special Republic of ChinaROC laws, rules and regulations, which are not discussed in this section.

General

Historically, foreign investments in the securities market of Taiwan were restricted. However, commencing in 1983, the Taiwan government has from time to time enacted legislation and adopted regulations to make foreign investment in the Taiwan securities market possible. Initially, only overseas investment trust funds of authorized securities investment trust enterprises established in Taiwan were permitted to invest in the Taiwan securities market. Since January 1, 1991, qualified foreign institutional investors are allowed to make investments in the Taiwan listed securities market. Since March 1, 1996, overseas Chinese, non-resident foreign institutional and individual investors (other than qualified foreign institutional investors), called “general foreign investors,” are permitted to make direct investments in the Taiwan securities market.

Foreign Investment in Taiwan Securities Market

On December 28, 1990, the Executive Yuan, the cabinet of the Republic of ChinaROC government, approved guidelines drafted by the Securities and Futures Commission (the predecessor of the Securities and Futures

Bureau), which, since January 1, 1991, has allowed direct foreign investment in Taiwan’s securities that are listed on the Taiwan Stock ExchangeTWSE or other Taiwan securities approved by the Securities and Futures Bureau by certain eligible qualified foreign institutional investors.

In addition to qualified foreign institutional investors, certain individual and foreign institutional investors which meet certain qualifications set by the Securities and Futures Bureau may invest in the shares of Taiwan Stock Exchange-listedTWSE-listed companies, GreTai Securities Marketthe Taipei Exchange (formerly known as Over-The-CounterGre Tai Securities Exchange)Market) traded companies, emerging market companies or other Taiwan securities approved by the Securities and Futures Bureau up to a limit of US$50 million (in the case of institutional investors) and US$5 million (in the case of individual investors) after obtaining permission from the Taiwan Stock Exchange.TWSE.

On September 30, 2003 and June 15, 2004, the Securities and Futures Bureau issued amendments to the “Guideline Governing Investment in Securities by Overseas Chinese and Foreign Nationals” and relevant regulations, in which the Securities and Futures Bureau lifted certain restrictions and simplified the procedures required for foreign investments in Taiwan’s securities market. The amendment focuses mainly on the following aspects:

 

The concept of “qualified foreign institutional investors” no longer exists. Foreign investors are reclassified as “off-shore foreign institutional investors,” “on-shore foreign institutional investors,” “off-shore general foreign investors,” and “on-shore general foreign investors” based on whether they are institutions or natural persons, and whether they have presence in Taiwan.

 

For foreign investors to invest in Taiwan’s securities market, registration with the Taiwan Stock Exchange,TWSE, instead of the approval of the Securities and Futures Bureau, is required. The Taiwan Stock ExchangeTWSE may withdraw or rescind the registration if the application documents submitted by foreign investors are untrue or incomplete, or if any material violation of the relevant regulations exists.

 

Off-shore foreign investors may provide the securities they hold as the underlying shares of depositary receipts and act as selling stockholders in depositary receipts offerings.

 

Off-shore foreign institutional investors are required to appoint their agent or nominee to attend the stockholders’ meeting of the invested company.

Currently, subject to the specific restriction imposed by relevant regulations, the off-shore foreign institutional investors may invest in the Taiwan securities market without any amount restriction. However, a ceiling will be separately determined by the Securities and Futures Bureau after consultation with the Central Bank of the Republic of ChinaROC (Taiwan) for investment by offshore oversea Chinese and foreign individual investors.

Foreign Investment Approval

Other than:

 

foreign institutional investors;

 

foreign individual investors; and

 

investors in overseas convertible bonds and depositary receipts,

foreign investors who wish to make direct investments in the shares of Taiwan companies may submit a “foreign investment approval” application to the Investment Commission of the Ministry of Economic Affairs of Taiwan or other government authority to qualify for benefits granted under the Statute for Investment by Foreign Nationals. The Investment Commission or other government authority reviews each foreign investment approval application and approves or disapproves the application after consultation with other governmental agencies. Any non-Taiwan person possessing a foreign investment approval may remit capital for the approved investment and repatriate annual net profits and interests and cash dividends attributable to an approved investment. Stock

dividends, investment capital and capital gains attributable to the investment may be repatriated with approval of the Investment Commission or other government authority.

In addition to the general restrictions against direct investment by non-Taiwan persons in Taiwan companies, non-Taiwan persons are currently prohibited from investing in prohibited industries in Taiwan under the Negative List promulgated by the Executive Yuan from time to time. The prohibition on direct foreign investment in the prohibited industries in the Negative List is absolute with the consequence of certain specific exemption from the application of the Negative List. Under the Negative List, some other industries are restricted so that non-Taiwan persons may directly invest only up to a specified level and with the specific approval of the relevant authority which is responsible for enforcing the legislation which the negative list is intended to implement. The telecommunication industry is a restricted industry under the Negative List.

Depositary Receipts

In April 1992, the Securities and Futures Bureau began allowing Taiwan companies listed on the Taiwan Stock Exchange,TWSE, with the prior approval of the Securities and Futures Bureau, to sponsor the issuance and sale of depositary receipts evidencing depositary shares. In December 1994, the Republic of ChinaROC Ministry of Finance began allowing companies whose shares are traded on the GreTaiTaipei Exchange (formerly known as Gre Tai Securities MarketMarket) also to sponsor the issuance and sale of depositary receipts evidencing depositary shares representing shares of its capital stock. Approvals for these issuances are still required.

After the issuance of a depositary share, a holder of the depositary receipt evidencing the depositary shares may request the depositary issuing the depositary share to cause the underlying shares to be sold in Taiwan and to distribute the proceeds of the sale to or to withdraw the shares and deliver the shares to the depositary receipt holder. A citizen of the People’s Republic of ChinaPRC is not permitted to withdraw and hold our shares.

If you are an offshore foreign institutional investor holding the depositary receipts, you must register with the Taiwan Stock ExchangeTWSE as a foreign investor before you will be permitted to withdraw the shares represented by the depositary receipts. In addition to obtaining registration with the Taiwan Stock Exchange,TWSE, you must also (i) appoint a qualified local agent to, among other things, open a securities trading account with a local securities brokerage firm and a bank account to remit funds, exercise stockholders’ rights and perform other functions as holders of ADSs may designate, (ii) appoint a custodian bank to hold the securities and cash proceeds, confirm transactions, settle trades and report and declare other relevant information and; (iii) appoint a tax guarantor as guarantor for the full compliance of the withdrawing depositary receipt holders’ tax filing and payment obligations in the Republic of China.ROC. A depositary receipt holder not registered as a foreign investor with the Taiwan Stock Exchange,TWSE, or not has made the necessary appointments as outlined above, will be unable to hold or subsequently transfer the shares withdrawn from the depositary receipt facility.

No deposits of shares may be made in a depositary receipt facility and no depositary shares may be issued against deposits without specific Securities and Futures Bureau approval, unless they are:

 

 (i)stock dividends;

 

 (ii)free distributions of shares;

 

 (iii)due to the exercise by the depositary receipt holder preemptive rights in the event of capital increases for cash; or

 

 (iv)

if permitted under the deposit agreement and custody agreement and within the amount of depositary receipts which have been withdrawn, due to the direct purchase by investors or purchase through the depositary on the Taiwan Stock ExchangeTWSE or the GreTaiTaipei Exchange (formerly known as Gre Tai Securities MarketMarket) or delivery by investors of the shares for deposit in the depositary receipt facility. In this event, the total number of depositary receipts outstanding after an issuance cannot exceed the number of issued depositary receipts

previously approved by the Securities and Futures Bureau of the Financial Supervisory CommissionFSC in connection with the offering plus any ADSs issued pursuant to the events described in (i), (ii) and (iii) above.

An ADS holder or the depositary, without obtaining further approvals from the Central Bank of the Republic of ChinaROC (Taiwan) or any other governmental authority or agency of the Republic of China,ROC, may convert NT dollars into other currencies, including U.S. dollars, in respect of:

 

the proceeds of the sale of common shares represented by ADSs or received as share dividends with respect to the common shares and deposited into the depositary receipt facility; and

 

any cash dividends or distributions received from the common shares.

In addition, the depositary may also convert into NT dollars incoming payments for purchases of common shares for deposit in the depositary receipt facility against the creation of additional ADSs. If you withdraw the common shares underlying your ADSs and become a holder of our common shares, you may convert into NT dollars subscription payment for rights offerings. The depositary may be required to obtain foreign exchange payment approval from the Central Bank of the Republic of ChinaROC (Taiwan) on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights of new common shares. Although it is expected that the Central Bank of the Republic of ChinaROC (Taiwan) will grant approval as a routine matter, required approvals may not be obtained in a timely manner, or at all.

Exchange Controls

Taiwan’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated to handle foreign exchange transactions by the Financial Supervisory CommissionFSC and by the Central Bank of the Republic of ChinaROC (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. All foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.

Aside from trade-related foreign exchange transactions, Taiwan companies and residents may remit to and from Taiwan foreign currencies of up to US$50 million (or its equivalent) and US$5 million, (or its equivalent), respectively, in each calendar year. These limits apply to remittances involving a conversion between New Taiwan dollars and U.S. dollars or other foreign currencies. A requirement is also imposed on all private enterprises to register all medium and long-term foreign debt with the Central Bank of the Republic of ChinaROC (Taiwan).

In addition, a foreign person without an alien resident card or an unrecognized foreign entity may remit to and from Taiwan foreign currencies of up to US$100,000 per remittance if required documentation is provided to Taiwan authorities. This limit applies only to remittances involving a conversion between New Taiwan dollars and U.S. dollars or other foreign currencies.

F.

E. Taxation

Republic of ChinaROC Taxation

The discussion below describes the principal Republic of ChinaROC tax consequences of the ownership and disposition of ADSs representing common shares and of common shares. It applies to you only if you are:

 

an individual who is not a citizen of the Republic of China,ROC, who owns ADSs or common shares and who is not physically present in Taiwan for 183 days or more during any calendar year; or

 

a corporation or a non-corporate body that is organized under the laws of a jurisdiction other than the Republic of ChinaROC for profit-making purposes and has no fixed place of business or other permanent establishment in Taiwan.

You should also consult your tax advisors concerning the tax consequences of owning ADSs and common shares in the Republic of ChinaROC and any other relevant taxing jurisdiction to which they are subject.

Dividends

Dividends declared by us out of our retained earnings and distributed to you are subject to Republic of ChinaROC 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% Republic of China retainedROC unappropriated earnings tax paid by us on our undistributed after-tax earnings, if any, may provide a credit of up to 10% of the gross amount of any dividends declared out of such earnings that would reduce the 20% Republic of ChinaROC withholding tax imposed on these distributions. Starting from 2015, the allowed tax credit is adjusted to 50% of the unappropriated earnings tax paid by us.

Share or cash dividends paid by us out of our capital surplus which are derived from the issuance of shares at a premium are not subject to Republic of ChinaROC withholding tax. According to the rulings of Ref. Tai-Tsai-Hsuei-Tzi-09504509440 issued by the Ministry of Finance of the Republic of China,ROC, if a company reduces its share capital and redeems for cash its outstanding common shares issued to the company’s stockholders by capitalization of capital surplus, those premiums under the capitalized capital surplus derived from re-evaluation of assets, sale of lands and/or merger with other enterprise shall be deemed as the gain in the stockholders’ capital investment, and shall be deemed as stockholders’ dividend income (or investment revenue) and be subject to ROC income tax.

As the legal reserve is set-aside from company’s profit earnings (after tax) in accordance with Article 237 of ROC Company Act, receipt of distribution of legal reserve shall be deemed as stockholders’ dividend income (or investment revenue) and be subject to ROC income tax collected by way of withholding at the time of distribution, currently at the rate of 20%, unless a lower withholding rate is provided under a tax treaty between the ROC and the jurisdiction where the Non-ROC Stockholder is a resident.

Capital Gains

Gains from the sale of property in the Republic of ChinaROC are generally subject to Republic of ChinaROC income tax. Effective January 1, 2013,2016, capital gains on the sale of common shares, including common shares withdrawn from the ADS facility, received by a Non-Resident Individual or Non-Resident Entity is no longer subject to the capital gain tax at a flat rate of 15%. A Non-Resident Entity is exempted from income tax for its capital gains from sale of common shares, including common shares withdrawn from the ADS facility, and is further exempted from Alternative Minimum Tax, or the AMT.

Sales of ADSs by you are regarded as transactions relating to property located outside the Republic of ChinaROC and thus any gains derived therefrom are currently not subject to Republic of ChinaROC income tax.

Preemptive Rights

Distributions of statutory preemptive rights for common shares in compliance with Republic of ChinaROC law are not subject to any Republic of ChinaROC tax. Proceeds derived from sales of statutory preemptive rights evidenced by securities are subject to

securities transaction tax at the rate of 0.3% of the gross amount received. A Non-Resident Individual is subject to income tax at a flat rate of 15% for such capital gains. A Non-Resident Entity is exempted from income tax for such capital gains and is further exempted from the AMT. Proceeds derived from sales of statutory preemptive rights which are not evidenced by securities are subject to capital gains tax at the rate of 20% of the gains realized.

Subject to compliance with Republic of ChinaROC law, we, at our sole discretion, can determine whether statutory preemptive rights shall be evidenced by issuance of securities.

Securities Transaction Tax

A securities transaction tax, at the rate of 0.3% of the gross amount received, payable by the seller will be withheld upon a sale of common shares in Taiwan. Transfers of ADSs are not subject to Republic of ChinaROC securities transaction tax. According to a letter issued by the Ministry of Finance of the Republic of ChinaROC in 1996, withdrawal of common shares from the deposit facility will not be subject to Republic of ChinaROC securities transaction tax.

Estate Taxation and Gift Tax

Republic of ChinaROC estate tax is payable on any property within Taiwan of a deceased person who is a non-resident individual, and Republic of ChinaROC gift tax is payable on any property within Taiwan donated by any such person. Under Republic of ChinaROC estate and gift tax laws, common shares issued by Taiwan companies are deemed located in Taiwan regardless of the location of the owner. It is not clear whether the ADSs will be regarded as property located in Taiwan under Republic of ChinaROC estate and gift tax laws. Starting from January 21, 2009, the estate tax and gift tax rates were reduced to 10%.

Tax Treaty

The Republic of ChinaROC does not have an income tax treaty with the United States. On the other hand, the Republic of ChinaROC has income tax treaties with Indonesia, Israel, Singapore, South Africa, Australia, Vietnam, New Zealand, Malaysia, Macedonia, Swaziland, the Netherlands, United Kingdom, Gambia, Senegal, Sweden, Belgium, Denmark, Paraguay, Hungary, France, India, Slovakia, Germany, Thailand, Switzerland, Luxembourg, Kiribati, Austria and Switzerland,Italy, which may limit the rate of Republic of ChinaROC withholding tax on dividends paid with respect to common shares in Taiwan companies. It is unclear whether if you hold ADSs, you will be considered to hold common shares for the purposes of these treaties. Accordingly, if you may otherwise be entitled to the benefits of the relevant income tax treaty, you should consult your tax advisors concerning your eligibility for the benefits with respect to the ADSs.

RetainedUnappropriated Earnings Tax

Under the Republic of ChinaROC Income Tax Laws, a 10% retainedunappropriated earnings tax will be imposed on a company for its after-tax earnings generated after January 1, 1998 which are not distributed in the following year. The retainedunappropriated earnings tax so paid will further reduce the retained earnings available for future distribution. When the company declares dividends out of those retained earnings, up to a maximum amount of 10% of the declared dividends may be credited against the 20% withholding tax imposed on the non-resident holders of its shares.

U.S. Federal Income Tax Considerations for U.S. Holders

The following is a summary of certain U.S. federal income tax consequences of the ownership and disposition of our shares and ADSs as of the date hereof. The discussion set forth below is applicable to beneficial owners of our shares or ADSs that hold the shares or ADSs as capital assets and that are U.S. holders (defined below) and non-residents of the Republic of China.ROC. You are a U.S. holder if you are:

 

an individual who is a citizen or resident of the United States;

 

a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

an estate the income of which is subject to U.S. federal income taxation regardless of its source;

a trust that is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust; or

a trust that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in U.S. federal income tax consequences different from those discussed below. It is for general purposes only and you should not consider it to be tax advice. In addition, it is also based in part on representations made by the depositary and assumes that the deposit agreement and any related agreement will be performed in accordance with their terms. This summary does not represent a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the effects of any state, local or non-U.S. tax laws (or other U.S. federal tax consequences, such as U.S. federal estate or gift tax consequences)consequences or the Medicare tax on net investment income). In addition, it does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:

 

a dealer in securities or currencies;

 

a trader in securities if you elect to use a mark-to-market method of accounting for your securities holdings;

 

a financial institution or an insurance company;

 

a regulated investment company;

 

a real estate investment trust;

 

a tax-exempt organization;

 

a person liable for alternative minimum tax;

 

a person holding shares or ADSs as part of a hedging, integrated or conversion transaction, constructive sale or straddle;

 

a person owning, actually or constructively, 10% or more of our voting stock;

 

a partnership or other pass-through entity for U.S. federal income tax purposes; or

 

a person whose “functional currency” is not the U.S. dollar.

We cannot assure you that a later change in law will not alter significantly the tax considerations that we describe in this summary.

If a partnership holds our shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our shares or ADSs, you should consult your tax advisor.

You should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the ownership and disposition of the shares or ADSs, as well as the consequences to you arising under the laws of any other taxing jurisdiction.

In general, for U.S. federal income tax purposes, a U.S. holder who is the beneficial owner of an ADS will be treated as the owner of the shares underlying such ADS. Deposits or withdrawals of shares, actually or constructively, by U.S. holders for ADSs will not be subject to U.S. federal income tax.

Taxation of Dividends

The gross amount of distributions (other than certain pro rata distributions of shares to all stockholders) you receive on your shares or ADSs, including net amounts withheld in respect of Republic of ChinaROC withholding taxes, will

generally be treated as dividend income to you to the extent the distributions are made from our

current and accumulated earnings and profits as calculated according to U.S. federal income tax principles. These amounts (including withheld taxes) will be includible in your gross income as ordinary income on the day you actually or constructively receive the distributions, which in the case of an ADS will be the date actually or constructively received by the depositary. You will not be entitled to claim a dividends-received deduction allowed to corporations under the Code with respect to distributions you receive from us.

With respect to non-corporate U.S. holders, who are individuals, certain dividends received from a qualified foreign corporation, on shares, or ADSs backed by such shares, that are readily tradable on an established securities market in the United States may be subject to reduced rates of taxation, provided further that the foreign corporation was not, in the year prior to the year in which the dividends are paid, and is not, in the year in which the dividends are paid, a passive foreign investment company (see “Passive Foreign Investment Company” below). A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. Under current U.S. Treasury Department guidance, our ADSs, which are listed on the New York Stock Exchange,NYSE, but not our shares, are treated as readily tradable on an established securities market in the United States. Thus, we do not believe that dividends that we pay on our shares that are not backedrepresented by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will continue to be readily tradable on an established securities market in later years, or that our shares will be readily tradable on an established securities market in any given year. IndividualsNon-corporate U.S. holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss, or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code, will not be eligible for the reduced rates of taxation regardless of the trading status of our shares or ADSs. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisor regarding the application of these rules given your particular circumstances.

The amount of any dividend paid in NT dollars will equal the U.S. dollar value of the NT dollars you receive, calculated by reference to the exchange rate in effect on the date you actually or constructively receive the dividend, which in the case of an ADS will be the date actually or constructively received by the depositary, regardless of whether the NT dollars are actually converted into U.S. dollars. If the NT dollars received as a dividend are converted into U.S. dollars on the date they are actually or constructively received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the NT dollars received as a dividend are not converted into U.S. dollars on the date of receipt, you will have a basis in the NT dollars equal to their U.S. dollar value on the date of receipt. Any gain or loss you realize if you subsequently sell or otherwise dispose of the NT dollars will be treated as ordinary income or loss from sources within the United States for foreign tax credit limitation purposes.

Subject to certain conditions and limitations under the Code, you may be entitled to a credit or deduction against your U.S. federal income taxes for the net amount of any Republic of ChinaROC taxes that are withheld from dividend distributions made to you. In determining the amounts withheld in respect of Republic of ChinaROC taxes, any reduction of the amount withheld on account of a Republic of ChinaROC credit in respect of the 10% retainedunappropriated earnings tax imposed on us is not considered a withholding tax and will not be treated as distributed to you or creditable by you against your U.S. federal income tax. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For purposes of calculating the foreign tax credit, dividends we pay with respect to shares or ADSs will generally be considered passive category income from sources outside the United States. Further, a U.S. holder that:

 

has held shares or ADSs for less than a specified minimum period during which it is not protected from risk of loss, or

 

is obligated to make payments related to the dividends,

may not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on shares or ADSs. The rules governing the foreign tax credit are complex. We therefore urge you to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.

To the extent that the amount of any distribution you receive exceeds our current and accumulated earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in your adjusted basis in the shares or ADSs and thereby increasing the amount of gain, or decreasing the amount of loss, you will recognize on a subsequent disposition of the shares or ADSs. The balance in excess of adjusted basis, if any, will be taxable to you as capital gain recognized on a sale or exchange. However, we do not expect to keep earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend.

It is possible that pro rata distributions of shares or ADSs to all stockholders may be made in a manner that is not subject to U.S. federal income tax. The basis of any new shares or ADSs so received will generally be determined by allocating your basis in the old shares or ADSs between the old shares or ADSs and the new shares or ADSs, based on their relative fair market values on the date of distribution.

For U.S. tax purposes, any such tax-free share distribution would not result in foreign source income to you. Consequently, you may not be able to use the foreign tax credit associated with any Republic of ChinaROC withholding tax imposed on such distributions unless you can use the credit (subject to applicable limitations) against U.S. federal income tax due on other foreign source income in the appropriate category for foreign tax credit purposes.

Taxation of Capital Gains

When you sell or otherwise dispose of your shares or ADSs, you will generally recognize capital gain or loss in an amount equal to the difference between the U.S. dollar value of the amount realized for the shares or ADSs and your basis in the shares or ADSs, determined in U.S. dollars. Such gain or loss will generally belong-term capital gain or loss if you have held the shares or ADSs for more than one year. If you are an individual or other non-corporate holder, long-term capital gains will be eligible for reduced rates of taxation. Your ability to deduct capital losses is subject to limitations. For foreign tax credit limitation purposes, such gain or loss will generally be treated as U.S. source gain or loss. Consequently, you may not be able to use the foreign tax credit arising from any Republic of ChinaROC tax imposed on the disposition of shares or ADSs unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources. If you are an individual or other non-corporate holder and have held the shares or ADSs being sold or otherwise disposed for more than one year, your gain recognized will be eligible for reduced rates of taxation. Your ability to deduct capital losses is subject to limitations.

Any Republic of ChinaROC securities transaction taxes that you pay generally will not be creditable foreign taxes for U.S. federal income tax purposes, but you may be able to deduct such taxes, subject to certain limitations under the Code. You are urged to consult your tax advisors regarding the U.S. federal income tax consequences of these taxes.

Passive Foreign Investment Company

We believe that we were not a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our taxable year ending on December 31, 2013,2015, and we do not expect to become onea PFIC for our current taxable year or in the future, although there can be no assurance in this regard. If we were treated as a PFIC for any taxable year during which you held our shares or ADSs, you could be subject to additional U.S. federal income taxes on gain recognized with respect to the shares or ADSs and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules.

Non-corporate U.S. holders will not be eligible for reduced rates of taxation on any dividends received from us, if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.

Information Reporting and Backup Withholding

In general, information reporting will apply to dividends in respect of our shares or ADSs and the proceeds from the sale, exchange or redemptionother disposition of our shares or ADSs that are paid to you within the United States (and in

certain cases, outside the United States), unless you are an exempt recipient such as a corporation. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.

AnyBackup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

Information Return under Section 6045B of the Internal Revenue Code

Section 6045B of the Code imposes certain reporting requirements on us with respect to any organizational action that affects the basis of our shares or ADSs, such as the capital reduction plan described in Item 9 under “A. Offer and Listing Details”. We intend to comply with the requirements by making available on our website IRS Form 8937, “Report of Organizational Actions Affecting Basis of Securities”, with respect to such capital reduction plan and any other such organizational action.

G.F. Dividends and Paying Agents

Not applicable.

H.G. Statement by Experts

Not applicable.

I.H. Documents on Display

We have filed this annual report on Form 20-F, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we have already filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.

You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’s regional offices in New York, New York and Chicago, Illinois. You also can also requestobtain copies of this annual report, including the exhibits incorporated by reference in this annual report, from the SEC’s Public Reference Room and regional offices upon payment of a duplicating fee, by writing information on the operation of the SEC’s Public Reference Room.fee.

The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may be accessed through this web site.

J.I. Subsidiary Information

Not applicable.

 

ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss related to adverse changes in market prices, including interest rates and foreign exchange rates, of financial instruments. In the normal course of business, we are routinely subject to a variety of risks, including market risk associated with interest rate movements, currency rate movements onnon-NT dollar denominated assets and liabilities and equity price movements on our portfolio of equity securities.

We regularly assess these financial instruments and their ability to address market risk and have established policies and business practices to protect against the adverse effects of these and other potential exposures.

Interest Rate Risk

We do not expect interest rate risk to have a material impact on our financial condition and results of operations. Please refer to “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources” for a discussion of our loans.

For our non-fixed interest rate loans, the interest rates will change in accordance with the fixed rates of the banks we borrowed from. For the financial assets, the risk associated with fluctuating interest rates is principally confined to our cash deposits in banks, which is one of the many ways we manage our capital. Assuming an increase or decrease of 0.25% in the interest rates of our non-fixed interest rate financial assets and loans, our profit before tax for the year ended December 31, 20132015 would have increased or decreased by NT$22.211.8 million (US$0.70.4 million). We have not used any derivative financial instruments to hedge interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. As of December 31, 2013,2015, our cash and cash equivalents amounted to NT$14.630.3 billion (US$0.50.9 billion). Interest income from our cash deposits in banks accounts for only a very small percentage of our total revenue. Therefore, we believe our exposure to interest rate risk is immaterial.

Foreign Currency Risk

We are exposed to foreign currency risk as a result of (i) our foreign currency and derivative trading activities; (ii) our telecommunications equipment being sourced from overseas suppliers; (iii) our international settlement payments associated with our services for international calls and roaming traffic; and (iv) securities denominated in foreign currencies.

We entered into currency swap and forward exchange contracts to reduce our exposure to foreign currency risk due to fluctuations in exchange rates. We had no outstanding currency swap contracts as of December 31, 2013. Outstanding forward exchange contracts on December 31, 20132015 were as follows:

 

FX Instrument

  Currencies
Involved
  Maturity Period  Contract Amount

Forward exchange contracts-Buy

  EUR$/NT$/US$  2016.03-06  2014.01EUR$18 million/NT$659 million

Forward exchange contracts-Buy

  US$/NT$90 million/US$3 million2016.01  US$1 million/NT$26 million

Forward exchange contracts-Buy

EUR$/NT$2016.03-06EUR$9 million/NT$306 million

Note 3738 to our consolidated financial statements included elsewhere in this annual report provides a sensitivity analysis for foreign currency risk.

Equity Price Risk

We are exposed to equity price risk as a result of our available-for-sale equity securities, including publicly-traded equities, and we manage our equity investment portfolio in accordance with our internal regulations.policies and procedures.

The table below presents the carrying amount and unrealized gain or loss for our available-for-sale equity securities traded in an active market and with quoted market price as of December 31, 2013.2015.

 

   Carrying
Amount
   Unrealized
Gain
   Unrealized
Loss
 
   NT$   NT$   NT$ 
   (in millions) 

Available-for-sale equity securities

      

Domestic listed stocks

  $3,046    $84    $227  

Foreign listed stocks

   24     12     —    
  

 

 

   

 

 

   

 

 

 
   3,070     96     227  
  

 

 

   

 

 

   

 

 

 
   Carrying
Amount
   Unrealized
Gain
   Unrealized
Loss
 
   NT$   NT$   NT$ 
   (in millions) 

Available-for-sale equity securities

      

Domestic listed stocks and emerging stocks

   3,243             9     680  
  

 

 

   

 

 

   

 

 

 

There is no significant or prolonged decline in the fair value of the security below its cost and we consider there is no objective evidence of impairment.

The total value of our listed available-for-sale equity portfolio amounted to NT$3.13.2 billion (US$102.498.9 million) as of December 31, 2013,2015, which decreased approximately 43%17% compared with the total value of our listed equity portfolio as of December 31, 2012.2014. This decrease was mainly due to the fact that we redeemed all our interests in several open-ended mutual funds.decreasing price of

the equity securities held by us. Compared to a net unrealized gain of NT$262920 million on our equity portfolio at the end of 2012,2014, we recognized a net unrealized loss of NT$131671 million (US$4.420.5 million) on our equity portfolio as of December 31, 2013.2015. The net unrealized loss was mainly due to the decreasing price of the equity securities we held.mentioned above.

For the year ended December 31, 2013,2015, we did not recognize anyrecognized other-than-temporary impairment losses for listed stocks of NT$25.9 million (US$0.8 million) and we recognized an impairment loss of NT$6681.3 million (US$2.22.5 million) for non-listed stock. The value of our equity holdings fluctuates depending on the market conditions. Assuming an increase or decrease of 5% in the equity prices, our comprehensive income before income tax for the year ended December 31, 20132015 would have increased or decreased by NT$153162.1 million (US$5.14.9 million). However, we do not expect the gains and losses in the values of the equities that we hold to have a material impact on our financial condition and results of operations.

Other Market Risk

We have made investments in corporate bonds and bank debentures issued by domestic public companies with strong industry leadership and solid profits. Industries in which we have invested include materials, financials, utilities, technology, and so on. As of December 31, 2013,2015, total value of our investments in corporate bonds and bank debentures amounted to NT$11.84.0 billion (US$394.4122.6 million), all of which were classified asheld-to-maturity financial assets. The fair value of these corporate bonds and bank debentures is valued usingmarket-based observable inputs including duration, yield rate and credit rating, which are subject to fluctuation based on many factors such as prevailing market conditions. However, we do not expect the gains and losses in the values of these investments to have a material impact on our financial condition and results of operations.

 

ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A. Debt Securities

Not applicable

B. Warrants and Rights

Not applicable

C. Other Securities

Not applicable

D. American Depositary Shares

Depositary Fees

Under the terms of the deposit agreement for our ADSs, an ADS holder may have to pay the following service fees to the depositary:

 

Service

  

Fees

Issuance of ADSs

  Up to US$5.00 per 100 ADS issued

Cancellation of ADSs

  Up to US$5.00 per 100 ADS cancelled

Distribution of cash dividends or other cash distributions

  Up to US$2.00 per 100 ADS held

Distribution of ADSs pursuant to stock dividends, free stock distributions or exercises of rights

  Up to US$5.00 per 100 ADS held

Distribution of securities other than ADSs or rights to purchase additional ADSs

  Up to US$5.00 per 100 ADS held

Depositary Charges

In addition, an ADS holder shall be responsible for the following charges:

 

taxes (including applicable interest and penalties) and other governmental charges;

 

such registration fees as may from time to time be in effect for the registration of common shares or other deposited securities on the share register and applicable to transfers of common shares or other deposited securities to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;

 

such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of ADS holders and beneficial owners of ADSs;

 

the expenses and charges incurred by the depositary in the conversion of foreign currency; and

 

the fees and expenses incurred by the depositary, the custodian or any nominee in connection with the servicing or delivery of deposited securities.

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

Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividends, rights offerings), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or un-certificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts via the central clearing and settlement system, The Depository Trust Company, or DTC, the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.

In the event of refusal to pay the depositary fees and charges, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.

The fees and charges ADS holders may be required to pay may vary over time and may be changed by us and by the depositary. ADS holders will receive prior notice of such changes.

Payments by Depositary

In 2013,2015, we received the followingUS$0.8 million net payments (after deducting the 30% U.S. withholding tax) from JPMorgan Chase Bank, N.A., the Depositary Bank for our American Depository Receipt, or ADR, program:program. The payments were intended to cover certain of our expenses incurred in relation to the ADR program for the year, including:

 

Item

US$
(in thousands)

Reimbursement of investor relations efforts

360

Reimbursement of legal fees

125

Reimbursement of NYSE listing fees

29

Reimbursement of proxy process expenses

13

Reimbursement of SEC filing fees

3

Reimbursement of Sarbanes-Oxley and accounting related expenses in connection with ongoing SEC compliance and listing requirements

845

Reimbursement of other ADR program-related expenses

110

Total

1,485

investor relations efforts;

 

*Total may not equal to sum of all items due to rounding. The amounts in the table are disclosed on a net basis after deducting US$636,366 that has been withheld for U.S. taxes. On December 17, 2010, the IRS published General Legal Advice Memorandum 2010-006 (the GLAM), which concludes that payments made by a U.S. depository institution to a non-U.S. corporation for expenses the ADR issuer incurs to institute a sponsored ADR program are treated as U.S.-source royalty income. Such income is therefore subject to a U.S. withholding tax of 30% or a lower applicable income tax treaty rate.
legal fees, NYSE listing fees, proxy process expenses, and SEC filing fees;

Sarbanes-Oxley and accounting related expenses in connection with ongoing SEC compliance and listing requirements; and

other ADR program-related expenses.

PART II

 

ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

 

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

None.

 

ITEM 15.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this annual report, an evaluation has been carried out under the supervision and with the participation of our management, including our chief executive officer and our acting chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our chief executive officer and acting chief financial officer have concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed in this annual report is recorded, processed, summarized and reported to them for assessment, and required disclosure is made within the time period specified in the rules and forms of the SEC.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB), or IFRSs, and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with IFRSs, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the SEC, management assessed the effectiveness of our internal control over financial reporting as of December 31, 20132015 using criteria established in Internal Control-Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 20132015 based on the criteria established in Internal Control-Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The effectiveness of our internal control over financial reporting has been audited by

Deloitte & Touche, an independent registered public accounting firm who has also audited our consolidated financial statements as of and for the year ended December 31, 2013. Deloitte & Touche2015, has issued an attestation report on the effectiveness of our internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Attestation Report of the Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Chunghwa Telecom Co., Ltd.

We have audited the internal control over financial reporting of Chunghwa Telecom Co., Ltd. and subsidiaries (the “Company”) as of December 31, 2013,2015, based on criteria established in Internal Control—Integrated Framework (1992)(2013) issued 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 International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB) (“IFRSs”). 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 IFRSs, 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, 2013,2015, based on the criteria established in Internal Control—Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 20132015 of the Company and our report dated April 28, 201427, 2016 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the convenience translation of New Taiwan dollar amounts into U.S. dollar amounts.

 

/S/s/ DELOITTE & TOUCHE

Deloitte & Touche

Taipei, Taiwan

The Republic of China

April 28, 201427, 2016

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 20132015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT

Chung-Fern Wu is our audit committee financial expert and independent director. See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”

The SEC has indicated that the designation of Dr. Wu as the audit committee financial expert does not: (i) make Dr. Wu an “expert” for any purpose, including without limitation for purposes of Section 11 of the Securities Act of 1933, as amended, as a result of this designation; (ii) impose any duties, obligations or liability on Dr. Wu that are greater than those imposed on her as a member of the audit committee and the board of directors in the absence of such designation; or (iii) affect the duties, obligations or liability of any other member of the audit committee or the board of directors.

 

ITEM 16B.CODE OF ETHICS

We have adopted a Code of Ethics and Ethical Corporate Management Best Practice Principles that applies to our directors, employeesmanagers and officers,employees, including our chief executive officer and acting chief financial officer. We have posted a copy of our Code of Ethics and Ethical Corporate Management Best Practice Principles on our website athttp://www.cht.com.tw/en/aboutus/companyrules.html

 

ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte & Touche, our principal accountant for the years indicated. We did not pay any other fees to Deloitte & Touche during the periods indicated below.

 

  Year Ended December 31 
  Year Ended December 31       2014       2015 
  2012   2013   NT$   NT$   US$ 
  (in millions)   (in millions) 

Audit fees(1)

  NT$56.9    NT$57.9    US$1.9     60.2     63.0     1.9  

Audit-related fees(2)

   —       —       —       —       —       —    

Tax fees(3)

   —       —       —       —       0.2     —    

All other fees(4)

   4.5     5.5     0.2     1.2     —       —    

 

(1)“Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal accountant for the audit of our annual consolidated financial statements or services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.

(2)“Audit-related fees” means the aggregate fees billed in each of the fiscal years listed for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit fees”. Services comprising the fees disclosed under the category of “Audit related fees” involve principally the issuance of agreed upon procedures letters.
(3)“Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning. Services comprising the fees disclosed under the category of “Tax Fees” involve tax advice.
(4)“All other fees” means the aggregate fees billed in each of the last two fiscal years for products and services provided by our principal accountant other than the services reported in items (1) to (3) above. The amount for the years ended December 31, 2012 and 20132014 mainly consisted of professional services rendered by the Deloitte & Touche for consultation of the Personal Information Protection Act.

All audit and non-audit services provided by Deloitte & Touche were pre-approved by our audit committee according to the revised Rule 2-01(c)201(c) (7) of Regulation S-X, entitled “Audit Committee Administration of the Engagement”, that served to strengthen requirements regarding auditor independence.

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

None.

 

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

Not applicable.

 

ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

 

ITEM 16G.CORPORATE GOVERNANCE

As a ROC company listed on the New York Stock Exchange, or NYSE, we are subject to the U.S. corporate governance rules to the extent that these rules are applicable to foreign private issuers. The following summary details the significant differences between our corporate governance practices and corporate governance standards for non-foreign private issuers (e.g., U.S. companies) under the NYSE Listed Company Manual.

Under Section 303A of the NYSE Listed Company Manual, NYSE-listed foreign private issuers 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 Sections 303A.06, 303A.11, 303A.12(b) and 303A.12(c) of the NYSE Listed Company Manual.

The Legal Framework. In general, corporate governance principles for Taiwanese companies are set forth in the Company Act of the Republic of China, or ROC Company Act, the ROC Securities Exchange Act, regulations promulgated by the Securities and Futures Bureau of the Financial Supervisory CommissionFSC and, to the extent they are listed on the TWSE, listing rules of the TWSE. Corporate governance principles under provisions of ROC law may differ in significant ways to corporate governance standards for non-foreign private issuers listed on the NYSE. Committed to high standards of corporate governance, we have generally brought our corporate governance in line with U.S. regulations. However, we have not adopted certain recommended NYSE corporate governance standards where such standards are not in conformity with ROC laws or regulations or generally prevailing business practices in Taiwan. We believe the following to be the significant differences between our corporate governance practices and NYSE corporate governance rules applicable to non-foreign private issuers listed on the NYSE.

Director Independence. The NYSE corporate governance rules applicable to non-foreign private issuers listed on the NYSE require companies to have a majority of independent directors on the board of directors. The ROC Securities Exchange Act requires the independent directors of a public company to comprise of no less than one-fifth of the board of directors. We currently have five independent directors on our thirteen-member board of directors. We follow the standards regulated under ROC Securities Exchange Act and by the FSC for determining director independence, which are comparable to the standards imposed by the NYSE.

In addition, under the ROC requirements, our board of directors is not required to make a formal determination of a director’s independence. Nevertheless, we believe that our independent directors are free from any business or other relationships that would impair the exercise of their independent judgment. Furthermore, pursuant to the NYSE Listed Company Manual, non-executive directors must meet on a regular basis without the management directors present. All of our directors attend our board of directors’ meetings; however, no separate meeting is held among non-executive directors.

Audit Committee. On April 1, 2003, the SEC adopted final rules relating to the audit committee requirements. Foreign private issuers listed on the NYSE were required to comply with the related NYSE corporate governance rules by July 31, 2005. Our audit committee was established in September 2004 in

accordance with the rules set forth in the NYSE Listed Company Manual. According to the NYSE corporate governance rules applicable to non-foreign private issuers listed on the NYSE, the board must review status of any audit member that serves on more than three audit committees. There is no such requirement under the ROC law, which allows a person to serve as an independent director on up to four public companies in the ROC.

Section 303A.07 of the NYSE Listed Company Manual requires issuers to have at least three directors on the audit committee that meets the definition of independence set forth under Rule 10A-3 of the Exchange Act and Section 303A of the NYSE Listed Company Manual. There is no such requirement under the ROC law, which requires all independent directors of a public company to be members of the audit committee if the company has established such a committee.

On February 20, 2013, the FSC of the ROC announced that any (i) financial holding company, bank, bill finance company or insurance company, (ii) listed company whose paid-in capital reaches NT$50 billion or (iii) integrated securities firm controlled by a financial holding company, should establish an audit committee to replace supervisors. As a result, our new audit committee started from the date of the annual general meeting on June 25, 2013. See “Item 6. Directors, Senior Management and Employees—C. Board Practices.” As a result, we now simultaneously comply with the relevant rules of the NYSE Listed Company Manual and the relevant rules and regulations in the ROC.

Nominating/Corporate Governance Committee and Corporate Governance Principles. The NYSE corporate governance rules applicable to non-foreign private issuers listed on the NYSE require companies to have a nominating/corporate governance committee, composed entirely of independent directors. In addition to identifying individuals qualified to become board members, the nominating/corporate governance committee must develop and recommend to the board a set of corporate governance principles. The ROC Company Act does not require companies incorporated in the ROC to have a nominating/corporate governance committee. We do not currently have a nominating committee or a corporate governance committee.

Currently, our board of directors performs the duties of a corporate governance committee and regularly reviews our corporate governance principles and practices. The ROC Company Act requires that directors shall be elected by stockholders. Our articles of incorporation requires us, beginning in the fifth commencement, to establish at least three independent directors in the number of directors. The elections for directors shall proceed with the candidate nomination system; the stockholders shall elect the directors from among the nominees listed in the roster of director candidates. Stockholders holding stock over 1% are entitled to nominate candidates of directors in written to us. The numbers of candidates nominated by stockholders shall not exceed the numbers of

directors to be elected; neither the numbers of candidates nominated by the Board. Elections for independent and non-independent directors shall proceed concurrently, and the number of elected independent and non-independent directors shall be calculated separately.

Non-foreign private issuers listed on the NYSE are also required to adopt and disclose corporate governance guidelines. We currently comply with the ROC Non-Binding Corporate Governance Best-PracticeBest Practice Principles for TSEC/TWSE/GTSM Listed Companies promulgated by the TWSE, or Best-PracticeBest Practice Principles, and we provide an explanation of differences between our practice and the principles, if any, in our ROC annual report.

Compensation Committee. The NYSE corporate governance rules applicable to non-foreign private issuers listed on the NYSE require companies to have a compensation committee, composed entirely of independent directors. The Article 14-6 of ROC Securities and Exchange Act requires all listed companies to establish a compensation committee for directors, supervisors and managers’ compensation, which includes salary, stock options and other rewards, as well as authorizes the Competent Authority (i.e., Financial Supervisory Commission)FSC) to enact a regulation on the authorities of the compensation committee and the qualifications of its members. See “Item 6. Directors, Senior Management and Employees—C. Board Practices” for description of our compliance.

Code of Business Conduct and Ethics. The NYSE corporate governance rules applicable to non-foreign private issuers listed on the NYSE require companies must adopt a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. We have adopted Code of Ethics which applies to our directors, managers and employees, and Ethical Corporate Management Best Practice Principles that applies to our directors, supervisors, managers, employees and persons having substantial control over us. We have filed Code of Ethics and Ethical Corporate Management Best Practice Principles as an exhibit to our annual report filed with the U.S. SEC and a copy is available to any stockholder upon request.

Equity Compensation Plans. The NYSE corporate governance rules applicable to non-foreign private issuers listed on the NYSE require that equity compensation plans be approved by a company’s stockholders. Under the ROC Company Act and the ROC Securities and Exchange Act, stockholders’the distribution of bonuses toemployees should be decided by the board of directors and reported to stockholders. Stockholders’ approval is required for the distribution of employee bonuses and any issuances of restricted stock to employees, whileand the board of director has authority to approve employee stock option plans and to grant options to employees pursuant to such plans, subject to the approval of the FSC and to approve share buy-back programs and transfer of shares to employees under such programs. We intend to follow only the ROC requirements.

Means to Communicate with Non-Management Directors. The NYSE corporate governance rules applicable to non-foreign private issuers listed on the NYSE require companies to establish a means for stockholders, employees and other interested parties to communicate with non-management directors. The ROC law does not have comparable requirements. However, according to the Best Practice Principles, companies are required to establish channels of communication with employees and encourage employees to communicate directly with the management or directors so as to reflect employees’ opinions about the management, financial conditions and material decisions of the company concerning employee welfare. We have complied with these provisions.

Internal Audit Function. The NYSE corporate governance rules applicable to non-foreign private issuers listed on the NYSE require companies to establish an internal audit function to provide management and the audit committee with assessments of the company’s risk management processes and system of internal control. We have complied with the Best-Practice Principles by setting up an internal control/audit system in accordance with the ROC Regulations Governing Establishment of Internal Control Systems by Public Companies.

CEO Certification to the NYSE.The NYSE listing standards require the CEO of companies to certify compliance with NYSE corporate governance standards annually. ROC law does not contain such requirement. Inrequirement.In this regard, we only follow ROC corporate governance requirement which does not require CEO annual

certification. However, our CEO and CFO are required to certify in the 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 operationoperations of our company.

 

ITEM 16H.MINE SAFETY DISCLOSURE

Not applicable.

PART III

 

ITEM 17.FINANCIAL STATEMENTS

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

 

ITEM 18.FINANCIAL STATEMENTS

The following is a list of the consolidated financial statements and report of independent registered public accounting firm included in this annual report beginning on page F-1.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

Page

 

Report of Independent Registered Public Accounting Firm

   F-1  

Consolidated Balance Sheets as of December 31, 20122014 and 20132015

   F-2  

Consolidated Statements of Comprehensive Income for the years ended December 31, 20122013, 2014 and 20132015

   F-4  

Consolidated Statements of Changes in Equity for the years ended December 31, 20122013, 2014 and 20132015

   F-6  

Consolidated Statements of Cash Flows for the years ended December  31, 20122013, 2014 and 20132015

   F-7  

Notes to Consolidated Financial Statements

   F-9  

 

ITEM 19.EXHIBITS

 

Exhibit
Number
  Description of Exhibits
  1.1  Statute of Chunghwa Telecom Co., Ltd., as last amended on November 29, 2000, which was subsequently abolished by the President of the ROC on December 24, 2014 (English translation) (incorporated by reference to Exhibit 1.1 to the Registrant’s Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (File No. 001-31731) filed with the Commission on May 17, 2004).
  1.2*  Articles of incorporation of Chunghwa Telecom Co., Ltd. (English translation), as last amended by Annual General Meeting on June 25, 2013.26, 2015.
  2.1  

Form of Amended and Restated Deposit Agreement dated as of November 2007 among Chunghwa Telecom Co. Ltd., JPMorgan Chase Bank, N.A., as depositary, and all holders from time to time of ADRs issued thereunder, including the Form of American Depositary Receipt (incorporated by reference to Exhibit (a) to the Registrant’s Registration Statement on Form F-6 (File No.333-147321)

filed with the Commission on November 13, 2007).

  8.1*  List of Subsidiaries.
11.1*11.1  Code of Ethics (English translation), as last amendedapproved by the board of directors on August 13, 2013.2013 (English translation) (incorporated by reference to Exhibit 11.1 to the Registrant’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013 (File No. 001-31731) filed with the Commission on April 28, 2014).
11.2*11.2  Ethical Corporate Management Best Practice Principles (English translation), as last amendedapproved by the board of directors on August 13, 2013.2013 (English translation) (incorporated by reference to Exhibit 11.2 to the Registrant’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013 (File No. 001-31731) filed with the Commission on April 28, 2014).
12.1*  Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2*  Certification of our Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1*  Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2*  Certification of our Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*Filed herewith.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

CHUNGHWA TELECOM CO., LTD.
By: /S/s/ LIH-SHYNG TSAI
 Name:  Lih-Shyng Tsai
 Title:    Chairman and Chief Executive Officer

Date: April 28, 201427, 2016


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Chunghwa Telecom Co., Ltd.

We have audited the accompanying consolidated balance sheets of Chunghwa Telecom Co., Ltd. and subsidiaries (the “Company”) as of January 1, 2012, December 31, 20122014 and December 31, 2013,2015, and the related consolidated statements of comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2012 and 2013,2015, all expressed in New Taiwan dollars. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 Chunghwa Telecom Co., Ltd. and subsidiaries as of January 1, 2012, December 31, 20122014 and December 31, 2013,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 and 2013,2015, in conformity with International Financial Reporting Standards as issued by the International Accounting Standard Board (“IASB”).

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 6 to the consolidated financial statements. Such U.S. dollar amounts are presented solely for the convenience of the readers.

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, 2013,2015, based on the criteria established in Internal Control Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 28, 201427, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/    DELOITTE & TOUCHE

Deloitte & Touche

Taipei, Taiwan

The Republic of China

April 28, 201427, 2016

CHUNGHWA TELECOM CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2014 AND 2015

(In Millions of New Taiwan or U.S. Dollars)

 

 

      January 1,
2012
   December 31,
2012
   December 31, 2013       2014   2015 
  Notes   NT$   NT$   NT$   US$ (Note 6)   Notes   NT$   NT$   US$ (Note 6) 

ASSETS

                  

CURRENT ASSETS

                  

Cash and cash equivalents

   3, 7    $26,407    $30,938    $14,585    $489     3, 7    $23,560    $30,271    $923  

Financial assets at fair value through profit or loss

   3, 8     46     3     —       —       3, 8     1     —       —    

Hedging derivative assets

   3, 21     —       1     —    

Available-for-sale financial assets

   3, 9     2,499     2,250     24     1     3, 9     —       —       —    

Held-to-maturity financial assets

   3, 10     1,201     4,250     4,264     143     3, 10     3,457     1,881     57  

Trade notes and accounts receivable, net

   3, 4, 11     22,396     24,355     22,901     768     3, 4, 11     26,228     26,926     821  

Accounts receivable from related parties

   39     34     44     69     2     40     81     42     1  

Inventories

   3, 4, 12, 40     4,822     7,196     7,848     263     3, 4, 12, 41     7,097     8,780     268  

Prepayments

   13, 38     1,889     1,986     2,224     75     13, 40     2,444     2,669     81  

Other current monetary assets

   8, 14, 27     43,051     24,449     4,636     155     14, 28     3,325     3,301     101  

Other current assets

   8, 20     3,039     4,476     3,962     133     20, 32, 41     3,219     2,336     72  
    

 

   

 

   

 

   

 

     

 

   

 

   

 

 

Total current assets

     105,384     99,947     60,513     2,029       69,412     76,207     2,324  
    

 

   

 

   

 

   

 

     

 

   

 

   

 

 

NONCURRENT ASSETS

                  

Available-for-sale financial assets

   3, 9     2,818     5,746     5,470     183     3, 9     6,281     5,511     168  

Held-to-maturity financial assets

   3, 10     13,495     11,796     7,502     251     3, 10     4,028     2,140     65  

Investments accounted for using equity method

   3, 16     2,520     2,191     2,359     80     3, 16     2,750     2,895     88  

Property, plant and equipment

   3, 4, 17, 38, 40     295,032     297,342     302,714     10,148     3, 4, 17, 40, 41     302,650     296,399     9,039  

Investment properties

   3, 4, 18     9,060     7,789     8,018     269     3, 4, 18     7,621     7,902     241  

Intangible assets

   3, 4, 19     6,278     5,782     44,399     1,488     3, 4, 19     42,825     50,447     1,538  

Deferred income tax assets

   3, 31     1,056     1,306     1,506     50     3, 32     1,826     2,061     63  

Prepayments

   13, 39     3,547     3,554     3,608     121     13, 40     3,504     3,612     110  

Other noncurrent assets

   20, 27, 40     3,858     4,596     4,883     164     20, 28, 41     5,601     5,597     172  
    

 

   

 

   

 

   

 

     

 

   

 

   

 

 

Total noncurrent assets

     337,664     340,102     380,459     12,754       377,086     376,564     11,484  
    

 

   

 

   

 

   

 

     

 

   

 

   

 

 

TOTAL

    $443,048    $440,049    $440,972    $14,783      $446,498    $452,771    $13,808  
    

 

   

 

   

 

   

 

     

 

   

 

   

 

 

(Continued)

      January 1,
2012
   December 31,
2012
   December 31, 2013       2014   2015 
  Notes   NT$   NT$   NT$ US$ (Note 6)   Notes   NT$   NT$   US$ (Note 6) 

LIABILITIES AND EQUITY

                 

CURRENT LIABILITIES

                 

Short-term loans

   21    $75    $111    $254   $9     22    $564    $110    $3  

Financial liabilities at fair value through profit or loss

   3, 8     4     2     —      —       3, 8     —       —       —    

Hedging derivative liabilities

   3, 21     —       —       —    

Trade notes and accounts payable

   23     14,265     13,513     15,589   523     24     18,519     16,301     497  

Payables to related parties

   39     788     837     557   19     40     408     611     19  

Current tax liabilities

   3, 31     8,044     7,139     6,171   207     3, 32     6,982     9,171     280  

Other payables

   24     26,302     26,102     26,792   898     25     24,335     25,487     777  

Provisions

   3, 25     148     221     129   4     3, 26     179     190     6  

Advance receipts

   26     11,502     10,194     9,464   317     27     9,913     9,567     292  

Current portion of long-term loans

   22     702     8     300   10     23, 41     —       8     —    

Other current liabilities

     1,955     1,598     1,599   53       1,619     1,501     46  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

Total current liabilities

     63,785     59,725     60,855    2,040       62,519     62,946     1,920  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 
    

 

   

 

   

 

  

 

 

NONCURRENT LIABILITIES

                 

Long-term loans

   22     1,058     2,050     1,400    47     23, 41     1,900     1,742     53  

Deferred income tax liabilities

   3, 31     111     98     101    3     3, 32     132     148     5  

Provisions

   3, 25     34     45     123    4     3, 26     93     58     2  

Customers’ deposits

   39     5,014     4,911     4,835    162     40     4,759     4,726     144  

Accrued pension liabilities

   3, 27     2,950     4,577     5,482    184  

Net defined benefit liabilities

   3, 4, 28     6,470     7,099     216  

Deferred revenue

     3,888     3,839     3,701    124     3     3,398     3,616     110  

Other noncurrent liabilities

     866     1,314     1,335    45       1,515     3,097     94  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

Total noncurrent liabilities

     13,921     16,834     16,977    569       18,267     20,486     624  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

Total liabilities

     77,706     76,559     77,832    2,609       80,786     83,432     2,544  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

EQUITY ATTRIBUTABLE TO STOCKHOLDERS OF THE PARENT

                 

Common stock

     77,574     77,574     77,574    2,601  

Common stocks

     77,574     77,574     2,366  

Additional paid-in capital

     168,872     168,877     163,294    5,474       146,720     146,733     4,475  

Retained earnings

                 

Legal reserve

     66,122     70,829     74,819    2,508       76,893     77,574     2,366  

Special reserve

     2,676     2,676     2,676    90       2,820     2,676     82  

Unappropriated earnings

     45,888     39,037     40,075    1,344       55,895     59,448     1,813  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

Total retained earnings

     114,686     112,542     117,570    3,942       135,608     139,698     4,261  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

Other adjustments

     29     161     (144  (5     886     269     8  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

Total equity attributable to stockholders of the parent

   15, 28     361,161     359,154     358,294    12,012     15, 29     360,788     364,274     11,110  

NONCONTROLLING INTERESTS

   15     4,181     4,336     4,846    162     15, 29     4,924     5,065     154  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

Total equity

     365,342     363,490     363,140    12,174       365,712     369,339     11,264  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

TOTAL

    $443,048    $440,049    $440,972   $14,783      $446,498    $452,771    $13,808  
    

 

   

 

   

 

  

 

     

 

   

 

   

 

 

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

CHUNGHWA TELECOM CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015

(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 
  

  

   2012 2013       2013 2014 2015 
  Notes   NT$ NT$ US$ (Note 6)   Notes   NT$ NT$ NT$ US$ (Note 6) 

REVENUES

   29, 39    $221,420   $227,981   $7,643     30, 40    $227,981   $226,609   $231,795   $7,069  

OPERATING COSTS

   12, 39     141,513   147,289   4,938     12, 40     147,289   148,380   148,126   4,517  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

GROSS PROFIT

     79,907    80,692    2,705       80,692   78,229   83,669   2,552  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

OPERATING EXPENSES

             

Marketing

     22,208    25,164    844       25,164   26,145   25,071   765  

General and administrative

     4,021    4,190    140       4,190   4,414   4,515   138  

Research and development

     3,698    3,726    126       3,726   3,504   3,617   110  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Total operating expenses

   39     29,927    33,080    1,110     40     33,080   34,063   33,203   1,013  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

OTHER INCOME AND EXPENSES

   30     (1,569  59    2     31     59   631   (105 (3
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

INCOME FROM OPERATIONS

     48,411    47,671    1,597       47,671   44,797   50,361   1,536  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

NON-OPERATING INCOME AND EXPENSES

             

Interest income

     742    563    19       563   288   306   9  

Other income

   30, 39     441    356    12     31, 40     356   587   650   20  

Other gains and losses

   30, 39     (139  (124  (4   31, 40     (124 124   (228 (6

Financial costs

   30     (22  (36  (1

Share of the profit of associates and joint venture accounted for using equity method

   16     520    666    23  

Interest expenses

     (36 (46 (33 (1

Share of the profit of associates and joint ventures accounted for using equity method

   16     666   802   897   27  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Total non-operating income and expenses

     1,542    1,425    49       1,425   1,755   1,592   49  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

INCOME BEFORE INCOME TAX

     49,953    49,096    1,646       49,096   46,552   51,953   1,585  

INCOME TAX EXPENSE

   3, 31     7,336    6,478    217     3, 32     6,478   8,985   9,101   278  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

NET INCOME

     42,617    42,618    1,429       42,618   37,567   42,852   1,307  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

      

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

       

Items that will not be reclassified to profit or loss:

             

Remeasurements of defined benefit pension plans

     (1,539  (617  (21   28     (617 (492 (231 (7

Share of remeasurements of defined benefit pension plans of associates

     (18  (39  (1

Income tax relating to items that will not be reclassified

   31     265    105    4  

Share of remeasurements of defined benefit pension plans of associates and joint ventures

     (39 1   (25 (1

Income tax benefit relating to items that will not be reclassified to profit or loss

   28, 32     105   84   39   1  
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 
     (1,292  (551  (18     (551 (407 (217 (7
    

 

  

 

  

 

     

 

  

 

  

 

  

 

 

Items that may be reclassified subsequently to profit or loss:

       

Exchange differences arising from the translation of the foreign operations

    $129   $164   $24   $1  

(Continued)

CHUNGHWA TELECOM CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015

(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       2013 2014   2015 
      2012 2013   Notes   NT$ NT$   NT$ US$ (Note 6) 
  Notes   NT$ NT$ US$ (Note 6) 

Items that may be reclassified subsequently to profit or loss:

      

Exchange differences arising from the translation of the foreign operations

    $(58 $129   $4  

Share of exchange differences arising from the translation of the foreign operations of associates

     (8 4    —    

Unrealized gain (loss) on available-for-sale financial assets

     192   (392 (14   31     (392 878     (645 (20

Income tax relating to items that may be reclassified subsequently

     —     (6  —    

Cash flow hedges

   21, 31     —      —       1    —    

Share of exchange differences arising from the translation of the foreign operations of associates and joint ventures

   16     4   4     6    —    

Income tax benefit (expense) relating to items that may be reclassified subsequently

   32     (6 3     (2  —    
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 
     126    (265  (10     (265 1,049     (616 (19
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 

Total other comprehensive income (loss), net of income tax

     (1,166  (816  (28     (816 642     (833 (26
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 

TOTAL COMPREHENSIVE INCOME

    $41,451   $41,802   $1,401      $41,802   $38,209    $42,019   $1,281  
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 

NET INCOME ATTRIBUTABLE TO

              

Stockholders of the parent

    $41,492   $41,494   $1,391      $41,494   $36,970    $42,039   $1,282  

Noncontrolling interests

     1,125    1,124    38     15     1,124   597     813   25  
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 
    $42,617   $42,618   $1,429      $42,618   $37,567    $42,852   $1,307  
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO

              

Stockholders of the parent

    $40,350   $40,636   $1,362      $40,636   $37,594    $41,207   $1,256  

Noncontrolling interests

     1,101    1,166    39       1,166   615     812   25  
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 
    $41,451   $41,802   $1,401      $41,802   $38,209    $42,019   $1,281  
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 

EARNINGS PER SHARE

   32         33        

Basic

    $5.35   $5.35   $0.18      $5.35   $4.77    $5.42   $0.17  
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 

Diluted

    $5.33   $5.34   $0.18      $5.34   $4.76    $5.41   $0.17  
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 

EARNINGS PER EQUIVALENT

   32      

ADS

      

EARNINGS PER EQUIVALENT ADS

        

Basic

    $53.49   $53.49   $1.79      $53.49   $47.66    $54.19   $1.65  
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 

Diluted

    $53.34   $53.40   $1.79      $53.40   $47.58    $54.06   $1.65  
    

 

  

 

  

 

     

 

  

 

   

 

  

 

 

 

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

CHUNGHWA TELECOM CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015

(In Millions of New Taiwan or U.S. Dollars)

 

 

 Equity Attributable to Stockholders of the Parent      Equity Attributable to Stockholders of the Parent     
             Other Adjustments                    Other Adjustments       
     Retained Earnings Exchange
Differences
Arising from the
Translation of

the Foreign
Operations
  Unrealized
Gain (Loss)  on

Available-for-sale
Financial Assets
    Total Equity
Attributable to

Stockholders’
of the Parent
       Common
stocks
  Additional
Paid-in
Capital
  

 

Retained Earnings

 Exchange
Differences
Arising

from the
Translation of
the Foreign
Operations
  Unrealized
Gain (Loss) on
Available-for-sale
Financial Assets
  Cash Flow
Hedges
  Total Other
Adjustments
  Total Equity
Attributable to

Stockholders
of the Parent
  Noncontrolling
Interests
  Total
Equity
 
 Common Stock Additional
Paid-in Capital
 Legal Reserve Special Reserve Unappropriated
Earnings
 Total Retained
Earnings
 Total Other
Adjustments
 Noncontrolling
Interests
 Total
Equity
   Legal
Reserve
 Special
Reserve
 Unappropriated
Earnings
 Total
Retained

Earnings
 
 NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$  NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ 

BALANCE, JANUARY 1, 2012

 $77,574   $168,872   $66,122   $2,676   $45,888   $114,686   $(39 $68   $29   $361,161   $4,181   $365,342  

Appropriation of 2011 earnings

            

Legal reserve

  —      —      4,707    —      (4,707  —      —      —      —      —      —      —    

Cash dividends paid by Chunghwa

  —      —      —      —      (42,362  (42,362  —      —      —      (42,362  —      (42,362

Cash dividends paid by subsidiaries to noncontrolling interests

  —      —      —      —      —      —      —      —      —      —      (893  (893

Net income for the year ended December 31, 2012

  —      —      —      —      41,492    41,492    —      —      —      41,492    1,125    42,617  

Other comprehensive income for the year ended December 31, 2012

  —      —      —      —      (1,274  (1,274  (58  190    132    (1,142  (24  (1,166
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total comprehensive income for the year ended December 31, 2012

  —      —      —      —      40,218    40,218    (58  190    132    40,350    1,101    41,451  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Exercise of employee stock option of a subsidiary

  —      5    —      —      —      —      —      —      —      5    38    43  

Decrease in noncontrolling interests

  —      —      —      —      —      —      —      —      —      —      (91  (91
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

BALANCE, DECEMBER 31, 2012

  77,574    168,877    70,829    2,676    39,037    112,542    (97  258    161    359,154    4,336    363,490  

BALANCE, JANUARY 1, 2013

 $77,574   $168,877   $70,829   $2,676   $39,037   $112,542   $(97 $258   $—     $161   $359,154   $4,336   $363,490  

Appropriation of 2012 earnings

                         

Legal reserve

  —      —      3,990    —      (3,990  —      —      —      —      —      —      —      —      —     3,990    —     (3,990  —      —      —      —      —      —      —      —    

Cash dividends paid by Chunghwa

  —      —      —      —      (35,913  (35,913  —      —      —      (35,913  —      (35,913  —      —      —      —     (35,913 (35,913  —      —      —      —     (35,913  —     (35,913

Cash dividends paid by subsidiaries to noncontrolling interests

  —      —      —      —      —      —      —      —      —      —      (811  (811  —      —      —      —      —      —      —      —      —      —      —     (811 (811

Cash distributed from capital surplus

  —      (5,589  —      —      —      —      —      —      —      (5,589  —      (5,589

Cash distributed from additional paid-in capital

  —     (5,589  —      —      —      —      —      —      —      —     (5,589  —     (5,589

Net income for the year ended December 31, 2013

  —      —      —      —      41,494    41,494    —      —      —      41,494    1,124    42,618    —      —      —      —     41,494   41,494    —      —      —      —     41,494   1,124   42,618  

Other comprehensive income for the year ended December 31, 2013

  —      —      —      —      (553  (553  103    (408  (305  (858  42    (816  —      —      —      —     (553 (553 103   (408  —     (305 (858 42   (816
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total comprehensive income for the year ended December 31, 2013

  —      —      —      —      40,941    40,941    103    (408  (305  40,636    1,166    41,802    —      —      —      —     40,941   40,941   103   (408  —     (305 40,636   1,166   41,802  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Exercise of employee stock option of subsidiaries

  —      6    —      —      —      —      —      —      —      6    44    50    —     6    —      —      —      —      —      —      —      —     6   44   50  

Compensation cost of employee stock options of a subsidiary

  —      —      —      —      —      —      —      —      —      —      70    70    —      —      —      —      —      —      —      —      —      —      —     70   70  

Employee stock bonus issued by a subsidiary

  —      —      —      —      —      —      —      —      —      —      2    2    —      —      —      —      —      —      —      —      —      —      —     2   2  

Increase in noncontrolling interests

  —      —      —      —      —      —      —      —      —      —      39    39    —      —      —      —      —      —      —      —      —      —      —     39   39  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

BALANCE, DECEMBER 31, 2013

 $77,574   $163,294   $74,819   $2,676   $40,075   $117,570   $6   $(150 $(144 $358,294   $4,846   $363,140   77,574   163,294   74,819   2,676   40,075   117,570   6   (150  —     (144 358,294   4,846   363,140  

Appropriation of 2013 earnings

             

Legal reserve

  —      —     2,074    —     (2,074  —      —      —      —      —      —      —      —    

Special reserve

  —      —      —     144   (144  —      —      —      —      —      —      —      —    

Cash dividends paid by Chunghwa

  —      —      —      —     (18,526 (18,526  —      —      —      —     (18,526  —     (18,526

Cash dividends distributed by subsidiaries to noncontrolling interests

  —      —      —      —      —      —      —      —      —      —      —     (797 (797

Cash distributed from additional paid-in capital

  —     (16,577  —      —      —      —      —      —      —      —     (16,577  —     (16,577

Change in additional paid-in capital from share subscription not based on original ownership of a subsidiary

  —     3    —      —      —      —      —      —      —      —     3    —     3  

Net income for the year ended December 31, 2014

  —      —      —      —     36,970   36,970    —      —      —      —     36,970   597   37,567  

Other comprehensive income for the year ended December 31, 2014

  —      —      —      —     (406 (406 140   890    —     1,030   624   18   642  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

BALANCE, DECEMBER 31, 2013 (IN MILLIONS OF US$—Note 6)

 $2,601   $5,474   $2,508   $90   $1,344   $3,942   $—     $(5 $(5 $12,012   $162   $12,174  

Total comprehensive income for the year ended December 31, 2014

  —      —      —      —     36,564   36,564   140   890    —     1,030   37,594   615   38,209  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Compensation cost of employee stock options of a subsidiary

  —      —      —      —      —      —      —      —      —      —      —     93   93  

Employee stock bonus issued by a subsidiary

  —      —      —      —      —      —      —      —      —      —      —     5   5  

Increase in noncontrolling interests

  —      —      —      —      —      —      —      —      —      —      —     162   162  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

BALANCE, DECEMBER 31, 2014

 77,574   146,720   76,893   2,820   55,895   135,608   146   740    —     886   360,788   4,924   365,712  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Appropriation of 2014 earnings

             

Legal reserve

  —      —     681    —     (681  —      —      —      —      —      —      —      —    

Special reserve

  —      —      —     (144 144    —      —      —      —      —      —      —      —    

Cash dividends paid by Chunghwa

  —      —      —      —     (37,673 (37,673  —      —      —      —     (37,673  —     (37,673

Cash dividends paid by subsidiaries to noncontrolling interests

  —      —      —      —      —      —      —      —      —      —      —     (350 (350

Reversal of special reserve recognized from land disposal

  —      —      —      —      —      —      —      —      —      —      —      —      —    

Partial disposal of interests in subsidiaries

  —     27    —      —      —      —      —      —      —      —     27   18   45  

Other changes in additional paid-in capital in subsidiaries

  —     1    —      —      —      —      —      —      —      —     1   2   3  

Change in additional paid-in capital from share subscription not based on original ownership of a subsidiary

  —      —      —      —      —      —      —      —      —      —      —      —      —    

Net income for the year ended December 31, 2015

  —      —      —      —     42,039   42,039    —      —      —      —     42,039   813   42,852  

Other comprehensive income for the year ended December 31, 2015

  —      —      —      —     (215 (215 31   (649 1   (617 (832 (1 (833
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total comprehensive income for the year ended December 31, 2015

  —      —      —      —     41,824   41,824   31   (649 1   (617 41,207   812   42,019  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Compensation cost of employee stock options of subsidiaries

  —      —      —      —      —      —      —      —      —      —      —     36   36  

Subsidiary purchased its treasury stock

  —     (15  —      —     (61 (61  —      —      —      —     (76 (416 (492

Increase in noncontrolling interests

  —      —      —      —      —      —      —      —      —      —      —     39   39  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

BALANCE, DECEMBER 31, 2015

 $77,574   $146,733   $77,574   $2,676   $59,448   $139,698   $177   $91   $1   $269   $364,274   $5,065   $369,339  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

BALANCE, DECEMBER 31, 2015 (IN MILLIONS OF
US$—Note 6)

 $2,366   $4,475   $2,366   $82   $1,813   $4,261   $5   $3   $—     $8   $11,110   $154   $11,264  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

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

CHUNGHWA TELECOM CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015

(In Millions of New Taiwan or U.S. Dollars)

 

 

  Year Ended December 31 
  2012 2013   2013 2014 2015 
  NT$ NT$ US$ (Note 6)   NT$ NT$ NT$ US$ (Note 6) 

CASH FLOWS FROM OPERATING ACTIVITIES

         

Income before income tax

  $49,953   $49,096   $1,646    $49,096   $46,552   $51,953   $1,585  

Adjustments to reconcile income before income tax to net cash provided by operating activities:

         

Depreciation

   31,037   30,954   1,038     30,954   31,896   30,368   926  

Amortization

   1,123   1,238   42     1,238   2,218   3,080   94  

Provision for (reversal of) doubtful accounts

   (1,451 253   8  

Provision for doubtful accounts

   253   326   519   16  

Interest expenses

   22   36   1     36   46   33   1  

Interest income

   (742 (563 (19   (563 (288 (306 (9

Dividend income

   (21 (79 (3   (79 (78 (218 (7

Compensation cost of employee share options

   —     70   2  

Share of the profit of associates and joint venture accounted for using equity method

   (520 (666 (23

Compensation cost of employee stock options

   70   93   36   1  

Share of the profit of associates and joint ventures accounted for using equity method

   (666 (802 (897 (27

Impairment loss on available-for-sale financial assets

   203   66   2     66   23   107   3  

Impairment loss on investments accounted for using equity method

   —      —     8    —    

Provision for inventory and obsolescence

   113   203   7     203   288   198   6  

Impairment loss on property, plant and equipment

   301   254   9     254    —     138   4  

Impairment loss (reversal of) on investment properties

   1,261   (246 (8

Reversal of impairment loss on investment properties

   (246  —     (142 (4

Impairment loss on intangible assets

   5   18   1     18    —      —      —    

Gain on disposal of financial instruments

   (113 (76 (3   (76 (46  —      —    

Loss (gain) on disposal of property, plant and equipment

   2   (85 (3   (85 (26 109   3  

Gain on disposal of investments accounted for using equity method

   —     (13 (1

Valuation loss on financial instruments at fair value through profit or loss, net

   1   1    —    

Loss (gain) on foreign exchange

   (18 19   1  

Gain on disposal of investment properties

   —     (605  —      —    

Loss (gain) on disposal of investments accounted for using equity method

   (13 7   (4  —    

Valuation loss (gain) on financial assets and liabilities at fair value through profit or loss, net

   1   (1  —      —    

Loss (gain) on foreign exchange, net

   19   (164 54   2  

Changes in operating assets and liabilities:

         

Decrease (increase) in:

         

Financial assets held for trading

   74   9    —       9    —     1    —    

Trade notes and accounts receivable

   (509 1,219   41     1,219   (3,617 (1,172 (36

Receivables from related parties

   (10 (25 (1   (25 (12 39   1  

Inventories

   (2,487 (855 (29   (855 463   (1,852 (56

Other current monetary assets

   (118 (1  —       (1 1,268   (357 (11

Prepayment

   (104 (287 (10

Prepayments

   (287 (116 (327 (10

Other current assets

   (1,518 590   10     590   741   889   27  

Increase (decrease) in:

         

Trade notes and accounts payable

   (804 2,076   70     2,076   2,972   (2,223 (68

Payables to related parties

   49   (280 (9   (280 (149 203   6  

Other payables

   (263 447   8     447   (1,868 1,644   50  

Provisions

   84   (14  —       (14 20   (24 (1

Advance receipts

   (1,308 (730 (24   (730 449   1,134   35  

Other current liabilities

   (383 88   20     88   13   (112 (3

Deferred revenue

   (49 (138 (5   (138 (303 218   7  

Accrued pension liabilities

   88   289   10  

Net defined benefit liabilities

   289   494   439   13  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Cash generated from operations

   73,898    82,868    2,778     82,868   79,794   83,536   2,548  
  

 

  

 

  

 

 

Interest paid

   (29  (36  (1   (36 (43 (33 (1

Income tax paid

   (8,213  (7,544  (253   (7,544 (8,373 (7,178 (219
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net cash provided by operating activities

   65,656    75,288    2,524     75,288   71,378   76,325   2,328  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

(Continued)

CHUNGHWA TELECOM CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015

(In Millions of New Taiwan or U.S. Dollars)

 

 

  Year Ended December 31 
  2012 2013   2013 2014 2015 
  NT$ NT$ US$ (Note 6)   NT$ NT$ NT$ US$ (Note 6) 

CASH FLOWS FROM INVESTING ACTIVITIES

         

Acquisition of designated financial assets at fair value through profit or loss

  $(30 $—     $—    

Proceeds from disposal of designated financial assets at fair value through profit or loss

   57    —      —    

Acquisition of available-for-sale financial assets

   (4,502 (1,822 (61  $(1,822 $(59 $(29 $(1

Proceeds from disposal of available-for-sale financial assets

   1,824   3,989   134     3,989   85   2    —    

Acquisition of time deposits and negotiable certificate of deposit with maturities of more than three months

   (32,934 (18,199 (610   (18,199 (411 (11,494 (350

Proceeds from disposal of time deposits and negotiable certificate of deposit with maturities of more than three months

   51,653   37,928   1,271     37,928   471   11,824   361  

Acquisition of held-to-maturity financial assets

   (3,865  —      —       —      —     (1,002 (31

Proceeds from disposal of held-to-maturity financial assets

   2,451   4,236   142     4,236   4,258   4,450   136  

Capital reduction of available-for-sale financial assets

   35   36   1     36   84   44   1  

Proceeds from disposal of hedging derivative assets

   —     15   1     15    —      —      —    

Derecognition of hedging derivative liabilities

   —     (108 (4   (108  —      —      —    

Acquisition of investments accounted for using equity method

   (26 (90 (3   (90 (252 (6  —    

Proceeds from disposal of investments accounted for using equity method

   —     24   1     24    —     16    —    

Capital reduction of investments accounted for using equity method

   65   16   1     16    —      —      —    

Net cash outflow on acquisition of subsidiaries

   —      —     (114 (3

Acquisition of property, plant and equipment

   (33,280 (36,382 (1,220   (36,382 (32,559 (25,084 (765

Proceeds from disposal of property, plant and equipment

   33   205   7     205   150   4    —    

Proceeds from disposal of investment properties

   —     1,215    —      —    

Acquisition of intangible assets

   (632 (39,872 (1,337   (39,872 (644 (10,380 (317

Increase in noncurrent assets

   (624 (291 (10

Decrease (increase) in other noncurrent assets

   (291 (719 72   2  

Interest received

   853   672   23     672   340   337   10  

Cash dividends received

   315   475   16     475   667   907   28  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net cash used in investing activities

   (18,607  (49,168  (1,648   (49,168 (27,374 (30,453 (929
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

         

Proceeds from short-term loans

   857    1,399    47     1,399   895   2,750   84  

Repayment of short-term loans

   (821  (1,256  (42   (1,256 (585 (3,258 (99

Proceeds from long-term loans

   400    —      —       —     348    —      —    

Repayment of long-term loans

   (102  (358  (12   (358 (148 (190 (6

Increase (decrease) customers’ deposits

   63    (50  (2

Increase in other liabilities

   447    22    1  

Increase in repurchase agreement collateralized by bonds

   2,925   13,000    —      —    

Decrease in repurchase agreement collateralized by bonds

   (2,925 (13,000  —      —    

Decrease in customers’ deposits

   (50 (69 (37 (1

Increase in other noncurrent liabilities

   22   181   12    —    

Cash dividends and cash distributed from additional paid-in capital

   (42,362  (41,502  (1,391   (41,502 (35,103 (37,673 (1,149

Proceeds from exercise of employee stock option granted by subsidiaries

   43    50    2     50    —      —      —    

Dividends paid to noncontrolling interests

   (893  (811  (27

Cash dividends paid to noncontrolling interests

   (811 (797 (350 (11

Partial disposal of interests in subsidiaries without losing control

   —      —     45   1  

Other change in noncontrolling interests

   (102  42    1     42   162   (485 (15
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net cash used in financing activities

   (42,470  (42,464  (1,423   (42,464 (35,116 (39,186 (1,196
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

   (48  (9  —      $(9 $87   $25   $1  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   4,531    (16,353  (547   (16,353 8,975   6,711   204  

CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR

   26,407    30,938    1,036     30,938   14,585   23,560   719  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

CASH AND CASH EQUIVALENTS, END OF THE YEAR

  $30,938   $14,585   $489    

$

14,585

  

 $23,560   $30,271   $923  
  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

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

CHUNGHWA TELECOM CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2012 AND 2013

(In Millions of New Taiwan, Unless Stated Otherwise)

 

 

1.GENERAL

Chunghwa Telecom Co., Ltd. (“Chunghwa”) was incorporated on July 1, 1996 in the Republic of China (“ROC”) pursuant to the Article 30 of the Telecommunications Act. Chunghwa is a company limited by shares and, prior to August 2000, was wholly owned by the Ministry of Transportation and Communications (“MOTC”). Prior to July 1, 1996, the current operations of Chunghwa were carried out under the Directorate General of Telecommunications (“DGT”). The DGT was established by the MOTC in June 1943 to take primary responsibility in the development of telecommunications infrastructure and to formulate policies related to telecommunications. On July 1, 1996, the telecom operations of the DGT were spun-off toas Chunghwa which continues to carry out the business and the DGT continues to be the industry regulator.

As the dominant telecommunications service provider of domestic and international fixed-line, Global System for Mobile Communications (“GSM”), and Third Generation (“3G”) in the ROC, Chunghwa is subject to industry-specificadditional regulations imposed by the ROC.

Effective August 12, 2005, the MOTC completed the process of privatizing Chunghwa by reducing the government ownership to below 50% in various stages. In July 2000, Chunghwa received approval from the Securities and Futures Commission (the “SFC”) for a domestic initial public offering and its common stocks were listed and traded on the Taiwan Stock Exchange (the “TWSE”) on October 27, 2000. Certain of Chunghwa’s common stocks were sold, in connection with the foregoing privatization plan, in domestic public offerings at various dates from August 2000 to July 2003. Certain of Chunghwa’s common stocks were also sold in an international offering of securities in the form of American Depository Shares (“ADS”) on July 17, 2003 and were listed and traded on the New York Stock Exchange (the “NYSE”). The MOTC sold common stocks of Chunghwa by auction in the ROC on August 9, 2005 and completed the second international offering on August 10, 2005. Upon completion of the share transfers associated with these offerings on August 12, 2005, the MOTC owned less than 50% of the outstanding shares of Chunghwa and completed the privatization plan.

Chunghwa together with its subsidiaries are hereinafter referred to collectively as “the Company”.

 

2.APPROVAL OF FINANCIAL STATEMENTS

The consolidated financial statements were approved and authorized for issue by the management on April 28, 2014.15, 2016.

 

3.3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Starting from January 1, 2012, the Company has prepared its financial statements in accordance with the International Financial Reporting Standards as issued by the International Accounting Standard Board (“IASB”) (collectively, “IFRSs”).

The consolidated financial statements for the year ended December 31, 2013 is its first IFRS consolidated financial statements. Prior to 2013, the Company prepared and reported its consolidated financial statements in accordance with accounting principles generally accepted in the Republic of China with reconciliation of net income and balance sheet differences of its consolidated financial statements to accounting principles generally accepted in the United States. The date of transition to IFRSs was January 1, 2012. Refer to Note 43 for the impact of IFRS conversion on the Company’s consolidated financial statements.

Statement of Compliance

The accompanying consolidated financial statements have been prepared in conformity with IFRSs.International Financial Reporting Standards as issued by the International Accounting Standard Board (collectively, “IFRSs”).

Basis of Preparation

The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments that are measured at revalued amounts or fair values, as explained in the accounting policies below.values.

The opening balance sheet at the date of transition is prepared in accordance with the recognition and measurement required by IFRS 1. According to IFRS 1, the Company is required to apply each effective IFRS retrospectively in its opening balance sheet at the date of transition to IFRSs; except for optional exemptions and mandatory exceptions to such retrospective application provided under IFRS 1. The main optional exemptions the Company adopted are described in Note 43.

Historical cost is generally based on the fair value of the consideration given in exchange for assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36.

In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

Level 3 inputs are unobservable inputs for the asset or liability.

Current and Noncurrent Assets and Liabilities

Current assets include:

 

 a.assetsAssets held primarily for the purpose of trading;

 

 b.assetsAssets expected to be realized within twelve months after the reporting period; and

 

 c.cashCash and cash equivalents unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

Current liabilities include:

 

 a.liabilitiesLiabilities held primarily for the purpose of trading;

 

 b.liabilitiesLiabilities due to be settled within twelve months after the reporting period; and

 

 c.liabilitiesLiabilities for which the Company does not have an unconditional right to defer settlement for at least twelve months after the reporting period.

Assets and liabilities that are not classified as current are classified as non-current.noncurrent.

Light Era Development Co., Ltd. (LED) engages mainly in development of property for rent and sale. The assets and liabilities of LED related to property development within its operating cycle, which is over one year, are classified as current items.

Basis of Consolidation

 

 a.The basis for the consolidated financial statements

The consolidated financial statements incorporate the financial statements of Chunghwa and entities controlled by Chunghwa (its subsidiaries). Control is achieved whenIncome and expenses of subsidiaries acquired or disposed of during the Company (a) has power overperiod are included in the investee; (b) is exposed, or has rights, to variable returnsconsolidated statements of comprehensive income from its involvement with the investee; and (c) has the ability to use its power to affect its returns.

The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including:

The size of the Company’s holding of voting rights relativeacquisition up to the size and dispersion of holdings of the other vote holders;

disposal, as appropriate.

Potential voting rights held by the Company, other vote holders or other parties;

Rights arising from other contractual arrangements; and

Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those used by the Company.

All intra-company transactions, balances, income and expenses are eliminated in full upon consolidation.

The noncontrolling interests in the subsidiaries and the equity attributable to stockholders are presented separately.

AllocationAttribution of total comprehensive income to the noncontrolling interests

Profit or loss and each component of other comprehensive income are attributed to the ownersstockholders of the Companyparent and to the noncontrolling interests. Total comprehensive income of subsidiaries is attributed to the ownersstockholders of the Companyparent and to the noncontrolling interests even if it results in the noncontrolling interests having a deficit balance.

Changes in the Company’s ownership interests in subsidiaries

Changes in the Company’s ownership interests in subsidiaries that do not result in the Company losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Company’s interests and the noncontrolling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the noncontrolling interests

are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to ownersstockholders of the Company.parent.

 b.The subsidiaries in the consolidated financial statements

The detail information of the subsidiaries at the end of reporting period was as follows:

 

      Percentage of Ownership     
 Percentage of Ownership         December 31     
Name of Investor Name of Investee Main Businesses and
Products
 January 1,
2012
 December 31,
2012
 December 31,
2013
 Note   Name of Investee  Main Businesses and
Products
     2014           2015       Note 

Chunghwa

Telecom Co., Ltd.

 

Senao International Co., Ltd. (“SENAO”)

 

Selling and maintaining mobile phones and its peripheral products

  28    28    28    1  

Senao International Co., Ltd. (“SENAO”)

  Sale and maintenance
of mobile phones
and its peripheral
products as well as
sales agent of CHT
mobile phone plan
application
  28     29     1
 

Light Era Development Co., Ltd. (“LED”)

 

Housing, office building development, rent and sale services

  100    100    100     

Light Era Development Co., Ltd. (“LED”)

  Planning and
development of real
estate and intelligent
buildings, and
property
management
  100     100    
 

Donghwa Telecom Co., Ltd. (“DHT”)

 

International telecommunications IP fictitious internet and internet transfer services

  100    100    100     

Donghwa Telecom Co., Ltd. (“DHT”)

  International private
leased circuit, IP
VPN service, and IP
transit services
  100     100    
 

Chunghwa Telecom Singapore Pte., Ltd. (“CHTS”)

 

Telecommunication wholesale, internet transfer services international data and long distance call wholesales to carriers

  100    100    100     

Chunghwa Telecom Singapore Pte., Ltd. (“CHTS”)

  International private
leased circuit, IP
VPN service, and IP
transit services
  100     100    
 

Chunghwa System Integration Co., Ltd. (“CHSI”)

 

Providing communication and information aggregative services

  100    100    100     

Chunghwa System Integration Co., Ltd. (“CHSI”)

  Providing system
integration services
and
telecommunication
equipment
  100     100    
 

Chunghwa Investment Co., Ltd. (“CHI”)

 

Investment

  89    89    89     

Chunghwa Investment Co., Ltd. (“CHI”)

  Investment  89     89    
 

CHIEF Telecom Inc. (“CHIEF”)

 

Internet communication and internet data center (“IDC”) service

  69    69    69     

CHIEF Telecom Inc. (“CHIEF”)

  International
telecommunication
facilities, internet
data center (IDC),
network integration,
and communications
integration services
  69     69     2
 

Chunghwa International Yellow Pages Co., Ltd. (“CHYP”)

 

Yellow pages sales and advertisement services

  100    100    100     

Chunghwa International Yellow Pages Co., Ltd. (“CHYP”)

  Digital information
supply services and
advertisement
services
  100     100    
 

Prime Asia Investments Group Ltd. (B.V.I.) (“Prime Asia”)

 

Investment

  100    100    100     

Prime Asia Investments Group Ltd. (B.V.I.) (“Prime Asia”)

  Investment  100     100    
 

Spring House Entertainment Tech. Inc. (“SHE”)

 

Network services, producing digital entertainment contents and broadband visual sound terrace development

  56    56    56     

Spring House Entertainment Tech. Inc. (“SHE”)

  Digital entertainment
contents production,
animated character
licensing and
endorsement, and
mobile digital
platform
construction
  56     56    
 

Chunghwa Telecom Global, Inc. (“CHTG”)

 

International data and internet services and long distance call wholesales to carriers

  100    100    100     

Chunghwa Telecom Global, Inc. (“CHTG”)

  International private
leased circuit,
internet services,
transit services, and
voice wholesale
  100     100    

(Continued)

      Percentage of Ownership     
 Percentage of Ownership         December 31     
Name of Investor Name of Investee Main Businesses and
Products
 January 1,
2012
 December 31,
2012
 December 31,
2013
 Note   Name of Investee  Main Businesses and
Products
     2014           2015       Note 
 

Chunghwa Telecom Vietnam Co., Ltd. (“CHTV”)

 

Information and communications technology, international circuit, and intelligent energy network service

  100    100    100     

Chunghwa Telecom Vietnam Co., Ltd. (“CHTV”)

  Intelligent energy
saving solutions,
international circuit,
and information and
communication
technology (“ICT”)
services
  100     100    
 

Smartfun Digital Co., Ltd. (“SFD”)

 

Software retail

  65    65    65     

Smartfun Digital Co., Ltd. (“SFD”)

  Providing diversified
family education
digital services
  65     65    
 

Chunghwa Telecom Japan Co., Ltd. (“CHTJ”)

 

Telecom business, information process and information provide service, development and sale of software and consulting services in telecommunication

  100    100    100     

Chunghwa Telecom Japan Co., Ltd. (“CHTJ”)

  International private
leased circuit, IP
VPN service, and IP
transit services
  100     100    
 

Chunghwa Sochamp Technology Inc. (“CHST”)

 

License plate recognition system

  51    51    51     

Chunghwa Sochamp Technology Inc. (“CHST”)

  Design, development
and production of
Automatic License
Plate Recognition
software and
hardware
  51     51    
 

Honghwa Human Resources Co., Ltd. (“HHR”)

 

Human resources service

          100    2  

Honghwa International Co., Ltd. (“HHI”)

  Telecommunication
engineering, sales
agent of mobile
phone plan
application and other
business services
  100     100     3
 

New Prospect Investments Holdings Ltd. (B.V.I.) (“New Prospect”)

 

Investment

  100    100    100     

New Prospect Investments Holdings Ltd. (B.V.I.) (“New Prospect”)

  Investment  100     100    

Senao International Co., Ltd.

 

Senao International (Samoa) Holding Ltd. (“SIS”)

 

International investment

  100    100    100     

Senao International (Samoa) Holding Ltd. (“SIS”)

  International
investment
  100     100    
  

Youth Co., Ltd (“Youth”)

  Sale of computer
software, hardware
and related products
  —       89     4
  

Aval Technologies Co., Ltd. (“Aval”)

  Sale of information and
communication
technologies
products as an agent
  —       100     5

Youth Co., Ltd (“Youth”)

  

ISPOT Co., Ltd (“ISPOT”)

  Sale of computer and
related products
  —       100     4
  

Youyi Co., Ltd (“Youyi”)

  Maintenance of
computer and related
products
  —       100     4

CHIEF Telecom Inc.

 

Unigate Telecom Inc. (“Unigate”)

 

Telecommunication and internet service

  100    100    100     

Unigate Telecom Inc. (“Unigate”)

  Telecommunication
and internet service
  100     100    
  

Chief International Corp. (“CIC”)

  Investment  100     100    
 

Chief International Corp. (“CIC”)

 

Internet communication and internet data center (“IDC”) service

  100    100    100     

Shanghai Chief Telecom Co., Ltd. (“SCT”)

  Internet and
communication
service
  —       49     6

Chunghwa System Integrated Co., Ltd.

 

Concord Technology Co., Ltd. (“Concord”)

 

Investment

  100    100    100     

Concord Technology Co., Ltd. (“Concord”)

  Investment  100     100    

Spring House Entertainment Tech. Inc.

 

Ceylon Innovation Ltd. (“CEI”)

 

International trading, general advertisement and book publishing service

  100    100    100     

Ceylon Innovation Ltd. (“CEI”)

  E-Book publication,
and copyright
negotiation of digital
music
  100     100     7

Light Era Development Co., Ltd.

 

Yao Yong Real Property Co., Ltd. (“YYRP”)

 

Real estate management and leasing business

  100    100    100     

Yao Yong Real Property Co., Ltd. (“YYRP”)

  Sales and lease of real
estate
  —       —       8

Chunghwa Investment Co., Ltd.

 

Chunghwa Precision Test Tech Co., Ltd. (“CHPT”)

 

Semiconductor testing components and printed circuit board industry production and marketing of electronic products

  53    53    51    3
 

Chunghwa Investment Holding Co., Ltd. (“CIHC”)

 

Investment

  100    100    100   

(Continued)

        Percentage of Ownership     
 Percentage of Ownership           December 31     
Name of Investor Name of Investee Main Businesses and
Products
 January 1,
2012
 December 31,
2012
 December 31,
2013
 Note   Name of Investee  Main Businesses and
Products
      2014           2015       Note 

Chunghwa Investment Co., Ltd.

  

Chunghwa Precision Test Tech Co., Ltd. (“CHPT”)

  Production and sale of
semiconductor
testing components
and printed circuit
board
   48     46     9
  

Chunghwa Investment Holding Co., Ltd. (“CIHC”)

  Investment   100     100    

Concord Technology Co., Ltd.

 

Glory Network System Service (Shanghai) Co., Ltd. (“GNSS (Shanghai)”)

 

Planning and design of software and hardware system services and integration of information system

  100    100    100     

Glory Network System Service (Shanghai) Co., Ltd. (“GNSS (Shanghai)”)

  Design, development
and production of
computer and
internet software,
installment,
maintenance and
consulting services
of information
system integration,
and sales of self-
production
products
   100     100    

Chunghwa Precision Test Tech. Co., Ltd.

 

Chunghwa Precision Test Tech. USA Corporation (“CHPT (US)”)

 

Semiconductor testing components and printed circuit board industry production and marketing of electronic products

  100    100    100     

Chunghwa Precision Test Tech. USA Corporation (“CHPT (US)”)

  Design and after-sale
services of
semiconductor
testing components
and printed circuit
board
   100     100    
 

CHPT Japan Co., Ltd. (“CHPT (JP)”)

 

Sale and maintenance of electronic parts and machinery processed products, and design of printed circuit board

  —      —      100    4  

CHPT Japan Co., Ltd. (“CHPT (JP)”)

  Related services of
electronic parts,
machinery
processed products
and printed circuit
board
   100     100    
 

Chunghwa Precision Test Tech. International, Ltd. (“CHPT (International)”)

 

Wholesale electronic materials, electronic materials and general retail investment industry

  —      —      100    5  

Chunghwa Precision Test Tech. International, Ltd. (“CHPT (International)”)

  Wholesale and retail
of electronic
materials, and
investment
   100     100    

Senao International (Samoa) Holding Ltd.

 

Senao International HK Limited (“SIHK”)

 

International investment

  100    100    100     

Senao International HK Limited (“SIHK”)

  International
investment
   100     100    

Chunghwa Investment Holding Co., Ltd.

 

CHI One Investment Co., Limited (“COI”)

 

Investment

  100    100    100     

CHI One Investment Co., Limited (“COI”)

  Investment   100     100     10

Senao International HK Limited

 

Senao Trading (Fujian) Co., Ltd. (“STF”)

 

Information technology services and sale of communication products

  100    100    100     

Senao Trading (Fujian) Co., Ltd. (“STF”)

  Sale of information
and communication
technologies
products
   100     100    
 

Senao International Trading (Shanghai) Co., Ltd. (“SITS”)

 

Information technology services and sale of communication products

  100    100    100     

Senao International Trading (Shanghai) Co., Ltd. (“SITS”)

  Sale of information
and communication
technologies
products
   100     100    
 

Senao International Trading (Shanghai) Co., Ltd. (“SEITS”)

 

Information technology services and maintenance of communication products

  100    100    100     

Senao International Trading (Shanghai) Co., Ltd. (“SEITS”)

  Maintenance of
information and
communication
technologies
products
   100     100    
 

Senao International Trading (Jiangsu) Co., Ltd. (“SITJ”)

 

Information technology services and sale of communication products

  100    100    100     

Senao International Trading (Jiangsu) Co., Ltd. (“SITJ”)

  Sale of information
and communication
technologies
products
   100     100    

Prime Asia Investments Group, Ltd. (B.V.I.)

 

Chunghwa Hsingta Co., Ltd. (“CHC”)

 

Investment

  100    100    100     

Chunghwa Hsingta Co., Ltd. (“CHC”)

  Investment   100     100    

(Continued)

        Percentage of Ownership     
 Percentage of Ownership           December 31     
Name of Investor Name of Investee Main Businesses and
Products
 January 1,
2012
 December 31,
2012
 December 31,
2013
 Note   Name of Investee  Main Businesses and
Products
      2014           2015       Note 

Chunghwa Hsingta Company Ltd.

 

Chunghwa Telecom (China) Co., Ltd. (“CTC”)

 

Planning and design of energy conservation and software and hardware system services, and integration of information system

  100    100    100     

Chunghwa Telecom (China) Co., Ltd. (“CTC”)

  Integrated information
and communication
solution services
for enterprise
clients, and
intelligent energy
network services
   100     100    
 

Jiangsu Zhenhua Information Technology Company, LLC. (“JZIT”)

 

Intelligent energy conserving and intelligent building services

  —      75    75    6  

Jiangsu Zhenhua Information Technology Company, LLC. (“JZIT”)

  Providing intelligent
energy saving
solution and
intelligent buildings
services
   75     75    
 

Hua-Xiong Information Technology Co., Ltd. (“HXIT”)

 

Intelligent system and energy saving system services in buildings

  —      51    51    7  

Hua-Xiong Information Technology Co., Ltd. (“HXIT”)

  Providing intelligent
buildings and smart
home services
   51     51     11

Chunghwa Precision Test Tech. International, Ltd.

  

Shanghai Taihua Electronic Technology Limited (“STET”)

  Design of printed
circuit board and
related consultation
service
   100     100    

(Concluded)

 

 1)The Company’s equity ownership of SENAO decreased from 28.44% as of January 1, 2012 to 28.30% and 28.18% as of December 31, 2012 and 2013, respectively, due to the exercise of options by SENAO’s employees. The Company owns 28%29% equity shares of SENAO. However, the Company has four out of seven seats of the boardBoard of directorsDirectors of SENAO through the support of large beneficial shareholders. Therefore, the Company has control over SENAO and the accounts of SENAO are included in the consolidated financial statements. The Company’s equity ownership of SENAO increased due to SENAO’s purchase of its treasury stock in June 2015 and July 2015. The Company owned 28.18% and 29.31% equity shares of SENAO as of December 31, 2014 and December 31, 2015, respectively.
 2)The Company’s equity ownership of CHIEF decreased as CHIEF issued employee stock bonus in July 2014. The Company owned 72.51% equity shares of CHIEF as of December 31, 2015.
3)Chunghwa established 100% owned subsidiary of HHRHonghwa Human Resources Co., Ltd. in January 2013.
3)The Company’s equity ownership of CHPT decreased Honghwa Human Resources Co., Ltd. changed its name to Honghwa International Co., Ltd. from 53.19% as of December 31, 2012 to 50.62% as of December 31, 2013 due to the exercise of options by CHPT’s employees and CHPT issued employee stock bonus.July 4, 2014.
 4)CHPT establishedSENAO acquired 70% equity shares of Youth in September, 2015. SENAO participated in Youth’s cash capital increase in December 2015; therefore, the ownership interests of Youth increased. SENAO owned 89.48% equity shares of Youth as of December 31, 2015. Youyi and ISPOT are 100% owned subsidiarysubsidiaries of CHPT (JP) in January 2013.Youth.
 5)CHPTSENAO established a 100% owned subsidiary of CHPT (International)Aval in July 2013.October 2015. Aval mainly engages in the sale of information and communication technologies products as an agent.
 6)JZIT was establishedCHIEF invested 49% equity shares of SCT in January 2012August 2015. Based on the written agreement between the stockholders, CHIEF has two out of three seats of the Board of Directors of SCT. Therefore, CHIEF has control over SCT and CHC owns 75% ownershipthe accounts of JZIT.SCT are included in the consolidated financial statements.
 7)CEI’s dissolution has been approved by local regulator in January 2016. The liquidation of CEI is still in progress.
8)LED merged YYRP by absorption in October 2014.
9)CHI disposed of some shares of CHPT in January 2015, so its ownership interest in CHPT decreased. The Company owned 47.65% and 45.68% equity shares of CHPT as of December 31, 2014 and December 31, 2015, respectively. In addition, considering Company’s absolute size, the relative size and the dispersion of shares owned by the other shareholders, the management concluded that the Company has a sufficiently dominant voting interest to direct the relevant activities; hence, CHPT is deemed as a subsidiary of the Company.
10)COI was liquidated in August 2015. CIHC received part of the proceeds from the liquidation.
11)HXIT’s dissolution has been approved by local regulator in March 2016. HXIT was establishedreceived part of the proceeds from the liquidation in November 2012 and CHC owns 51% ownership of HXIT.April 2016.

The following diagram presents information regarding the relationship and ownership percentages between Chunghwa and its subsidiaries as of December 31, 2013:2015:

 

LOGOLOGO

Business Combination

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Company, liabilities incurred by the Company to the former owners of the acquire and the equity interests issued by the Company in exchange for control of the acquiree. Acquisition-related costs are recognized in profit or loss as incurred.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any noncontrolling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any noncontrolling

Noncontrolling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain.

For each business combination, the Company shall measure at the acquisition date components of noncontrolling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at either fair value or at the noncontrolling interest’spresent ownership instruments’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of noncontrolling interests are measured at fair value.

WhenIf the consideration transferred by the Company ininitial accounting for a business combination includesis incomplete by the end of the reporting period in which the combination occurs, the Company reports its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date or recognizes additional assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is

measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additionalto reflect new information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed atas of the acquisition date and if known, would have affected the measurement of the amounts recognized as of that date.

Foreign Currencies

In preparing the financial statements of each individual entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions.

At the end of each balance sheet date,reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items arising from settlement or translation denominated in foreign currencies are recognized in profit or loss in the period in which they arise.

Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences on monetary items denominated in foreign currencies are recognized in profit or loss when the transactions occur.

Foreign-currency nonmonetary assets or liabilities (such as equity instruments) that are carried at fair value are revalued using prevailing exchange rates at the balance sheet datedetermined and related exchange differences are recognized in profit or loss. Conversely, when the fair value changes were recognized in other comprehensive income, related exchange difference shall be recognized in other comprehensive income.

Non-monetary items that are measured at historical cost in a foreign currency are not retranslated.

Chunghwa use New Taiwan dollars as the functional currency. For the purposes of presenting consolidated financial statements, the assets and liabilities of the Company’s foreign operations (including of the subsidiaries and associates in other countries or currencies used different with Chunghwa) are translated into New Taiwan dollars using exchange rates prevailing at the end of each balance date.reporting period. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity attributed to stockholders of the parent and noncontrolling interests as appropriate.

Cash Equivalents

Cash equivalent includes treasury bills,equivalents include commercial paper, time deposits and negotiable certificate of deposit with original maturities within three months from the date of acquisition, are highly liquid, readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These cash equivalents are held for the purpose of meeting short-term cash commitments.

Inventories

Inventories are stated at the lower of cost (weighted-average cost) or net realizable value item by item, except for those that may be appropriate to group items of similar or related inventories. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. The calculation of the cost of inventory is derived using the weighted-average method.

Buildings and LandsLand Consigned to Constructing FirmConstruction Contractors

Inventories of LED are stated at the lower of cost or net realizable value item by item, except for those that may be appropriate to group as similar items or related inventories. Land acquired before construction is classified as land held for development, and then reclassified as land held under development after LED begins its construction project. Prepayments for licensing and other

miscellaneous costs have been capitalized as part of inventory. For qualifying assets, cost includes capitalized borrowing costs.

When using the completed-contract method for its construction projects, LED recognizes the proceeds from customers as advances from customers for land and building before the construction project is completed. After completion of the construction project and ownership is transferred to the customers, LED recognizes the relevant revenues.

Investments in Associates and Joint VentureVentures

An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. JointA joint venture arrangementsis a joint arrangement whereby the Company and other parties that involve the establishment of a separate entity in which venturers have joint control over the economic activity of the entity are referredarrangement have rights to as joint venture.

The operating results and identifiablethe net assets of associates and joint venture are incorporated in these consolidated financial statementsthe arrangement.

Investments accounted for using the equity method of accounting.include investments in associates and interests in joint ventures. Under the equity method, an investment in an associate andor a joint venture is initially recognized in the consolidated balance sheet at cost and adjusted thereafter to recognize the Company’s share of the profit or loss any impairment losses, and other comprehensive income of the associate and joint venture. The Company also recognizesventure as well as the changes in the Company’s share of equity of associates and joint venture attributable to the Company.distribution received.

When the Company reducessubscribes for new shares of the associate and joint venture at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of the Company’s proportionate interest in the associate and joint venture. The Company records such a difference as an associateadjustment to investments with the corresponding amount charged or a joint venturecredited to additional paid-in capital. When the adjustment should be debited to additional paid-in capital but the Company continues to useadditional paid-in capital recognized from investments accounted for using the equity method is insufficient, the Company reclassifiesshortage is debited to profit or loss the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities.retained earnings.

Any excess of the cost of acquisition over the Company’s share of the fair value of the identifiable net assets liabilities and contingent liabilities of an associate andor a joint venture recognized at the date of acquisition is recognized as goodwill, which is included inwithin the carrying amount of the investment and shall not be amortized. Any excess of the Company’s share of the net fair value of the identifiable assets and liabilities over the cost of acquisition is recognized immediately in profit or loss.

TheWhen necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its recoverable amount with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.

When athe Company entity transacts with its associate and joint venture, profits and losses resulting from the transactions with the associate and joint venture are recognized in the Company’Company’s consolidated financial statements only to the extent of interests in the associate and the joint venture that are not related to the Company.

Property, Plant and Equipment

When future economic benefits are expected to inflow to the Company and costs can be evaluated reliably, property,Property, plant and equipment that are held for use in the production or supply of goods or services, or for administrative purposes for over one year areinitially measured at costs. Subsequent to initial recognition, property, plantcost and equipment aresubsequently measured at cost less accumulated depreciation and accumulated impairment.impairment loss.

Depreciation on property, plant and equipment is recognized so as to write off the cost of the assets less their residual values over their useful lives, and it is computed using the straight-line method. Each significant part is depreciated separately. The estimated useful lives, residual values and depreciation method are reviewed periodically, however, at least annually,the end of each year, with the effect of any changes in estimatesestimate accounted for on a prospective basis.

Upon sale or disposalOn derecognition of an item of property, plant and equipment, the related cost, accumulated depreciationdifference between the net disposal proceeds and accumulated impairment losses are deducted from the corresponding accounts, and any gain or losscarrying amount of the asset is recognized in profit or loss as incurred.in the period in which the property is derecognized.

Investment Properties

Investment properties are properties held to earn rentals and/or for capital appreciation (including property under construction for such purposes).appreciation. Investment properties also include land held for a currently undetermined future use as such land is regarded as held for capital appreciation.use.

Investment properties are measured initially at cost, including direct costs of bringing the assets to intended use.transaction costs. Subsequent to initial recognition, investment properties are measured at cost less accumulated depreciation and accumulated impairment.impairment loss. Depreciation is recognized using the straight-line method.

The Company uses the straight line method to depreciate the assets, that is, to evenly allocate the cost less residual value over the expected useful livesOn derecognition of the investment properties.

Upon disposal of investment properties, the related cost, accumulated depreciationdifference between the net disposal proceeds and accumulated impairment losses are deducted from the corresponding accounts, and any gain or losscarrying amount of the asset is recognized in profit or loss as incurred.in the period in which the property is derecognized.

Goodwill

Goodwill arising on anfrom the acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.loss.

For the purpose of impairment testing, goodwill is allocated to each of the Company’s cash-generating units or groups of cash-generating units (referred to as “cash-generating unit”) that are expected to benefit from the synergies of the business combination.

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired.impaired, by comparing its carrying amount, including the attributable goodwill, with its recoverable amount. However, if the goodwill allocated to a cash-generating unit was acquired in a business combination during the current annual period, that unit shall be tested for impairment before the end of the current annual period. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

When the Company disposes of an operation within a cash-generating unit (group of units) to which goodwill has been allocated, the goodwill associated with that operation should be included in the carrying amount of the operation when determining the gain or loss on disposal; and measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit (group of units) retained.

Intangible Assets Other Than Goodwill

Intangible assets with finite useful lives that are acquired separately are carriedinitially measured at cost and subsequently measured at cost less accumulated amortization and accumulated impairment losses.loss. Amortization is recognized on a straight-line basis over their estimated useful lives.basis. The estimated useful life, residual value and amortization method are reviewed periodically,

however, at least annually,the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Except forThe residual value of an intangible asset with a finite useful life shall be assumed to be zero unless the Company expects to dispose of the intangible assets to be disposed by the Companyasset before the end of theits economic life. Intangible assets with indefinite useful lives that are acquired separately are measured at cost less accumulated impairment loss.

Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the residual values ofacquisition date (which is regarded as their cost). Subsequent to initial recognition, they are measured on the same basis as intangible assets with finite useful livesthat are expected to be zero.acquired separately.

UponGains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of intangible assets, the related cost, accumulated amortization and accumulated impairment lossesasset, are deducted from the corresponding accounts, and any gain or loss is recognized in profit or loss as incurred.in the period in which the asset is derecognized.

Impairment of Tangible and Intangible Assets Other Than Goodwill

When an indicationAt the end of impairment is identified foreach reporting period, the Company reviews the carrying amounts of its tangible and intangible assets, otherexcluding goodwill, to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. When it is not possible to estimate

the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset or cash-generating unit is estimated to be less than goodwill, any excess ofits carrying amount, the carrying amount of anthe asset overor cash-generating unit is reduced to its recoverable amount, with the resulting impairment loss recognized in profit or loss.

When an impairment loss is recognized as a loss. Ifsubsequently reversed, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, increases in a subsequent period,but only to the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceedextent of the carrying amount that would have been determined as ifhad no impairment loss had been recognized.recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized in profit or loss.

Financial Instruments

Financial assets and financial liabilities are recognized when a consolidated entitythe Company becomes a party to the contractual provisions of the instruments.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

 

 a.Financial assets

RegularAll regular way purchases or sales of financial assets are accounted for usingrecognized and derecognized on a trade date accounting.basis. The regular way of transaction means the purchase or sale of financial assets delivered within the time frame established by regulation or convention in the marketplace.

 

 1)Measurement category

 

 a)Financial assets at fair value through profit and loss (FVTPL)

Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on measurementremeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss does not incorporate any dividend or interest earned on the financial asset.

 

 b)Held-to-maturity financial assets

Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturity date that the Company has positive intention and ability to hold to maturity other than those that are designated as at fair value

through profit or loss or as available-for-sale and those that meet the definition of loans and receivables on initial recognition. When the counterparties of the Company’s investments have good

The Company invests in bank debentures and corporate bonds with specific credit quality,ratings and the Company has positive intentionintent and ability to hold to maturity, the investments are classified as held-to-maturity financial assets.investments.

Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method less any impairment.

The effective interest rate method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that discounts the estimated future cash receipts through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.impairment loss.

 

 c)Available-for-sale financial assets (AFS financial assets)

AFS financial assets are non-derivatives that are either designated as AFS or are not classified as loans and receivables, held-to-maturity financial assets or financial assets at fair value through profit or loss.

ListedThe Company invests in listed stocks, emerging market stocks, open-end mutual funds,and unlisted stocks and corporate bonds held by the Companystocks. Among these investments, those that have a quoted market price in an active market andare classified as AFS areand measured at fair value at the end of each reporting period. AFS equity investmentsperiod; the others that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. If, in a subsequent period, the fair value of the financial assets can be reliably measured, the financial assets are remeasured at fair value. The difference between the carrying amount and the fair value is recognized in other comprehensive income. Any impairment losses are recognized in profit or loss.

Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency exchange rates, interest income calculated using the effective interest method and dividends on AFS equity investments are recognized in profit or loss. Other changes in the carrying amount of AFS financial assets are recognized in other comprehensive income. Whenincome and will be reclassified to profit or loss when the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss.impaired.

Dividends on AFS equity instruments are recognized in profit or loss when the Company’s right to receive the dividends is established.

 

 d)Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including cash and cash equivalents, trade notes and accounts receivable, accounts receivable from related parties, other financial assets and refundable deposits) are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate,impairment loss, except for short-term receivables whensince the effect of discounting would beis immaterial.

 

 2)Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators ofto determine whether there is objective evidence that an impairment loss has occurred at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

For financial assets carried at amortized cost, such as held-to-maturity investmentsfinancial assets, assets that are individually assessed and trade notes and accounts receivable, assetsnot impaired are, in addition, assessed for impairment on a collective and individual basis.

For financial assets carried at amortized cost, the amount of the impairment loss recognized is mainly based on the difference between the asset’s carrying amount and the present value

of estimated future cash flows, discounted at the financial asset’s original effective interest rate. However, since the discounted effect of short-term receivables is immaterial, the impairment loss is recognized on the difference between carrying amount and estimated future cash flow.

For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

For AFS equity investments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the period.

In respect of AFS equity securities, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income.

For financial assets that are carried at cost, the amount of the impairment loss is mainly measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss is not reversed in subsequent periods.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivablesnotes and accounts receivable and other receivables, where the carrying amount is reduced through the use of an allowance account. When a trade note and accounts receivable and other receivables isare considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss.loss except for uncollectible trade notes and accounts receivable and other receivables that are written off against the allowance account.

 

 3)Derecognition of financial assets

The Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.

 

 c.b.Financial liabilities

 

 1)Subsequent measurement

Except for financial liabilities at FVTPL, otherall the financial liabilities are subsequently measured at amortized cost using the effective interest method.

 2)Derecognition of financial liabilities

The Company derecognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, (includes the transfer ofincluding any non-cash assets transferred or assumption of liabilities)liabilities assumed, is recognized in profit or loss.

 d.c.Derivative financial instruments

The Company enters into a variety of derivative financial instruments to manage its exposure to risk of foreign exchange rate and the fluctuation on stock price,risks, including foreignforward exchange forward contracts, cross currency swap contracts and index future contracts.

Derivative financial instrumentsDerivatives are initially recognizedmeasured at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. When the fair value of the derivative financial instruments is positive, itthe derivative is recognized as a financial asset; otherwise, itwhen the fair value of derivative financial instruments is negative, the derivative is recognized as a financial liability.

Hedge Accounting

The Company designates certain derivativesome derivatives instruments as fair valuecash flow hedges. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges.

At the inceptionThe effective portion of the hedge relationship, the Company documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Company documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.

Changes in the fair value of derivatives that are designated and qualify as fair valuecash flow hedges areis recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss.

The associated gains or losses that were recognized in other comprehensive income are reclassified from equity to profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognizedas a reclassification adjustment in the line of the consolidated statement of comprehensive incomeitem relating to the hedged item.item in the same period when the hedged item affects profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the associated gains and losses that were recognized in other comprehensive income are removed from equity and are included in the initial cost of the non-financial asset or non-financial liability.

Hedge accounting is discontinued prospectively when the Company revokes the designated hedging relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifiesmeets the criteria for hedge accounting. The cumulative gain or loss on the hedging instrument that has been previously recognized in other comprehensive income from the period when the hedge was effective remains separately in equity until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in profit or loss.

Provisions

Provisions for the expected cost of warranty obligations under sale of goods are recognized at the date of sale of the relevant products, at the management’s best estimate of the expenditure required to settle the Company’s obligation.obligation by the management of the Company.

Revenue Recognition

Revenue from the sale of goods is recognized when the goods are delivered and titles have passed, at which time all the following conditions are satisfied:

 

 a.The Company has transferred to the buyer the significant risks and rewards of ownership of the goods;

 

 b.The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

 

 c.The amount of revenue can be measured reliably;

 

 d.It is probable that the economic benefits associated with the transaction will flow to the Company; and

 

 e.The costs incurred or to be incurred in respect of the transaction can be measured reliably.

Services revenue is recognized when service is provided.

Revenue is measured at the fair value of the consideration received or receivable and represents amounts for goods sold in the normal course of business, net of sales discounts and volume rebates. For trade receivablesnotes and accounts receivable due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest.

Usage revenues from fixed-line services (including local, domestic long distance and international)international long distance telephone services), cellular services, internetInternet and data services, and interconnection and call transfer fees from other telecommunications companies and carriers are billed in arrears and are recognized based upon seconds or minutes of traffic processed when the services are provided in accordance with contract terms.

Other revenues are recognized as follows: (a) one-time subscriber connection fees (on fixed-line services) are deferred and recognized over the average expected customer service periods, (b) monthly fees (on fixed-line services, mobile, internetInternet and data services) are accrued every month, and (c) prepaid services (fixed-line, mobile, internetInternet and data services) are recognized as income based upon actual usage by customers or when the right to use those services expires.customers.

Where the Company enters into transactions which involve both the provision of air time bundled with products such as 3G data card and handset, total consideration received from products and air time in these arrangements are allocated and measured using units of accounting within the arrangement based on their relative fair values limited to the amount that is not contingent upon the delivery of products.

Services revenueRevenue from a contract to provide services is recognized by reference to the stage of completion of the contract.

Dividend income from investments is recognized when the shareholder’s right to receive payment has been established.established under the premises when it is probable that the economic benefit related to the transactions will flow to the Company and that the revenue can be reasonably measured.

Interest income from a financial asset is recognized when it is probable that the economic benefits related to the transactions will flow to the Company and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

Leasing

 

 a.The Company as lessor

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease.

 

 b.The Company as lessee

Operating lease payments are recognized as an expense on a straight-line basis over the lease term.

Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

AllOther than stated above, all other borrowing costs are recognized in profit or loss in the period in which they are incurred.

Employee Benefits

a.Short-term employee benefits

Retirement Benefit CostsLiabilities recognized in respect of short-term employee benefits are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service.

b.Retirement benefits

Payments to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions.

ForDefined benefit costs (including service cost, net interest and remeasurement) under the defined benefit retirement benefit plans the cost of providing benefits isare determined using the Projected Unit Credit Method with actuarial calculations being carried out atprojected unit credit method. Service cost (including current service cost and gains or losses on settlements) and net interest on the year end.net defined benefit liability (asset) are recognized as employee benefits expense in the period they occur. Remeasurement, comprising (a) actuarial gains and losses, the effect of the changes to the asset ceiling (if applicable)losses; and (b) the return on plan assets, (excluding interest)excluding amounts included in net interest on the net defined benefit liability (asset), is reflected immediately in the balance sheet with a charge or credit recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss and past service cost is recognized in profit or loss in the period of a plan amendment. loss.

Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are categorized as follows:

Service cost (including current service cost, past service cost, as well as gains and losses on curtailments and settlements);

Net interest expense or income; and

Remeasurement.

The retirement benefit obligation recognized in the consolidated balance sheet(asset) represents the actual deficit or surplus(surplus) in the Company’s defined retirement benefit plans.plan. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans.

c.Other long-term employee benefits

Other long-term employee benefits are accounted for in the same way as the accounting required for defined benefit plan except that remeasurement is recognized in profit or loss.

Share-based PaymentsPayment Arrangements—Employee Stock Options

Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date.

The fair value determined at the grant date of the stockemployee share 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, based on the Company’s estimate of employee share options that are expected to ultimately vest, with a corresponding adjustment toincrease in additional paid-in capital—employee stock options. For those options with graded vesting schedules, each installment is treated as a separate share option grant for purposes of determiningIf the grant date fair value. Expenses are recognizedequity instruments granted vest immediately at the grant date, expenses are recognized in full in profit or loss if vested immediately.loss.

At the balance sheet date,end of each reporting period, the Company reviewsrevises its estimate of the number of equity instrumentsemployee share options expected to vest. The impact of the revision of the original estimates if any, is recognized in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to additional paid-in capital—employee stock options.

Income Tax

Income tax expense represents the sum of the tax currently payable and deferred tax.

Current and deferred taxes are recognized in profit or loss, except for those relate to items recognized in other comprehensive income or directly in equity; in which cases, the relevant tax effects (current and deferred taxes) are also recognized in other comprehensive income or directly in equity, respectively.

 a.Current tax

The current tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Income tax (10%) on undistributed earnings is accrued during the period the earnings arise and adjusted to the extent that distributions are approved by the stockholders in the following year.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

 

 b.Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. If the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit, the resulting deferred tax asset or liability is not recognized. In addition, a deferred tax liability is not recognized on taxable temporary difference arising from initial recognition of goodwill.

Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, unused loss carry forward and unused tax credits from purchases of machinery, equipment and technology, and research and development expenditures to the extent that it is probable that taxable profits will be available against which those deductible temporary differences loss carryforwards, unused tax credits from purchases of machinery, equipment and technology, research and development expenditures, and personnel training expenditures can be utilized.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the balance sheet date,end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. A previously unrecognized deferred tax asset is also reviewed at the end of each reporting period and recognized to the to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

c.Current and deferred tax for the year

Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income, or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive incomeincome.

Where current tax or directlydeferred tax arises from the initial accounting for a business combination, the tax effect is included in equity respectively.the accounting for the business combination.

 

4.CRITICAL ACCOUNTING JUDGEMENTSJUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Company’s accounting policies, which are described in Note 3, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptionswhich are based on historical experience and other factors that are considered to be relevant.not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed by the management on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period. Actual results may differ from these estimates.

 

 a.Impairment of trade notes and accounts receivable

When there is objective evidence showingshowed indications of impairment, the Company will considerconsiders the estimation of future cash flows. The amount of impairment will be measured asat the difference between the carrying amount and the present value of estimated future cash flows discounted by the original effective interest rates of the financial assets. However, as the impact from discounting short-term receivables is not material; therefore,material, the impairment of short-term receivables is based onmeasured at the difference between the carrying amount and the estimated undiscounted estimated future cash flows. Where the actual future cash flows are lesslower than expected, a material impairment loss may arise.

 

 b.Provision for inventory valuation and obsolescence

Inventories are stated at the lower of cost or net realizable value. Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made at the end of reporting period. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the

end of the period. Estimates of net realizable value also take into consideration. Inventory write-downs are determined on an item by item basis, except for those similar items which could be categorized into the same groups. The Company uses the inventory holding period and turnover as the evaluation basis for inventory obsolescence losses.

 

 c.Impairment of tangible and intangible assets

In the process of evaluating the potential impairment of tangible and intangible assets, the Company is required to consider internal and external indicators of impairment and make subjective judgments in determining the independent cash flows, useful lives, expected future revenue and expenses related to the specific asset groups within the context of the telecommunication industry. Any changes in these estimates based on changed economic conditions or business strategies could result in significant impairment charges in future periods.

 

 d.Useful lives of property, plant and equipment

As discussed in Note 3, “Summary of Significant Accounting Policies” “Property, Plant and Equipment”, the Company reviews the estimated useful lives of property, plant and equipment at the balance sheet date.end of each year.

 

 e.Recognition and measurement of defined benefit plans

Accrued pensionNet defined benefit liabilities and the resulting pension expense under defined benefit pension plans are calculated using the Projected Unit Credit Method. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability.

f.Control over subsidiaries

As discussed in Note 3, some entities are subsidiaries of the Company although the Company only owns less than 50% ownership interest in these entities. After considering the Company’s absolute size of holding in the entity and the relative size of and the dispersion of shares owned by the other shareholders, and the contractual arrangements between the Company and other investors, potential voting interests and the written agreement between shareholders, the management concluded that the Company has a sufficiently dominant voting interest to direct the relevant activities of the entity and therefore the Company has control over these entities.

5.APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

Amendments to IFRSs and the New Interpretation That Are Mandatorily Effective for the Current Year

In the current year, the Company has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after January 1, 2015.

a.Annual Improvements to IFRSs 2010—2012 Cycle and 2011—2013 Cycle

The Company has applied the amendments to IFRSs included in the Annual Improvements to IFRSs 2010—2012 Cycle and 2011—2013 Cycle for the first time in 2015. One of the annual improvements requires entities to disclose judgments made by management in applying the aggregation criteria set out in paragraph 12 of IFRS 8 “Operating Segments”. The Company has aggregated several operating segments into a single operating segment and made the required disclosures in Note 43 in accordance

with the amendments. The application of the other amendments has had no impact on the disclosures or amounts recognized in the Company’s consolidated financial statements.

New andRevised Revised IFRSs in Issue But Not Yet Effective

The Company has not applied the following new and revised IFRSs that have been issued but are not yet effective.

 

New, Revised or Amended Standards and Interpretations

 

Effective Date Issued by IASB (Note)(Note 1)

Amendments to IFRSs

Annual Improvements to IFRSs 2012-2014 Cycle

January 1, 2016 (Note 2)

IFRS 9 

Financial Instruments

 

Tentatively determined as January 1, 2018

Amendments to IFRS 9 and IFRS 7 

Mandatory Effective Date of
IFRS 9 and Transition DisclosureDisclosures

 

Tentatively determined as January 1, 2018

Amendments to IFRS 10 and IAS 28

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

To be determined by IASB

Amendments to IFRS 10, IFRS 12
and

IAS 27

28
 

Investment EntitiesEntities: Applying the Consolidation Exception

 

January 1, 20142016

Amendment to IFRS 11

Acquisitions of Interests in Joint Operations

January 1, 2016

IFRS 14 

Regulatory Deferral Accounts

 

January 1, 2016 (Note 3)

IFRS 15

Revenue from Contracts with Customers

January 1, 2018

Amendments to IFRS 15

Clarifications to IFRS 15

January 1, 2018

IFRS 16

Leases

January 1, 2019

Amendment to IAS 191 

Defined Benefit Plans: Employee Contributions

July 1, 2014

Amendment to IAS 32

Offsetting of Financial Assets and Financial LiabilitiesDisclosure Initiative

 

January 1, 20142016

AmendmentsAmendment to IAS 367

Disclosure Initiative

 

Recoverable Amount Disclosure for Non-financialJanuary 1, 2017

Amendment to IAS 12

Deferred Tax: Recovery of Underlying Assets

 

January 1, 20142017

AmendmentAmendments to IAS 39

16 and IAS 38
 

NovationClarification of DerivativesAcceptable Methods of Depreciation and Continuation of Hedge AccountingAmortization

 

January 1, 20142016

IFRIC 21

Amendments to IAS 16 and IAS 41
 

LeviesAgriculture: Bearer Plants

 

January 1, 20142016

IFRSs (Amendments)

Note 1:
  

Annual Improvements to IFRSs 2010-2012 Cycle

The amendments to IFRS 2 apply to share-based payment transactions for which the grant date isaforementioned new, revised or amended standards or interpretations are effective after fiscal year beginning on or after July 1, 2014; the amendmentseffective dates, unless specified otherwise.

Note 2:Except the amendment to IFRS 3 apply5 which is applied prospectively to business combinations occurredchanges in a method of disposal that occur in annual periods beginning on or after JulyJanuary 1, 2014; the amendments to IFRS 13 are effective immediately; the amendments to2016, the remaining standardsamendments are effective for annual periods beginning on or after JulyJanuary 1, 2014.

2016.

IFRSs (Amendments)

Note 3:  

Annual ImprovementsApplicable to IFRSs 2011-2013 Cycle

Effectivefirst annual IFRS financial statements effective for annual periodsa period beginning on or after JulyJanuary 1, 2014

2016.

(Concluded)

Note:   The aforementioned new, revised or amended standards or interpretations are effective after fiscal year beginning on or after the effective dates, unless specified otherwise.

Except for the following items, the Company believes the adoption of the aforementioned new and revised IFRSs will not have material impact on the Company’s financial statements.

 

 a.IFRS 9 “Financial Instruments”15 “Revenue from Contracts with Customers”

Recognition and measurement of financial assets

With regardsIFRS 15 establishes principles for recognizing revenue that apply to financial assets, all recognized financial assets that are within the scope of IAS 39 “Financial Instruments: Recognition and Measurement” are to be subsequently measured at amortized cost or fair value. Specifically, financial assets that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other financial assets are measured at their fair values at the balance sheet date. However, the Company may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income,contracts with only dividend income generally recognized in profit or loss.

Hedge accounting

The main changes in hedge accounting amended the application requirements for hedge accounting to better reflect the entity’s risk management activities. Compared with IAS 39, the main changes include: (1) enhancing types of transactions eligible for hedge accounting, specifically broadening the risk eligible for hedge accounting of non-financial items; (2) changing the way hedging derivative instruments are accounted for to reduce profit or loss volatility; and (3) replacing retrospective effectiveness assessment with the principle of economic relationship between the hedging instrument and the hedged item.

The mandatory effective date of IFRS 9, which was previously set on January 1, 2015, was removedcustomers, and will be reconsidered oncesupersedes IAS 18 “Revenue”, IAS 11 “Construction Contracts” and a number of revenue related interpretations.

When applying IFRS 15, an entity shall recognize revenue by applying the standard is complete with a new impairment model and finalization of any limited amendments to classification and measurement.following steps:

The Company anticipates that

1)Identify the contract with the customer;

2)Identify the performance obligations in the contract;

3)Determine the transaction price;

4)Allocate the transaction price to the performance obligations in the contracts; and

5)Recognize revenue when the entity satisfies a performance obligation.

Upon the application of IFRS 915, the Company will allocate the transaction price to each performance obligation identified in the future may havecontract on a significant impactrelative stand-alone selling price basis.

Incremental costs of obtaining a contract will be recognized as an asset to the extent the Company expects to recover those costs. Such asset will be amortized on amounts reported in respecta basis that is consistent with the transfer to the customer of the Company’s financial assets. However, itgoods or services to which the asset relates. This will lead to the later recognition of charges for certain customer-obtaining costs.

The amendments to IFRS 15 clarify how to (1) identify performance obligation; (2) determine whether a company is not practicablea principal or an agent; and (3) determine whether the revenue from granting a license should be recognized at a point in time or over time.

When IFRS 15 is effective, the Company may elect to provide a reasonable estimate ofapply this Standard and the related amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of IFRS 9 until a detailed review has been completed.initially applying this Standard recognized at the date of initial application.

 

 b.Amendments to IAS 36 “Recoverable Amount Disclosure for Non-financial Assets”IFRS 16 “Leases”

In issuing IFRS13 “Fair Value Measurement”,IFRS 16 sets out the IASB made some consequential amendments to the disclosure requirements inaccounting standards for leases that will supersede IAS 36 “Impairment17 and a number of Assets”, introducing a requirement to disclose in every reporting period the recoverable amount of an asset or each cash-generating unit. The amendment clarifies that the disclosure of such recoverable amount is required during the period when an impairment loss has been recognized or reversed. Furthermore,related interpretations.

Under IFRS 16, if the Company is requireda lessee, it shall recognize right-of-use assets and lease liabilities for all leases on the consolidated balance sheets except for low-value and short-term leases. The Company may elect to discloseapply the discount rate usedaccounting method similar to the accounting for operating lease under IAS 17 to the low-value and short-term leases. On the consolidated statements of comprehensive income, the Company should present the depreciation expense charged on the right-of-use asset separately from interest expense accrued on the lease liability and discloses such amounts in current and previous measurementsthe footnotes; interest is computed by using effective interest method. On the consolidated statements of cash flows, cash payments for the principal portion of the recoverable amount based on fair value less costslease liability are classified within financing activities; cash payments for interest portion are classified within operating activities.

The application of disposal measured usingIFRS 16 is not expected to have a present value technique. The Company is currently evaluating thematerial impact on the adoptionaccounting of the amendments.Company as lessor.

c.Amendments to IAS 39 “Novation of Derivatives and Continuation of Hedge Accounting”

The amendmentsWhen IFRS 16 becomes effective, the Company may elect to IAS 39 provide an exceptionapply this Standard either retrospectively to each prior reporting period presented or retrospectively with the requirementcumulative effect of the initial application of this Standard recognized at the date of initial application.

Except for the discontinuation of hedge accounting. The amendment states that the novation of a hedging instrument should not be considered

an expiration or termination giving rise to the discontinuation of hedge accounting when a hedging derivative is novated:

As a consequence of laws and regulations, or the introduction of laws and regulations, one or more clearing counterparties replace the original counterparty; and

Any changes in termsabovementioned impact, as of the novated derivative are limited to those necessary to effectdate the replacement ofconsolidated financial statements were authorized for issue, the counterparty.

Any changes toCompany is continuously assessing the derivative’s fair value arising from the novation would be reflected in its measurement and therefore in the measurement and assessment of hedge effectiveness. The Company does not anticipatepossible impact that the application of these amendments to IAS 39other standards and interpretations will have a significant impact on the Company’s consolidated financial statements asposition and operating result, and will disclose the Company does not have any novation of derivatives.relevant impact when the assessment is completed.

6.U.S. DOLLAR AMOUNTS

The Company maintains its accounts and expresses its consolidated financial statements in New Taiwan dollars. For readers’ convenience only, U.S. dollar amounts presented in the accompanying consolidated financial statements have been translated from New Taiwan dollars as set forth in the statistical release of the Federal Reserve Board of the United States as of December 31, 2013,2015, which was NT$29.8332.79 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.

 

7.CASH AND CASH EQUIVALENTS

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
   (In Millions) 

Cash

      

Cash on hand

  $239    $447    $236  

Bank deposits

   5,115     5,731     10,592  
  

 

 

   

 

 

   

 

 

 
   5,354     6,178     10,828  
  

 

 

   

 

 

   

 

 

 

Cash equivalents

      

Commercial paper

   18,966     18,957     2,375  

Time deposits with maturities of less than three months

   610     1,213     1,382  

Negotiable certificate of deposit

   1,177     4,590     —    

Treasury bills

   300     —       —    
  

 

 

   

 

 

   

 

 

 
   21,053     24,760     3,757  
  

 

 

   

 

 

   

 

 

 
  $26,407    $30,938    $14,585  
  

 

 

   

 

 

   

 

 

 

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Cash

    

Cash on hand

  $310    $333  

Bank deposits

   5,590     7,616  
  

 

 

   

 

 

 
   5,900     7,949  
  

 

 

   

 

 

 

Cash equivalents (investments with maturities of less than three months)

    

Commercial paper

   14,000     11,914  

Negotiable certificate of deposit

   3,100     7,600  

Time deposits

   560     2,808  
  

 

 

   

 

 

 
   17,660     22,322  
  

 

 

   

 

 

 
  $23,560    $30,271  
  

 

 

   

 

 

 

The annual yield rates of bank deposits, commercial paper, time deposits with maturities of less than three months from acquisition, negotiable certificate of deposit and treasury billstime deposits were as follows:

 

January 1, 2012

December 31,

2012

December 31,

2013

Bank deposits

0.00%-0.75%0.00%-0.75%0.00%-0.76%

Commercial paper

0.45%-0.80%0.71%-0.74%0.60%-0.65%

Time deposits with maturities of less than three months

0.40%-5.50%0.88%-4.70%0.05%-5.10%

Negotiable certificate of deposit

0.63%-0.72%0.83%-0.96%—  

Treasury bills

0.70%—  —  
   December 31 
   2014   2015 

Bank deposits

   0.00%-0.95%     0.00%-1.10%  

Commercial paper

   0.58%-0.65%     0.35%-0.41%  

Negotiable certificate of deposit

   0.50%-0.80%     0.36%-0.45%  

Time deposits

   0.38%-5.45%     0.55%-3.80%  

 

8.FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
   (In Millions) 

Financial assets held for trading

      

Derivatives (not designated for hedge)

      

Forward exchange contracts

  $—      $—      $—    

Currency swap contracts

   6     3     —    
  

 

 

   

 

 

   

 

 

 
   6     3     —    

Financial assets designated as at fair value through profit or loss Convertible bonds

   40     —       —    
  

 

 

   

 

 

   

 

 

 
  $46    $3    $—    
  

 

 

   

 

 

   

 

 

 

Financial liabilities held for trading

      

Derivatives (not designated for hedge)

      

Forward exchange contracts

  $—      $—      $—    

Currency swap contracts

   4     2     —    

Index future contracts

   —       —       —    
  

 

 

   

 

 

   

 

 

 
  $4    $2    $—    
  

 

 

   

 

 

   

 

 

 

(Concluded)
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Financial assets held for trading

    

Derivatives (not designated for hedge)

    

Forward exchange contracts

  $1    $—    
  

 

 

   

 

 

 

Financial liabilities held for trading

    

Derivatives (not designated for hedge)

    

Forward exchange contracts

  $  —      $  —    
  

 

 

   

 

 

 

The Company did not apply hedge accounting on the aforementioned contracts at the balance sheet date.

Outstanding currency swap contracts and forward exchange contracts as of balance sheet dates were as follows:

 

   Currency   Maturity Period   Contract Amount
(In Millions)
 

January 1, 2012

Currency swap contracts

US$/NT$2012.01-2012.03US$43/NT$1,307
US$/NT$2012.01-2012.02US$19/NT$571

Forward exchange contracts—buy

NT$/US$2012.01NT$60/US$2

December 31, 2012

Currency swap contracts

US$/NT$2013.01-2013.03US$34/NT$991
US$/NT$2013.01-2013.03US$32/NT$929

Forward exchange contracts—buy

NT$/US$2013.01NT$154/US$5

December 31, 20132014

      

Forward exchange contracts—buy

  NT$US$/US$NT$     2014.012015.01    US$7/NT$219

December 31, 2015

Forward exchange contracts—buy

EUR/NT$90/2016.03-06EUR18/NT$659

Forward exchange contracts—buy

US$3/NT$2016.01US$1/NT$26  

Outstanding index future contracts of subsidiaries on January 1, 2012 were as follows:

   Maturity Period   Units   Contract
Amount
(In Millions)
 

January 1, 2012

      

TAIFEX futures

      

TX

   2012.01     2    NT$3  

TX

   2012.02     4    NT$6  

TX

   2012.03     37    NT$52  

TE

   2012.03     19    NT$11  

TF

   2012.01     8    NT$6  

TF

   2012.02     5    NT$4  

TF

   2012.03     15    NT$12  

The deposits paid for outstanding index future contracts of subsidiaries (included in other current assets) were $5 million as of January 1, 2012.

The Company did not have any outstanding index future contracts as of December 31, 2012 and 2013.

The Company entered into the above currency swap contracts, forward exchange contracts and index future contracts to manage its exposure to foreign currency risk due to fluctuations in exchange rates and stock prices.rates. However, the aforementioned derivatives did not meet the criteria for hedge accounting and were classified as financial assets or financial liabilities held for trading.

The convertible bonds owned by subsidiaries were hybrid financial instruments that were financial assets designated as at fair value through profit or loss.

 

9.AVAILABLE-FOR-SALE FINANCIAL ASSETS

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
   (In Millions) 

Equity securities

      

Domestic listed stocks and emerging stocks

  $528    $3,278    $3,046  

Domestic and foreign open-end mutual funds

   2,137     2,190     —    

Domestic non-listed stocks

   2,470     2,328     2,224  

Foreign non-listed stocks

   105     140     200  

Foreign listed stocks

   —       10     24  
  

 

 

   

 

 

   

 

 

 
   5,240     7,946     5,494  
  

 

 

   

 

 

   

 

 

 

Debt securities

      

Corporate bonds

   77     50     —    
  

 

 

   

 

 

   

 

 

 
  $5,317    $7,996    $5,494  
  

 

 

   

 

 

   

 

 

 

Current

  $2,499    $2,250    $24  

Non-current

   2,818     5,746     5,470  
  

 

 

   

 

 

   

 

 

 
  $5,317    $7,996    $5,494  
  

 

 

   

 

 

   

 

 

 
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Equity securities

    

Domestic and foreign listed stocks

  $3,914    $3,243  

Domestic non-listed stocks

   2,105     1,990  

Foreign non-listed stocks

   262     278  
  

 

 

   

 

 

 
  $6,281    $5,511  
  

 

 

   

 

 

 

Current

  $—      $—    

Noncurrent

   6,281     5,511  
  

 

 

   

 

 

 
  $6,281    $5,511  
  

 

 

   

 

 

 

Since the fair value cannot be reliably measured due to the range of reasonable fair values measurement of the non-listed stocks isvalue estimates was so significant, and the probabilities of the various estimates cannot be reasonably assessed, thus the above non-listed stocks investmentinvestments owned by the Company were carried at costs less any impairment losses at the balance sheet date.dates.

CHI evaluated and concluded itsdisposed non-listed available-for-sale financial assets were partially impaired, and recorded an impairment losswith carrying amounts of $203$2 million, $6 million and $66$2 million for the years ended 2013, 2014 and 2015, respectively, and recognized the gains (losses) from the disposal of $3 million, $1 million and $(0.4) million for the years ended December 31, 20122013, 2014 and 2013,2015, respectively.

After the Company evaluated the financial positions and future operation results of aforementioned investment, the Company concluded some of its investment that have ceased their operations were fully impaired, and recognized an impairment loss of $17 million, $9 million and $77 million for the years ended December 31, 2013, 2014 and 2015, respectively. In addition, some of its investments are encountering profit recession or deficit. The Company concluded the recoverable amount of such investments which represented listed stock price, present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset or based on the market approach using financial indicators such as PE ratios of the comparable listed companies was lower than the carrying amount. Therefore, the Company recognized impairment losses of $49 million, $14 million and $30 million for the years ended December 31, 2013, 2014 and 2015, respectively.

10.HELD-TO-MATURITY FINANCIAL ASSETS

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Corporate bonds

  $13,790    $14,791    $10,513    $6,534    $3,871  

Bank debentures

   906     1,255     1,253     951     150  
  

 

   

 

   

 

   

 

   

 

 
  $14,696    $16,046    $11,766    $7,485    $4,021  
  

 

   

 

   

 

   

 

   

 

 

Current

  $1,201    $4,250    $4,264    $3,457    $1,881  

Non-current

   13,495     11,796     7,502  

Noncurrent

   4,028     2,140  
  

 

   

 

   

 

   

 

   

 

 
  $14,696    $16,046    $11,766    $7,485    $4,021  
  

 

   

 

   

 

   

 

   

 

 

The related information of corporate bonds and bank debentures as of balance sheet dates were as follows:

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Corporate bonds

          

Par value

  $13,865    $15,955    $10,473    $6,515    $3,865  
  

 

   

 

   

 

   

 

   

 

 

Nominal interest rate

   1.20%-2.98%     1.15%-2.90%     1.15%-2.49%     1.15%-2.49%     1.18%-2.49%  

Effective interest rate

   0.83%-2.89%     1.00%-2.89%     1.00%-1.95%     1.15%-1.58%     1.15%-1.54%  

Average expiry date

   4 years     4 years     4 years  

Average remaining maturity life

   1.34 years     1.04 years  

Bank debentures

          

Par value

  $900    $1,250    $1,250    $950    $150  
  

 

   

 

   

 

   

 

   

 

 

Nominal interest rate

   1.37%-1.60%     1.25%-1.60%     1.25%-1.60%     1.25%-1.60%     1.25%  

Effective interest rate

   1.25%-1.40%     1.15%-1.40%     1.15%-1.40%     1.15%-1.40%     1.25%  

Average expiry date

   4 years     4 years     4 years  

Average remaining maturity life

   0.75 year     1.41 years  

 

11.TRADE NOTES AND ACCOUNTS RECEIVABLE, NET

 

  December 31 
  January 1, 2012 December 31,
2012
 December 31,
2013
   2014   2015 
  NT$ NT$ NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Trade notes and accounts receivable

      $27,277    $28,260  

Trade notes and accounts receivable

  $24,819   $25,166   $23,823  

Less: Allowance doubtful accounts

   (2,423 (811 (922

Less: Allowance for doubtful accounts

   (1,049   (1,334
  

 

  

 

  

 

   

 

   

 

 
  $22,396   $24,355   $22,901    $26,228    $26,926  
  

 

  

 

  

 

   

 

   

 

 

The average credit terms range from 30 to 90 days. In determining the recoverability of a trade notes and accounts receivable, the Company considers significant change in the credit quality of the trade notes and accounts receivable from the date credit was initially granted up to the end of the reporting period. In general, with few exceptional cases, it is unlikely for the notes and accounts receivable due longer than 180 days to be collected, therefore the Company recognized 100% allowance of notes and accounts receivable overdue

longer than 180 days. For the notes and accounts receivable less than 180 days, the allowance for doubtful accounts was estimated based on the Company’s historical recovery experience.

The Company serves a large consumer base; therefore, the concentration of credit risksrisk is limited.

As of January 1, 2012, December 31, 2012 and December 31, 2013, the

The aging analysis for trade notes and accounts receivable as of balance sheet dates were as follows:

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Non-overdue

  $24,454    $25,708  

Less than 30 days

   680     733  

31-60 days

   171     346  

61-90 days

   91     241  

91-120 days

   76     193  

121-180 days

   64     121  

More than 181 days

   1,741     918  
  

 

 

   

 

 

 
  $27,277    $28,260  
  

 

 

   

 

 

 

The above aging analysis was based on days overdue.

At balance sheet dates, the receivables that were neither past due nor impaired amounted to $21,108 million, $23,798 million and $22,399 million, respectively.

Aging of receivables that are past due but not impaired were considered recoverable by the management of the Company. The aging of these receivables as of December 31, 2014 and 2015 was as follows:

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Less than 30 days

  $178    $188    $132    $114    $128  

31-60 days

   84     49     41     20     16  

61-90 days

   59     36     14     20     95  

91-120 days

   9     8     85     19     58  

121-180 days

   —       —       2     1     2  

More than 181 days

   11     9     12     17     20  
  

 

   

 

   

 

   

 

   

 

 
  $341    $290    $286    $191    $319  
  

 

   

 

   

 

   

 

   

 

 

The above aging analysis was based on days overdue.

Movements of the allowance for doubtful accounts were as follows:

 

   Year Ended December 31 
           2012                  2013         
   NT$  NT$ 
   (In Millions) 

Balance, beginning of year

  $2,423   $811  

Add: Provision for (reversal of) doubtful accounts

   (1,473  239  

Deduct: Amounts written off

   (139  (128
  

 

 

  

 

 

 

Balance, end of year

  $811   $922  
  

 

 

  

 

 

 

The amount of allowance for doubtful accounts assessed individually included the impairment loss of accounts receivable from certain companies in liquidation process or in significant financial difficulties, which were $7 million, $164 million and $221 million as of January 1, 2012, December 31, 2012 and December 31, 2013, respectively.

Chunghwa evaluated the results of procedures implemented to enhance the collection of accounts receivable as well as the experience of decreases in uncollected receivables, and decided to refine the estimates used in the allowance calculation which led to the reversal of allowance for doubtful accounts for the year ended December 31, 2012.

   Individually
Assessed for
Impairment
   Collectively
Assessed for
Impairment
   Total 
   NT$   NT$   NT$ 
   (In Millions) 

Balance on January 1, 2013

  $164    $647    $811  

Add: Provision for doubtful accounts

   57     182     239  

Deduct: Amounts written off

   —       (128   (128
  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2013

   221     701     922  

Add: Provision for doubtful accounts

   55     237     292  

Deduct: Amounts written off

   —       (165   (165
  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2014

   276     773     1,049  

Add: Provision for doubtful accounts

   88     392     480  

Deduct: Amounts written off

   —       (195   (195
  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2015

  $364    $970    $1,334  
  

 

 

   

 

 

   

 

 

 

12.INVENTORIES

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Merchandise

  $2,999    $4,243    $5,221    $4,164    $5,849  

Project in process

   770     795     520     822     697  

Work in process

   12     18     26     13     100  

Raw materials

   25     36     26     52     71  
  

 

   

 

   

 

   

 

   

 

 
   3,806     5,092     5,793     5,051     6,717  

Land held for sale

   579     15     —    

Land and building held for sale

   —       55     8  

Land held under development

  $1,999    $1,999  

Construction in progress

   290     —       44     47     64  

Land held under development

   111     —       1,999  

Land held for development

   36     2,034     4  
  

 

   

 

   

 

   

 

   

 

 
  $4,822    $7,196    $7,848    $7,097    $8,780  
  

 

   

 

   

 

   

 

   

 

 

The operating costs related to inventories were $44,150$50,860 million, $51,341 million and $50,860$52,666 million for the years ended December 31, 20122013, 2014 and 2013,2015, respectively.

For the years ended December 31, 20122013, 2014 and 2013,2015, the costs of valuation loss on inventories recognized as operating costcosts included the amountamounts of $113$203 million, $288 million and $203$198 million, respectively.

The capitalized borrowing costs of construction in progress were not significant for both 2012 and 2013.

As of January 1, 2012, December 31, 20122014 and December 31, 2013,2015, inventories of $1,023 million, $2,042$2,061 million and $2,057$2,063 million, respectively, were expected to be recovered for a time period longer than twelve months. The aforementioned amount of inventories is mainly related to property development owned by LED.

Land held for sale on January 1, 2012 was for Wan-Xi, Li-Shui (A) projects and Covent projects. Land held for sale on December 31, 2012 was for Wan-Xi and Li-Shui (A) projects.

Land and building held for sale on December 31, 2012 and 2013 was for the Guang-Diang project.

Land held under development and construction in progress on January 1, 2012 was for Guang-Diang and Li-Shui (A) projects. Land held under development and construction in progress on December 31, 20132014 and 2015 was for Qingshan Sec., Dayuan Township,Dist., Taoyuan County.City project.

Land held for development on January 1, 2012 was for Subsection 2 Gongyuan Sec., Zhongzheng Dist., Taipei City and Yucheng Sec., Nangang Dist., Taipei City. Land held for development on December 31, 2012 was for Subsection 2 Gongyuan Sec., Zhongzheng Dist., Taipei City, Yucheng Sec., Nangang Dist., Taipei City and Qingshan Sec., Dayuan Township, Taoyuan County. Land held for development on December 31, 2013 was for Yucheng Sec., Nangang Dist., Taipei City.

Subsection 2 Gongyuan Sec., Zhongzheng Dist, Taipei City was sold in July 2013.

13.PREPAYMENTS

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Prepaid rents

  $3,852    $3,566    $3,389    $3,330    $3,275  

Others

   1,584     1,974     2,443     2,618     3,006  
  

 

   

 

   

 

   

 

   

 

 
  $5,436    $5,540    $5,832    $5,948    $6,281  
  

 

   

 

   

 

   

 

   

 

 

Current

          

Prepaid rents

  $994    $919    $953    $1,105    $1,033  

Others

   895     1,067     1,271     1,339     1,636  
  

 

   

 

   

 

   

 

   

 

 
  $1,889    $1,986    $2,224    $2,444    $2,669  
  

 

   

 

   

 

   

 

   

 

 

Non-current

      

Noncurrent

    

Prepaid rents

  $2,858    $2,647    $2,436    $2,225    $2,242  

Others

   689     907     1,172     1,279     1,370  
  

 

   

 

   

 

   

 

   

 

 
  $3,547    $3,554    $3,608    $3,504    $3,612  
  

 

   

 

   

 

   

 

   

 

 

14.OTHER CURRENT MONETARY ASSETS

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Time deposits and negotiable certificates of deposit with maturities of more than three months

  $40,982    $22,264    $2,535    $2,616    $2,286  

Receivables from the Fund for Privatization of Government—owned Enterprises under the Executive Yuan

   1,284     869     1,318  
    

 

   

 

 

Others

   785     1,316     783     709     1,015  
  

 

   

 

   

 

   

 

   

 

 
  $43,051    $24,449    $4,636    $3,325    $3,301  
  

 

   

 

   

 

   

 

   

 

 

The annual yield rates of time deposits and negotiable certificates of deposit with maturities of more than three months at each period endbalance sheet dates were as follows:

 

January 1, 2012December 31,
2012
December 31,
2013

Time deposits and negotiable certificate of deposit with maturities of more than three months

0.25%-3.30%0.25%-3.30%0.11%-3.30%
   December 31 
   2014   2015 

Time deposits and negotiable certificate of deposit with maturities of more than three months

   0.11%-4.95%     0.11%-3.50%  

 

15.NON-WHOLLY OWNED SUBSIDIARIES THAT HAVE MATERIAL NONCONTROLLING MATERIAL INTERESTS

a.Information on significant noncontrolling interest subsidiary

The table below shows details of less than wholly owned subsidiaries of the Company that have material noncontrolling interests:

 

   

Place of
Incorporation
and Principal

Place of
Business

   Proportion of Ownership Interests and Voting
Rights Held by Noncontrolling Interests
 
     January 1,
2012
  December 31,
2012
  December 31,
2013
 

Senao International Co., Ltd.

   Taiwan     72  72  72
   

Place of
Incorporation

and Principal

Place of
Business

   Proportion of Ownership Interests and Voting
Rights Held by Noncontrolling Interests
 
     December 31 
     2014  2015 

SENAO

   Taiwan     72  71

  Profit Allocated to
Noncontrolling Interests
   Accumulated Noncontrolling Interests   Profit Allocated to
Noncontrolling Interests
   Accumulated
Noncontrolling Interests
 
  Year Ended December 31   January 1,
2012
   December 31,
2012
   December 31,
2013
   Year Ended December 31   December 31 
          2012                   2013             2013   2014   2015         2014               2015       
  NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Senao International Co., Ltd.

  $1,066    $1,022    $3,534    $3,811    $4,302  

SENAO

  $1,022    $436    $551    $4,013    $3,942  
  

 

   

 

         

 

   

 

   

 

     

Individually immaterial subsidiaries with noncontrolling interests

       647     525     544           911     1,123  
      

 

   

 

   

 

         

 

   

 

 
      $4,181    $4,336    $4,846          $4,924    $5,065  
      

 

   

 

   

 

         

 

   

 

 

The Company owns 28%29% equity shares of Senao International Co., Ltd. (SENAO).SENAO. However, the Company has four out of seven seats of the boardBoard of directorsDirectors of SENAO through the support of large beneficial shareholders. Therefore, the Company has control over SENAO and the accounts of SENAO are included in the consolidated financial statements.

Summarised

Summarized financial information in respect of SENAO and its subsidiaries that has material noncontrolling interests is set out below. The summarized financial information below represents amounts before intracompany eliminations.

 

Senao International Co., Ltd.

  January 1, 2012   December 31,
2012
   December 31,
2013
 
  December 31 
  2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Current assets

  $7,559    $8,723    $8,134    $7,944    $7,423  
  

 

   

 

   

 

   

 

   

 

 

Non-current assets

  $1,704    $1,926    $2,386  

Noncurrent assets

  $2,480    $2,615  
  

 

   

 

   

 

   

 

   

 

 

Current liabilities

  $4,221    $5,247    $4,439    $4,643    $4,398  
  

 

   

 

   

 

   

 

   

 

 

Non-current liabilities

  $79    $100    $91  

Noncurrent liabilities

  $94    $138  
  

 

   

 

   

 

   

 

   

 

 

Equity attributable to the parent

  $1,429    $1,491    $1,688    $1,674    $1,560  
  

 

   

 

   

 

   

 

   

 

 

Noncontrolling interests

  $3,534    $3,811    $4,302    $4,013    $3,942  
  

 

   

 

   

 

   

 

   

 

 

 

  Year Ended December 31   Year Ended December 31 
      2012         2013       2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Revenue

  $35,241   $43,033    $43,033    $41,753    $35,944  

Expenses

   33,758   41,610     41,610     41,146     35,171  
  

 

  

 

   

 

   

 

   

 

 

Profit for the year

  $1,483   $1,423    $1,423    $607    $773  
  

 

  

 

   

 

   

 

   

 

 

Profit attributable to the parent

  $417   $401    $401    $171    $222  

Profit attributable to the noncontrolling interests

   1,066    1,022     1,022     436     551  
  

 

  

 

   

 

   

 

   

 

 

Profit for the year

  $1,483   $1,423    $1,423    $607    $773  
  

 

  

 

   

 

   

 

   

 

 

Other comprehensive income (loss) attributable to the parent

  $(9 $12  

Other comprehensive income (loss) attributable to the noncontrolling interests

   (24  30  

Other comprehensive income attributable to the parent

  $12    $8    $(1

Other comprehensive income attributable to the noncontrolling interests

   30     21     (2
  

 

  

 

   

 

   

 

   

 

 

Other comprehensive income (loss) for the year

  $(33 $42  

Other comprehensive income for the year

  $42    $29    $(3
  

 

  

 

   

 

   

 

   

 

 

Total comprehensive income attributable to the parent

  $408   $413    $413    $179    $222  

Total comprehensive income attributable to the noncontrolling interests

   1,042    1,052     1,052     457     548  
  

 

  

 

   

 

   

 

   

 

 

Total comprehensive income for the year

  $1,450   $1,465    $1,465    $636    $770  
  

 

  

 

   

 

   

 

   

 

 

Dividends paid to noncontrolling interests

  $739    $742    $274  
  

 

   

 

   

 

 

Net cash inflow (outflow) from operating activities

  $(240  $1,233    $1,739  

Net cash inflow (outflow) from investing activities

   (274   (106   65  

Net cash outflow from financing activities

   (993   (533   (1,530
  

 

   

 

   

 

 

Net cash inflow (outflow)

  $(1,507  $594    $274  
  

 

   

 

   

 

 

   Year Ended December 31 
       2012          2013     
   NT$  NT$ 
   (In Millions) 

Dividends paid to noncontrolling interests

  $827   $739  
  

 

 

  

 

 

 

Net cash inflow (outflow) from operating activities

  $1,554   $(240
  

 

 

  

 

 

 

Net cash outflow from investing activities

  $(196 $(274
  

 

 

  

 

 

 

Net cash outflow from financing activities

  $(1,111 $(993
  

 

 

  

 

 

 

Net cash inflow (outflow)

  $247   $(1,507
  

 

 

  

 

 

 
b.Equity transactions with noncontrolling interests

The Company’s equity ownership of SENAO decreased from 28.44%28.30% as of January 1, 20122013 to 28.30% and 28.18% as of December 31 2012 and 2013, due to the exercise of options by SENAO’s employees. The total proceeds from exercise of employee stock options were $43 million and $42 million for the yearsyear ended December 31, 2012 and 2013, respectively.2013. The partial proceeds of $38 million and $36 million werewas attributed to noncontrolling interests for the yearsyear ended December 31, 2012 and 2013, respectively.2013. The Company’s equity ownership of SENAO did not change for the year ended December 31, 2014.

The Company’s equity ownership of CHPT decreased from 53.19% as of December 31, 2012January 1, 2013 to 50.62% as of December 31, 2013 due to the exercise of options by CHPT’s employees and CHPT issued employee stock bonus. The total proceeds from exercise of employee stock options were $8 million, substantially all of which were attributed to noncontrolling interests for the year ended December 31, 2013. The Company’s equity ownership of CHPT decreased from 50.62% as of December 31, 2013 to 47.65% as of December 31, 2014 due to CHI did not participate the CHPT’s capital increase in August and September 2014, and the cash inflow from noncontrolling interests was $162 million.

SENAO participated in share subscription of Youth in December 2015 at a percentage different from its original ownership interest. Therefore, the ownership interest of Youth increased from 70% to 89.48%.

SENAO purchased its treasury stock in June 2015 and July 2015, and the ownership interest of SENAO increased from 28.18% to 29.31%.

CHI disposed of partial shares of CHPT in January 2015, and the ownership interest of CHPT decreased from 47.65% to 45.68%.

The above transactions were accounted for as equity transactions since the Company did not cease to have control over these subsidiaries.

The detailed information of the equity transactions for the year ended December 31, 2015 was as follows:

 

   CHI Disposed
Some Shares of
CHPT
   SENAO
Purchased Its
Treasury Stock
   SENAO
Participated in
Youth’s Share
Subscription
 
   NT$   NT$   NT$ 
       (In Millions)     

Cash consideration received (paid) from (to) noncontrolling interest

  $45    $(492  $—    

The proportionate share of the carrying amount of the net assets of the subsidiary transferred from (to) noncontrolling interests

   (18   416     (0.4
  

 

 

   

 

 

   

 

 

 

Differences arising from equity transaction

  $27    $(76  $(0.4
  

 

 

   

 

 

   

 

 

 

Line items for equity transaction adjustment

      

Additional paid-in capital—difference between consideration received and the carrying amount of the subsidiaries’ net assets upon actual disposal

  $27    $—      $—    
  

 

 

   

 

 

   

 

 

 

Additional paid-in capital—arising from changes in equities of subsidiaries

  $—      $(15  $(0.4
  

 

 

   

 

 

   

 

 

 

Unappropriated earnings

  $—      $(61  $—    
  

 

 

   

 

 

   

 

 

 

c.Business combinations

1)Subsidiary acquired

   Principal Activity  Date of Acquisition   Proportion of
Voting
Equity
Interests
Acquired (%)
   Consideration
Transferred
 
              NT$ 
              (In Millions) 

Youth Co., Ltd. and its subsidiaries

  

Sale of computer software, hardware and related products

   September 2, 2015     70    $135  
        

 

 

 

Youth and its subsidiaries were acquired in order to continue the expansion of SENAO’s activities in selling telecommunication products. Youth and its subsidiaries were acquired by cash.

2)Assets acquired and liabilities assumed at the date of acquisition

   Youth and Its
Subsidiaries
 
   NT$ 
   (In Millions) 

Current assets

  

Cash and cash equivalents

  $21  

Accounts and other receivables

   10  

Inventories

   30  

Prepayments

   6  

Other current assets

   6  

Noncurrent assets

  

Property, plant and equipment

   36  

Intangible assets

   259  

Refundable deposits

   22  

Deferred income tax assets

   4  

Other noncurrent assets

   32  

Current liabilities

  

Short-term loans

   (54

Trade notes payable

   (9

Accounts and other payable

   (75

Other current liabilities

   (80

Noncurrent liabilities

  

Long-term loans

   (40

Deferred income tax liabilities

   (44

Other noncurrent liabilities

   (10
  

 

 

 
  $114  
  

 

 

 

3)Goodwill arising on acquisition

   Youth and Its
Subsidiaries
 
   NT$ 
   (In Millions) 

Consideration transferred

  $135  

Add: Noncontrolling interest (30% of the recognized amounts of Youth and its subsidiaries’ identifiable net assets)

   34  

Less: Fair value of identifiable net assets acquired

   (114
  

 

 

 

Goodwill arising on acquisition

  $55  
  

 

 

 

Goodwill that arose in the acquisition of Youth and its subsidiaries mainly included the amount in relation to the benefit of expected synergies from integrating the businesses of Youth and its subsidiaries that operate sales and maintenance of Apple’s products for many years. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.

Goodwill arising from business combinations is not deductible for tax purposes.

4)Net cash outflow on acquisition of subsidiaries

   Youth and Its
Subsidiaries
 
   NT$ 
   (In Millions) 

Consideration paid in cash

  $135  

Less: Cash and cash equivalents acquired

   (21
  

 

 

 
  $114  
  

 

 

 

5)Impact of acquisitions on the results of the Company

The results of the acquired subsidiaries since the date of acquisition were as follows:

   Youth and Its
Subsidiaries
 
   NT$ 
   (In Millions) 

Revenue

  $188  
  

 

 

 

Net loss

  $18  
  

 

 

 

Had these business combinations been in effect at the beginning of the annual reporting period, the Company’s revenue and net income would have been $232,187 million and $42,774 million for the year ended December 31, 2015. This pro-forma information is for illustrative purposes only and is not necessarily an indication of revenue and results of operations of the Company that actually would have been achieved had the acquisition been completed on January 1, 2015, nor is it intended to be a projection of future results.

In determining the pro-forma revenue and net income of the Company had Youth and its subsidiaries been acquired at the beginning of the current reporting period, management calculated depreciation of property, plant and equipment and amortization of intangible assets acquired on the basis of the fair values arising in the initial accounting for the business combination rather than the carrying amounts recognized in the pre-acquisition financial statements.

16.INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
       (In Millions)     

Associates

  $2,269    $1,950    $2,131  

Joint venture

   251     241     228  
  

 

 

   

 

 

   

 

 

 
  $2,520    $2,191    $2,359  
  

 

 

   

 

 

   

 

 

 
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Investments in associates

  $2,493    $2,668  

Investments in joint ventures

   257     227  
  

 

 

   

 

 

 
  $2,750    $2,895  
  

 

 

   

 

 

 

 a.Investments in associates

Investments in associates were as follows:

 

  Carrying Amount 
 Carrying Amount   December 31 
 January 1, 2012 December 31,
2012
 December 31,
2013
     2014       2015   
 NT$ NT$ NT$   NT$   NT$ 
   (In Millions)     (In Millions) 

Listed

       

Senao Networks, Inc. (“SNI”)

 $332   $393   $484    $589    $699  

Non-listed

       

ST-2 Satellite Ventures Pte., Ltd. (“STS”)

 462   542   520  

ST-2 Satellite Ventures Pte. Ltd. (“STS”)

   558     495  

Taiwan International Standard Electronics Co., Ltd. (“TISE”)

   209     338  

Viettel-CHT Co., Ltd. (“Viettel-CHT”)

   278     316  

International Integrated System, Inc. (“IISI”)

 257   276   290     291     297  

Viettle-CHT Co., Ltd.

 255   265   278  

Taiwan International Standard Electronics Co., Ltd. (“TISE”)

 612   192   180  

Skysoft Co., Ltd. (“SKYSOFT”)

 111   124   152     135     137  

KingwayTek Technology Co., Ltd. (“KWT”)

   85     82  

So-net Entertainment Taiwan Limited (“So-net”)

 34   31   92     99     106  

Kingwaytek Technology Co., Ltd. (“KWT”)

 74   76   74  

Alliance Digital Technology Co., Ltd. (“ADT”)

  —      —     29  

Taiwan International Ports Logistics Corporation (“TIPL”)

   79     69  

Dian Zuan Integrating Marketing Co., Ltd. (“DZIM”)

   66     40  

Click Force Co., Ltd. (“CF”)

   39     39  

HopeTech Technologies Limited (“HopeTech”)

 21   22   25     31     36  

Alliance Digital Tech Co., Ltd. (“ADT”)

   20     14  

MeWorks LIMITED (HK) (“MeWorks”)

   9     —    

Xiamen Sertec Business Technology Co., Ltd. (“Sertec”)

 1   8   6     5     —    

Dian Zuan Integrating Marketing Co., Ltd. (“DZIM”)

 110   21   1  

Panda Monium Company Ltd.

  —      —      —       —       —    
 

 

  

 

  

 

   

 

   

 

 
 $2,269   $1,950   $2,131    $2,493    $2,668  
 

 

  

 

  

 

   

 

   

 

 

At the end of the reporting period,periods, the percentagepercentages of ownership and voting rights in associates held by the Company were as follows:

 

  % of Ownership and Voting Right 
  January 1, 2012  December 31,
2012
  December 31,
2013
 

Senao Networks, Inc. (“SNI”)

  41    40    34  

ST-2 Satellite Ventures Pte., Ltd. (“STS”)

  38    38    38  

International Integrated System, Inc. (“IISI”)

  33    33    33  

Viettle-CHT Co., Ltd.

  30    30    30  

Taiwan International Standard Electronics Co., Ltd. (“TISE���)

  40    40    40  

Skysoft Co., Ltd. (“SKYSOFT”)

  30    30    30  

So-net Entertainment Taiwan Limited (“So-net”)

  30    30    30  

Kingwaytek Technology Co., Ltd. (“KWT”)

  33    33    33  

Alliance Digital Technology Co., Ltd. (“ADT”)

  —      —      19  

HopeTech Technologies Limited (“HopeTech”)

  45    45    45  

Xiamen Sertec Business Technology Co., Ltd. (“Sertec”)

  49    49    49  

Dian Zuan Integrating Marketing Co., Ltd. (“DZIM”)

  40    33    13  

Panda Monium Company Ltd.

  43    43    43  
   % of Ownership and
Voting Rights
 
   December 31 
   2014   2015 

Senao Networks, Inc. (“SNI”)

   34     34  

ST-2 Satellite Ventures Pte., Ltd. (“STS”)

   38     38  

Taiwan International Standard Electronics Co., Ltd. (“TISE”)

   40     40  
   (Continued)  

   % of Ownership and
Voting Rights
 
   December 31 
   2014   2015 

Viettel-CHT Co., Ltd. (“Viettel-CHT”)

   30     30  

International Integrated System, Inc. (“IISI”)

   33     33  

Skysoft Co., Ltd. (“SKYSOFT”)

   30     30  

KingwayTek Technology Co., Ltd. (“KWT”)

   27     26  

So-net Entertainment Taiwan Limited (“So-net”)

   30     30  

Taiwan International Ports Logistics Corporation (“TIPL”)

   27     27  

Dian Zuan Integrating Marketing Co., Ltd. (“DZIM”)

   26     26  

Click Force Co., Ltd. (“CF”)

   49     49  

HopeTech Technologies Limited (“HopeTech”)

   45     45  

Alliance Digital Tech Co., Ltd. (“ADT”)

   13     13  

MeWorks LIMITED (HK) (“MeWorks”)

   20     20  

Xiamen Sertec Business Technology Co., Ltd. (“Sertec”)

   49     —    

Panda Monium Company Ltd.

   43     —    
   (Concluded)  

None of the above associates is considered individually material to the Company. Aggregate information of associates that are not individually material was as follows:

 

  Year Ended December 31   Year Ended December 31 
      2012         2013       2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)       (In Millions)     

The Company’s share of the profit

  $529   $680    $680    $823    $926  

The Company’s share of other comprehensive income (loss)

   (26 (35   (35   5     (19
  

 

  

 

   

 

   

 

   

 

 

The Company’s share of total comprehensive income

  $503   $645    $645    $828    $907  
  

 

  

 

   

 

   

 

   

 

 

SNI was listed in December 2013. The Level 1 fair valuevalues based on the closing market prices of SNI as of the balance sheet date isdates were as follows:

 

   December 31,
2013
 
   NT$ 
   (In Millions) 

SNI

  $2,545  
  

 

 

 
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

SNI

  $2,868    $3,556  
  

 

 

   

 

 

 

SENAO’s equity ownership of SNI decreased from 40% as of December 31, 2012 to 34% as of December 31, 2013 for the following reasons: (1) not participating in capital increase of SNI; (2) disposal some shares of SNI; and (3) the exercise of options by SNI’s employees.

SENAO disposed of 245 thousand shares of SNI in December 2013 and the amountgain of disposal of SNI was recognized in profit andor loss recognized was as follows:

 

  Year Ended
December 31,
 
  Year Ended
December 31,
2013
   2013 
  NT$   NT$ 
  (In Millions)   (In Millions) 

Proceeds from disposal

  $24    $24  

Carrying amount of the disposed investment

   (9   (9

Reclassification adjustment upon disposal—exchange differences arising from the translation of the net investment in foreign operations

   (2   (2
  

 

   

 

 

Profit or loss, net

  $13    $13  
  

 

   

 

 

Chunghwa participateddid not participate in the capital increase of So-net by investing $60 millionKWT in March 2013. TheAugust 2014 and November 2014 and the ownership interest remains 30%decreased to 27% after the capital increase.increase of KWT. Chunghwa sold its partial ownership interest in KWT in January 2015. The gain on disposal of KWT was $7 million and the ownership interest decreased to 26% after the disposal.

Chunghwa and Taiwan MobileInternational Ports Corporation, Asia Pacific Telecom, Vibo Telecom, EasyCard Corporation and Far Eastone TelecommunicationsLtd. established an associate, ADT,TIPL in November 2013.October 2014. Chunghwa invested $30$80 million cash and held 19%27% ownership of ADT. Based on the share of capital commitments, Chunghwa has one seat out of five seats in the board of directors; therefore it has significant influence over ADT. ADTTIPL. TIPL engages mainly in the developmentlogistics service of mobile payments and information processing service.increasing cargo movement efficiency.

Chunghwa, President Chain Store Corporation and EasyCard Corporation established an associate, DZIM in May 2011. Chunghwa invested $115 million cash and held 40% ownership of DZIM in May 2011. Chunghwa participated in the capital increase of DZIM by investing $14 million in May 2012 but did not subscribe to the shares at its corresponding proportion. Thus, the ownership interest

decreased from 40% to 33% after the capital increase of DZIM. DZIM reduced its capital by $193 million in December 2012; Chunghwa received $65 million from the capital reduction and the ownership interest remains at 33%. DZIM reduced its capital to offset the deficits amounting to $131 million and made capital reduction of $49 million during its stockholders’ meeting held on March 31, 2013. Chunghwa received $16 million formfrom the capital reduction. DZIM increased its capital in April 2014 and June 2014. Chunghwa did not participateparticipated in the capital increase of DZIM by investing $49 million in July 2013 and the ownership interest decreased from 33% to 13% afterApril 2014. SENAO participated in the capital increase of DZIM. TheDZIM by investing $24 million in April 2014. As of December 31, 2015, the Company still has two seats outheld 26% ownership of five seats in the board of directors; therefore it remains an investor with significant influence over DZIM. DZIM engages mainly in information technology service and general advertisement service.

COICHYP participated in the capital increase of SertecCF by investing $12$39 million and $6 million in February 2012. COI remainedNovember 2014 and April 2015, respectively. CHYP held 49% ownership. CF engages mainly in advertisement services.

Chunghwa, Taiwan Mobile Corporation, Asia Pacific Telecom, Vibo Telecom, EasyCard Corporation and Far EasTone Telecommunications established an associate, ADT, in November 2013. Chunghwa invested $30 million cash and held 19% ownership of SertecADT. Based on the share of capital commitments, Chunghwa has one out of five seats in the Board of Directors; therefore it has significant influence over ADT. Chunghwa did not participate in the capital increase of ADT in April 2014 and October 2014 and the ownership interest decreased to 13% after the capital increase.increase of ADT. Chunghwa still has one out of five seats in the Board of Directors; therefore it remains significant influence over ADT. ADT engages mainly in the development of mobile payments and information processing service.

Prime Asia participated in the capital increase of MeWorks by investing $10 million and held 20% ownership in May 2014. Based on the share of capital commitments, Prime Asia has two seats out of five seats in the Board of Directors; therefore it has significant influence over MeWorks. MeWorks engages mainly in investment business. As the operation of MeWorks had ceased, the Company concluded that this investment was fully impaired. The Company recognized an impairment loss of $8 million for the year ended December 31, 2015.

Sertec completed its liquidation in June 2015. CHI recognized the gain on disposal of Sertec of $1 million and received the proceeds from disposal in July 2015.

CHI disposed all ownership interest in Panda Monium Company Ltd. in September 2015.

The Company’s share of profit (loss) and other comprehensive income (loss) of associates was recordedrecognized based on the audited financial statements of the associates prepared in conformity with IFRSs for the years ended December 31, 2012 and 2013.statements.

 

 b.InvestmentInvestments in joint ventureventures

InvestmentInvestments in joint venture wasventures were as follows:

 

      % of Ownership and 
  Carrying Amount   Voting Rights 
  Carrying Amount   % of Ownership and Voting Rights   December 31   December 31 
  January 1,
2012
   December 31,
2012
   December 31,
2013
   January 1,
2012
   December 31,
2012
   December 31,
2013
   2014   2015   2014   2015 
  NT$   NT$   NT$               NT$   NT$         
  (In Millions)               (In Millions)         

Non-listed

                    

Huada Digital Corporation (“HDD”)

  $251    $241    $228     50     50     50    $219    $207     50     50  

Chunghwa Benefit One Co., Ltd. (“CBO”)

   38     20     50     50  
  

 

   

 

   

 

         

 

   

 

     
  $    257    $    227      
  

 

   

 

     

Chunghwa invested in HDDCBO in September 2011February 2014 at $250$50 million cash to acquire 50% of its shares and the rest of 50% ownership interest was held by HTC CorporationBenefit One Asia Pte. Ltd. (“HTC”BOA”). After the stockholders’ meeting of HDD held on March 2, 2012, Chunghwa, and HTC each obtained half of director seats. Thus, neither entityChunghwa nor BOA obtained control over HDD. HDDCBO. CBO engages mainly in providing software services.e-commerce business for employees of corporate members and personal customers.

In March 2016, the shareholders of HDD approved that HDD would start its dissolution from March 31, 2016. The liquidation of HDD is still in process.

None of the above joint ventures is considered individually material to the Company. Summarized financial information of joint ventureventures that was not material to the Company was as follows:

 

  Year Ended December 31   Year Ended December 31 
      2012         2013       2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

The Company’s share of the loss

  $(9 $(14

The Company’s share of loss

  $(14  $(21  $(29

The Company’s share of other comprehensive income

   —      —       —       —       —    
  

 

  

 

   

 

   

 

   

 

 

The Company’s share of total comprehensive loss

  $(9 $(14  $(14  $(21  $(29
  

 

  

 

   

 

   

 

   

 

 

The Company’s share of loss of the joint ventureventures was recorded based on the audited financial statements for the years ended December 31, 2012 and 2013.

statements.

17.PROPERTY, PLANT AND EQUIPMENT

 

   December 31 
   2011   2012   2013 
   NT$   NT$   NT$ 
   (In Millions) 

Carrying amount

      

Land

  $102,122    $102,197    $102,263  

Land improvements

   504     480     443  

Buildings

   47,619     46,604     45,586  

Computer equipment

   3,889     3,886     4,395  

Telecommunications equipment

   124,300     121,530     122,804  

Transportation equipment

   1,273     2,045     2,073  

Miscellaneous equipment

   1,636     1,917     2,297  

Construction in progress and advances related to acquisition of equipment

   13,689     18,683     22,853  
  

 

 

   

 

 

   

 

 

 
  $295,032    $297,342    $302,714  
  

 

 

   

 

 

   

 

 

 
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Carrying amount

    

Land

  $102,774    $102,747  

Land improvements

   413     372  
   (Continued)  

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Buildings

   44,398     43,369  

Computer equipment

   4,010     3,281  

Telecommunications equipment

   126,309     123,167  

Transportation equipment

   1,616     1,065  

Miscellaneous equipment

   2,200     1,996  

Construction in progress and advances related to acquisition of equipment

   20,930     20,402  
  

 

 

   

 

 

 
  $302,650    $296,399  
  

 

 

   

 

 

 
   (Concluded)  

 

 Land Land
Improvements
 Buildings Computer
Equipment
 Telecommuni-
cations
Equipment
 Transportation
Equipment
 Miscellaneous
Equipment
 Construction
in Progress
and Advances
Related to
Acquisition
of Equipment
 Total  Land Land
Improvements
 Buildings Computer
Equipment
 Telecommuni-
cations
Equipment
 Transportation
Equipment
 Miscellaneous
Equipment
 Construction
in Progress
and Advances
Related to
Acquisition of
Equipment
 Total 
 NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$  NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ 
 (In Millions)  (In Millions) 

Cost

                  

Balance on January 1, 2012

 $102,122   $1,521   $67,289   $14,808   $655,543   $2,527   $7,220   $13,689   $864,719  

Additions

  —      —      —      51    30    1    108    33,531    33,721  

Disposal

  (17  (5  (47  (921  (11,204  (399  (417  —      (13,010

Effect of foreign exchange differences

  —      —      —      (1  (1  —      (1  (21  (24

Other

  92    32    187    1,297    25,008    1,186    678    (28,516  (36
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance on December 31, 2012

 $102,197   $1,548   $67,429   $15,234   $669,376   $3,315   $7,588   $18,683   $885,370  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance on January 1, 2013

 $102,197   $1,548   $67,429   $15,234   $669,376   $3,315   $7,588   $18,683   $885,370   $102,197   $1,548   $67,429   $15,234   $669,376   $3,315   $7,588   $18,683   $885,370  

Additions

  —      —      6    68    72    1    285    36,295    36,727    —      —     6   68   72   1   285   36,295   36,727  

Disposal

  (56  (9  (18  (1,132  (14,778  (158  (439  —      (16,590 (56 (9 (18 (1,132 (14,778 (158 (439  —     (16,590

Effect of foreign exchange differences

  —      —      —      2    7    —      (9  —      —      —      —      —     2   7    —     (9  —      —    

Other

  122    8    141    1,824    28,441    587    990    (32,125  (12

Others

 122   8   141   1,824   28,441   587   990   (32,125 (12
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance on December 31, 2013

 $102,263   $1,547   $67,558   $15,996   $683,118   $3,745   $8,415   $22,853   $905,495   $102,263   $1,547   $67,558   $15,996   $683,118   $3,745   $8,415   $22,853   $905,495  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Accumulated depreciation and impairment

                  

Balance on January 1, 2012

 $—     $(1,017 $(19,670 $(10,919 $(531,243 $(1,254 $(5,584 $—     $(569,687

Depreciation Expenses

  —      (56  (1,220  (1,342  (27,534  (408  (461  —      (31,021

Balance on January 1, 2013

 $—     $(1,068 $(20,825 $(11,348 $(547,846 $(1,270 $(5,671 $—     $(588,028

Depreciation expenses

  —     (57 (1,245 (1,380 (26,977 (550 (728  —     (30,937

Disposal

  —      5    47    918    11,191    398    416    —      12,975    —     9   18   1,129   14,735   158   421    —     16,470  

Impairment losses

  —      —      —      —      (281  —      (20  —      (301  —      —      —      —     (254  —      —      —     (254

Effect of foreign exchange differences

  —      —      —      —      2    —      —      —      2    —      —      —     (1 22    —     (27  —     (6

Other

  —      —      18    (5  19    (6  (22  —      4  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance on December 31, 2012

 $—     $(1,068 $(20,825 $(11,348 $(547,846 $(1,270 $(5,671 $—     $(588,028
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance on January 1, 2013

 $—     $(1,068 $(20,825 $(11,348 $(547,846 $(1,270 $(5,671 $—     $(588,028

Depreciation Expenses

  —      (57  (1,245  (1,380  (26,977  (550  (728  —      (30,937

Disposal

  —      9    18    1,129    14,735    158    421    —      16,470  

Impairment losses

  —      —      —      —      (254  —      —      —      (254

Effect of foreign exchange differences

  —      —      —      (1  22    —      (27  —      (6

Other

  —      12    80    (1  6    (10  (113  —      (26

Others

  —     12   80   (1 6   (10 (113  —     (26
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance on December 31, 2013

 $—     $(1,104 $(21,972 $(11,601 $(560,314 $(1,672 $(6,118 $—     $(602,781 $—     $(1,104 $(21,972 $(11,601 $(560,314 $(1,672 $(6,118 $—     $(602,781
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Cost

         

Balance on January 1, 2014

 $102,263   $1,547   $67,558   $15,996   $683,118   $3,745   $8,415   $22,853   $905,495  

Additions

 308    —     136   30   130   1   266   31,213   32,084  

Disposal

 (26 (12 (14 (1,805 (19,208 (76 (539  —     (21,680

Effect of foreign exchange differences

  —      —      —     2   102    —     5    —     109  

Others

 229   23   (80 1,095   30,934   154   496   (33,136 (285
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance on December 31, 2014

 $102,774   $1,558   $67,600   $15,318   $695,076   $3,824   $8,643   $20,930   $915,723  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
        (Continued)  

  Land  Land
Improvements
  Buildings  Computer
Equipment
  Telecommuni-
cations
Equipment
  Transportation
Equipment
  Miscellaneous
Equipment
  Construction
in Progress
and Advances
Related to
Acquisition of
Equipment
  Total 
  NT$  NT$  NT$  NT$  NT$  NT$  NT$  NT$  NT$ 
  (In Millions) 

Accumulated depreciation and impairment

         

Balance on January 1, 2014

 $—     $(1,104 $(21,972 $(11,601 $(560,314 $(1,672 $(6,118 $—     $(602,781

Depreciation expenses

  —      (53  (1,252  (1,473  (27,704  (599  (799  —      (31,880

Disposal

  —      12    13    1,800    19,194    76    461    —      21,556  

Impairment losses

  —      —      —      —      —      —      —      —      —    

Effect of foreign exchange differences

  —      —      —      (1  (15  —      (4  —      (20

Others

  —      —      9    (33  72    (13  17    —      52  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2014

 $—     $(1,145 $(23,202 $(11,308 $(568,767 $(2,208 $(6,443 $—     $(613,073
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cost

         

Balance on January 1, 2015

 $102,774   $1,558   $67,600   $15,318   $695,076   $3,824   $8,643   $20,930   $915,723  

Additions

  —      —      59    37    159    —      203    23,993    24,451  

Disposal

  —      —      (11  (1,073  (13,047  (69  (511  —      (14,711

Effect of foreign exchange differences

  —      —      —      —      69    —      —      —      69  

Acquisitions through business combinations

  19    —      7    —      —      —      39    —      65  

Others

  (46  17    135    714    23,115    60    363    (24,521  (163
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2015

 $102,747   $1,575   $67,790   $14,996   $705,372   $3,815   $8,737   $20,402   $925,434  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Accumulated depreciation and impairment

         

Balance on January 1, 2015

 $—     $(1,145 $(23,202 $(11,308 $(568,767 $(2,208 $(6,443 $—     $(613,073

Depreciation expenses

  —      (53  (1,269  (1,467  (26,291  (599  (671  —      (30,350

Disposal

  —      —      10    1,061    13,033    69    425    —      14,598  

Impairment losses

  —      —      —      —      (138  —      —      —      (138

Effect of foreign exchange differences

  —      —      —      —      (14  —      —      —      (14

Acquisitions through business combinations

  —      —      (1  —      —      —      (28  —      (29

Others

  —      (5  41    (1  (28  (12  (24  —      (29
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2015

 $—     $(1,203 $(24,421 $(11,715 $(582,205 $(2,750 $(6,741 $—     $(629,035
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The Company determined that(Concluded)

Due to technology upgrade, some telecommunications equipment became obsolete. The Company evaluated and miscellaneousconcluded the recoverable amount determined on the basis of value in use of aforementioned telecommunications equipment will not have future economic benefits,was nil and wrote off their carrying amount to nil, which resulted in anrecognized impairment losslosses of $301$254 million, $0.064 million and $254$138 million for the years ended December 31, 20122013, 2014 and 2013,2015, respectively. The impairment loss was included in other income and expenses in the statements of comprehensive income.

Depreciation expense is computed using the straight-line method over the following estimated service lives:

 

Land improvement

   8-30 years  

Buildings

  

Main building

   35-60 years  

Other building facilities

   3-102-20 years  

Computer equipment

   3-82-8 years  

Telecommunications equipment

  

Telecommunication circuits

   9-152-30 years  

Telecommunication machinery and antennas equipment

   5-102-30 years  

Transportation equipment

   3-10 years  

Miscellaneous equipment

  

Leasehold improvements

   2-61-6 years  

Mechanical and air conditioner equipment

   8-163-16 years  

Others

   3-102-10 years  

 

18.INVESTMENT PROPERTIES

 

  December 31   December 31 
  2011   2012   2013   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Carrying amount

          

Investment properties

  $9,060    $7,789    $8,018    $7,621    $7,902  
  

 

   

 

   

 

   

 

   

 

 

Cost

  $9,249    $9,260    $9,260  
  

 

   

 

   

 

 

 

  Investment
Properties
   Investment
Properties
 
  NT$   NT$ 
  (In Millions)   (In Millions) 

Cost

  

Balance on January 1, 2013 and December 31, 2013

  $9,260  
  

 

 

Accumulated depreciation and impairment

    

Balance on January 1, 2012

  $(189

Depreciation expense

   (16

Recognized impairment loss

   (1,261

Reclassification

   (5
  

 

 

Balance on December 31, 2012

  $(1,471
  

 

 

Balance on January 1, 2013

  $(1,471  $(1,471

Depreciation expense

   (17   (17

Reversal of impairment loss

   246     246  
  

 

   

 

 

Balance on December 31, 2013

  $(1,242  $(1,242
  

 

   

 

 

Cost

  

Balance on January 1, 2014

  $9,260  

Disposal

   (623

Reclassification

   246  
  

 

 

Balance on December 31, 2014

  $8,883  
  

 

 

Accumulated depreciation and impairment

  

Balance on January 1, 2014

  $(1,242

Depreciation expense

   (16

Disposal

   13  

Reclassification

   (17
  

 

 

Balance on December 31, 2014

  $(1,262
  

 

 
   (Continued)  

The fair values of investment properties were based on appraisals conducted by independent appraisers. Those appraisals are based on the comparison approach, income approach or cost approach. Key assumptions and the fair values were as follows:

   December 31 
   2011   2012   2013 
   NT$   NT$   NT$ 
   (In Millions) 

Fair value

  $15,058    $15,511    $17,501  
  

 

 

   

 

 

   

 

 

 

Overall capital interest rate

   1.46%     1.46%     1.46%-2.20%  

Profit margin ratio

   12%-15%     12%-15%     12%-20%  

Discount rate

   1.36%     1.36%     1.36%  

Capitalization rate

   1.5%-2.05%     1.5%-2.05%     0.68%-2.02%  

After evaluating the investment properties, the Company determined that some land and buildings were impaired and recognized an impairment loss of $1,261 million for the year ended December 31, 2012.

The fair value associated with certain properties increased during 2013 and therefore the Company reversed a portion of previously recognized impairment losses amounting to $246 million for the year ended December 31, 2013.

The fair values of impaired investment properties were based on appraisals conducted by independent appraisers and are Level 3 in the hierarchy of valuations in IFRS 13. The appraisers used comparison approach or cost approach to estimate the fair values. For comparison approach, the valuation was based on observable inputs from comparable property transactions. For cost approach, the overall capital interest rate, profit margin ratio and discount rate were used in measuring fair value. The fair value less costs to sell is higher than the value in use and hence the recoverable amount of the relevant assets has been determined on the basis of their fair value less costs to sell. The fair values of these properties were $2,685 million and $2,858 million and the cost of disposal were $4 million and $5 million as of December 31, 2012 and 2013, respectively.

   Investment
Properties
 
   NT$ 
   (In Millions) 

Cost

  

Balance on January 1, 2015

  $8,883  

Disposal

   —    

Reclassification

   175  
  

 

 

 

Balance on December 31, 2015

  $9,058  
  

 

 

 

Accumulated depreciation and impairment

  

Balance on January 1, 2015

  $(1,262

Depreciation expense

   (18

Disposal

   —    

Reclassification

   (18

Reversal of impairment loss

   142  
  

 

 

 

Balance on December 31, 2015

  $(1,156
  

 

 

 
  

 

 

 

(Concluded)

 

  

Depreciation expense is computed using the straight-line method over the following estimated service lives:

 

Land improvements

   8-30 years  

Buildings

  

Main buildings

   35-60 years  

Other building facilities

   3-104-10 years  

After the evaluation of land and buildings, the Company concluded the recoverable amount which represented the fair value less costs to sell of some land and buildings was higher than the carrying amount. Therefore, the Company recognized reversals of impairment loss of $246 million and $142 million for the years ended December 31, 2013 and 2015, respectively, and the amount was recognized only to the extent of impairment losses that had been recognized in prior years. The reversals of impairment loss were included in other income and expenses in the statements of comprehensive income.

LED disposed its investment property in October 2014. The disposal price is $1,230 million, related cost is $625 million (including carrying value of $610 million and related disposal expense of $15 million), and the disposal gain was $605 million.

The fair value of the Company’s investment properties as of December 31, 2014 and 2015 was determined by Level 3 fair value measurements inputs based on the appraisal reports conducted by independent appraisers. Those appraisal reports are based on the comparison approach, income approach or cost approach. Key assumptions and the fair values were as follows:

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Fair value

  $17,180    $17,694  
  

 

 

   

 

 

 

Overall capital interest rate

   1.54%-2.36%     1.49%-2.28%  

Profit margin ratio

   10%-20%     10%-20%  

Discount rate

   1.36%     1.21%-1.28%  

Capitalization rate

   0.44%-1.65%     0.44%-1.73%  

All of the Company’s investment properties are held under freehold interest.

 

19.INTANGIBLE ASSETS

 

  December 31 
  January 1,
2012
   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Carrying amount

          

3G and 4G concession

  $5,240    $4,492    $42,818    $41,150    $48,601  

Computer software

   751     1,015     1,331     1,399     1,266  

Goodwill

   181     181     163     163     218  

Others

   106     94     87     113     362  
  

 

   

 

   

 

   

 

   

 

 
  $6,278    $5,782    $44,399    $42,825    $50,447  
  

 

   

 

   

 

   

 

   

 

 

   3G and 4G
Concession
  Computer
Software
  Goodwill  Others  Total 
   NT$  NT$  NT$  NT$  NT$ 
   (In Millions) 

Cost

      

Balance on January 1, 2013

  $10,179   $2,065   $181   $117   $12,542  

Additions-acquired separately

   39,075    796    —      1    39,872  

Disposal

   —      (225  —      —      (225

Effect of foreign exchange difference

   —      1    —      —      1  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2013

  $49,254   $2,637   $181   $118   $52,190  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Accumulated amortization and impairment

      

Balance on January 1, 2013

  $(5,687 $(1,050 $—     $(23 $(6,760

Amortization expenses

   (749  (481  —      (8  (1,238

Disposal

   —  ��   225    —      —      225  

Impairment loss

   —      —      (18  —      (18

Effect of foreign exchange difference

   —      —      —      —      —    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2013

  $(6,436 $(1,306 $(18 $(31 $(7,791
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cost

      

Balance on January 1, 2014

  $49,254   $2,637   $181   $118   $52,190  

Additions-acquired separately

   —      611    —      33    644  

Disposal

   —      (56  —      —      (56

Effect of foreign exchange difference

   —      —      —      —      —    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2014

  $49,254   $3,192   $181   $151   $52,778  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Accumulated amortization and impairment

      

Balance on January 1, 2014

  $(6,436 $(1,306 $(18 $(31 $(7,791

Amortization expenses

   (1,668  (543  —      (7  (2,218

Disposal

   —      56    —      —      56  

Effect of foreign exchange difference

   —      —      —      —      —    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2014

  $(8,104 $(1,793 $(18 $(38 $(9,953
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
      (Continued)  

  3G and 4G
Concession
 Computer
Software
 Goodwill Others Total   3G and 4G
Concession
 Computer
Software
 Goodwill Others Total 
  NT$ NT$ NT$ NT$ NT$   NT$ NT$ NT$ NT$ NT$ 
  (In Millions)   (In Millions) 

Cost

            

Balance on January 1, 2012

  $10,179   $1,733   $181   $139   $12,232  

Additions-acquired separately

   —     630    —     2   632  

Disposal

   —     (298  —     (24 (322
  

 

  

 

  

 

  

 

  

 

 

Balance on December 31, 2012

  $10,179   $2,065   $181   $117   $12,542  
  

 

  

 

  

 

  

 

  

 

 

Balance on January 1, 2013

  $10,179   $2,065   $181   $117   $12,542  

Balance on January 1, 2015

  $49,254   $3,192   $181   $151   $52,778  

Additions-acquired separately

   39,075    796    —      1    39,872     9,955   424    —     1   10,380  

Disposal

   —      (225  —      —      (225   —     (375  —     (2 (377

Effect of foreign exchange difference

   —      1    —      —      1     —      —      —      —      —    

Acquisitions through business combinations

   —      —     55   259   314  

Others

   —     8    —      —     8  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Balance on December 31, 2013

  $49,254   $2,637   $181   $118   $52,190  

Balance on December 31, 2015

  $59,209   $3,249   $236   $409   $63,103  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Accumulated amortization and impairment

            

Balance on January 1, 2012

  $(4,939 $(982 $—     $(33 $(5,954

Balance on January 1, 2015

  $(8,104 $(1,793 $(18 $(38 $(9,953

Amortization expenses

   (748  (366  —      (9  (1,123   (2,504 (565  —     (11 (3,080

Disposal

   —      298    —      24    322     —     375    —     2   377  

Impairment loss

   —      —      —      (5  (5

Effect of foreign exchange difference

   —      —      —      —      —       —      —      —      —      —    

Others

   —      —      —      —      —    
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Balance on December 31, 2012

  $(5,687 $(1,050 $—     $(23 $(6,760

Balance on December 31, 2015

  $(10,608 $(1,983 $(18 $(47 $(12,656
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Balance on January 1, 2013

  $(5,687 $(1,050 $—     $(23 $(6,760

Amortization expenses

   (749  (481  —      (8  (1,238

Disposal

   —      225    —      —      225  

Impairment loss

   —      —      (18  —      (18

Effect of foreign exchange difference

   —      —      —      —      —    
  

 

  

 

  

 

  

 

  

 

 

Balance on December 31, 2013

  $(6,436 $(1,306 $(18 $(31 $(7,791
  

 

  

 

  

 

  

 

  

 

 

(Concluded)

For long-term business development, Chunghwa participated in mobile broadband (4G) license bidding process announced by NCC and obtained certain spectrums. Chunghwa paid the 4G concession fee amounting to $39,075 million in November 2013. Amortization of

For long-term business development, Chunghwa participated in mobile broadband license (4G license) in 2.5 and 2.6 GHz bands bidding process announced by NCC and obtained certain spectrums. Chunghwa paid the 4G concession fee would commence at the date the network is available for use. Chunghwa expectsamounting to amortize the 4G concession fee from the second half of 2014 to$9,955 million in December 2030.

Except for goodwill, the amortization expense is computed using the straight-line method over the following estimated service lives:2015.

The computer software isconcessions are granted and issued by the NCC. The concession fees are amortized using the straight-line method over the estimated useful lives of 2 to 10 years.

The 3G concession fee is amortized on a straight-line basis from the date operations commence through the date the license expires. The carrying amount of 3G concession fee will be fully amortized by December 2018. Goodwill2018, and 4G concession fees will be fully amortized by December 2030 and December 2033.

The computer software is not amortized.

amortized using the straight-line method over the estimated useful lives of 1 to 10 years. Other intangible assets are amortized using the straight-line method over the estimated useful lives of 3 to 20 years. Goodwill is not amortized.

CHPT recognized an impairment loss of $5 million on the patent for the year ended December 31, 2012.

The Company did not recognize any impairment loss on goodwill for the year ended December 31, 2012. Goodwill amounted to $18 million arising from the business combination of a subsidiary, CHI, which is classified in other reportable segment, was fully impaired for the year ended December 31, 2013 because CHI underwent organizational downsizing. The recoverable amount of the goodwill determined on the basis of value in use was nil. The Company did not recognize any impairment loss on goodwill for the years ended December 31, 2014 and 2015.

20.OTHER ASSETS

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Spare parts

  $2,306    $4,046    $3,008    $2,977    $1,876  

Refundable deposits

   1,760     2,087     2,210     2,739     2,198  

Other financial assets

   1,000     1,000     1,000     1,000     1,000  

Others

   1,831     1,939     2,627     2,104     2,859  
  

 

   

 

   

 

 
  $6,897    $9,072    $8,845  
  

 

   

 

   

 

 

Current

  $3,039    $4,476    $3,962  

Noncurrent

   3,858     4,596     4,883  
  

 

   

 

   

 

   

 

   

 

 
  $6,897    $9,072    $8,845    $8,820    $7,933  
  

 

   

 

   

 

   

 

   

 

 

Current

          

Spare parts

  $2,306    $4,046    $3,008    $2,977    $1,876  

Others

   733     430     954     242     460  
  

 

   

 

   

 

   

 

   

 

 
  $3,039    $4,476    $3,962    $3,219    $2,336  
  

 

   

 

   

 

   

 

   

 

 

Noncurrent

          

Refundable deposits

  $1,760    $2,087    $2,210    $2,739    $2,198  

Other financial assets

   1,000     1,000     1,000     1,000     1,000  

Others

   1,098     1,509     1,673     1,862     2,399  
  

 

   

 

   

 

   

 

   

 

 
  $3,858    $4,596    $4,883    $5,601    $5,597  
  

 

   

 

   

 

   

 

   

 

 

Other financial assets—noncurrent relates to thewas Piping Fund. As part of the government’s effort to upgrade the existing telecommunications infrastructure, Chunghwa and other public utility companies were required by the ROC government to contribute to a Piping Fund administered by the Taipei City Government. This fund was used to finance various telecommunications infrastructure projects. Net assets of this fund wouldwill be returned proportionately after the project wasis completed.

 

21.21.HEDGING DERIVATIVE INSTRUMENTS

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Hedge on derivative financial assets

    

Cash flow hedge—forward exchange contracts

  $—      $1  
  

 

 

   

 

 

 

Hedge on derivative financial liabilities

    

Cash flow hedge—forward exchange contracts

  $—      $—    
  

 

 

   

 

 

 

Chunghwa’s hedge strategy is to enter forward exchange contracts—buy to avoid its foreign currency exposure to certain foreign currency denominated payments in the following six months. In addition, Chunghwa’s management considers the market condition to determine the hedge ratio, and enters into forward exchange contracts with the banks to avoid the foreign currency risk.

Chunghwa signed equipment purchase contracts with suppliers, and entered into forward exchange contracts to avoid foreign currency risk exposure to Euro-denominated purchase commitments. Those forward exchange contracts were designated as cash flow hedges. For the years ended December 31, 2014 and 2015, gain (loss) arising from changes in fair value of the hedged items recognized in other comprehensive income was $(0.3) million and $1 million, respectively. Upon the completion of the purchase transaction, the amount deferred and recognized in equity initially will be reclassified into equipment as its carrying value.

As of December 31, 2015, Chunghwa expected part of the equipment purchase transactions will not occur and reclassified the related loss of $1 million arising from the forward exchange contracts of the aforementioned transactions from equity to profit or loss.

The outstanding forward exchange contracts at the balance sheet date were as follows:

   Currency   Maturity Period   

Contract

Amount
(Millions)

 

December 31, 2014

      

Forward exchange contracts—buy

  EUR/NT$      2015.03    EUR2/NT$91  

December 31, 2015

      

Forward exchange contracts—buy

  EUR/NT$      2016.03-06    EUR9/NT$306  

Loss (gain) arising from the hedging derivative instruments that have been reclassified from equity to initial cost of the property, plant and equipment were as follows:

   Year Ended December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Construction in progress and advances related to acquisition of equipment

  $18    $(18
  

 

 

   

 

 

 

22.SHORT-TERM LOANS

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Unsecured loans

  $75    $111    $254    $564    $110  
  

 

   

 

   

 

   

 

   

 

 

Annual interest rate

   1.25%-1.53%     1.25%-2.40%     1.18%-2.40%  

Annual interest rates

   1.25%-2.40%     1.29%-2.40%  

22.23.LONG-TERM LOANS (INCLUDING LONG-TERM LOANS—CURRENTLOANS-CURRENT PORTION)

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
       (In Millions)     

Secured loans

  $1,651    $2,050    $1,700  

Unsecured loans

   109     8     —    
  

 

 

   

 

 

   

 

 

 
   1,760     2,058     1,700  

Less: Current portion of long-term loans

   702     8     300  
  

 

 

   

 

 

   

 

 

 
  $1,058    $2,050    $1,400  
  

 

 

   

 

 

   

 

 

 
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Secured loans (Note 41)

  $1,900    $1,750  

Less: Current portion of long-term loans

   —       (8
  

 

 

   

 

 

 
  $1,900    $1,742  
  

 

 

   

 

 

 

The annual interest rates of loans were as follows:

 

January 1, 2012December 31,
2012
December 31,
2013

Secured loans

1.10%-1.83%1.13%-2.10%1.15%-2.10%

Unsecured loans

2.01%-2.04%2.01%—  
   December 31 
   2014   2015 

Secured loans

   1.13%-2.35%     1.11%-1.36%  

LED obtained a secured loan from Chang Hwa Bank in September 2010. Interest is paid monthly. $300 million and $1,350 million will becomewere originally due in December 2014 and September 2015, respectively. In October 2014, the bank borrowing mentioned above was extended to September 2018

for one time repayment. LED has made an early repayment of $50 million in April 2015. LED obtained another secured loan from Chang Hwa Bank in December 2012 atin the amount of $400 million which will be due in December 2017; LED repaidhas made an early repayment of $350 million and $50 million in February 2013.2013 and January 2015, respectively.

CHIEF obtained an unsecuredCHPT entered into a secured loan fromcontract of $348 million with Bank of Taiwan in January 2009. Interest and principal amount areApril 2014, interest will be paid monthly, from January 2009 and all were repaidamortization of principle will begin in January 2013.

CHPT obtained a secured loan from the E.SUN Commercial Bank in February 2009. InterestMay 2016, and the principal were paid monthlycontract will expire in April 2029. CHPT made early repayments of $148 million and $50 million from March 2009September to December 2014 and all were repaid in February 2012.November 2015, respectively.

 

23.24.TRADE NOTES AND ACCOUNTS PAYABLE

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
       (In Millions)     

Trade notes and accounts payable

  $14,265    $13,513    $15,589  
  

 

 

   

 

 

   

 

 

 
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Trade notes and accounts payable

  $18,519    $16,301  
  

 

 

   

 

 

 

Trade notes and accounts payable were attributable to operating activities and the trading term and conditions were agreed separately.

24.25.OTHER PAYABLES

 

  January 1, 2012   December 31,
2012
   December 31,
2013
   December 31 
  NT$   NT$   NT$   2014   2015 
      (In Millions)       NT$   NT$ 

Other payables

      
  (In Millions) 

Accrued salary and compensation

  $10,506    $9,838    $10,336    $9,122    $10,430  

Accrued remuneration to employees, bonus to employees and remuneration to directors and supervisors

   1,680     2,190  

Payables to equipment suppliers

   1,182     1,541  

Payables to contractors

   1,834     2,380     2,733     2,629     1,452  

Accrued franchise fees

   2,246     2,164     2,009     1,585     1,401  

Payables to equipment suppliers

   1,870     1,884     1,820  

Amounts collected for others

   1,201     1,327     1,326     1,330     1,406  

Accrual amounts for bonuses to employees and remuneration to directors and supervisors

   2,344     1,785     980  

Accrued maintenance costs

   898     988     991     868     998  

Others

   5,403     5,736     6,597     5,939     6,069  
  

 

   

 

   

 

   

 

   

 

 
  $26,302    $26,102    $26,792    $24,335    $25,487  
  

 

   

 

   

 

   

 

   

 

 

 

25.26.PROVISIONS

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Warranties

  $148    $221    $201    $212    $213  

Employee benefits

   33     42     47     55     30  

Others

   1     3     4     5     5  
  

 

   

 

   

 

   

 

   

 

 
  $182    $266    $252    $272    $248  
  

 

   

 

   

 

   

 

   

 

 

Current

  $148    $221    $129    $179    $190  

Noncurrent

   34     45     123     93     58  
  

 

   

 

   

 

   

 

   

 

 
  $182    $266    $252    $272    $248  
  

 

   

 

   

 

   

 

   

 

 

   Warranties  Employee
Benefits
   Others   Total 
   NT$  NT$   NT$   NT$ 
   (In Millions) 

Balance on January 1, 2012

  $148   $33    $1    $182  

Additional provisions recognized

   166    9     2     177  

Used during the period

   (92  —       —       (92

Unused amounts reserved

   (1  —       —       (1
  

 

 

  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2012

  $221   $42    $3    $266  
  

 

 

  

 

 

   

 

 

   

 

 

 

Balance on January 1, 2013

  $221   $42    $3    $266  

Additional provisions recognized

   153    5     1     159  

Used during the period

   (173  —       —       (173
  

 

 

  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2013

  $201   $47    $4    $252  
  

 

 

  

 

 

   

 

 

   

 

 

 

(Concluded)

   Warranties   Employee
Benefits
   Others   Total 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Balance on January 1, 2013

  $221    $42    $3    $266  

Additional provisions recognized

   153     5     1     159  

Used during the period

   (173   —       —       (173
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance on December 31, 2013

  $201    $47    $4    $252  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance on January 1, 2014

  $201    $47    $4    $252  

Additional provisions recognized

   192     8     1     201  

Used during the period

   (174   —       —       (174

Reversed during the period

   (7   —       —       (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance on December 31, 2014

  $212    $55    $5    $272  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance on January 1, 2015

  $212    $55    $5    $272  

Additional provisions recognized

   100     12     —       112  

Used during the period

   (99   (37   —       (136
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance on December 31, 2015

  $213    $30    $5    $248  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 a.The provision for warrantywarranties claims represents the present valuesvalue of the management’s best estimate of the future outflow of economic benefits that will be required under the Company’s obligation for warranties in sales agreements. The estimate has been made based on the historical warranty experience.
 b.The provision for employee benefits represents vested long-term service leave entitlementscompensation accrued.

26.27.ADVANCE RECEIPTS

Advance receipts are mainly from advance telecommunication charges. In accordance with NCC’s regulation named “Mandatory and Prohibitory Provisions To Be Included In Standard Contracts for Telecommunication Goods (Services) Coupons”, the Company entered into a contract with Bank of Taiwan. Bank of Taiwan providedto provide a performance guarantee for advance receipts from selling prepaid cards amounting to $1,058$1,022 million and $1,173 million as of December 31, 2013.2014 and 2015, respectively.

 

27.28.RETIREMENT BENEFIT PLANS

 

 a.Defined contribution plans

The pension plan under the Labor Pension Act of ROC (the “LPA”) is considered as a defined contribution plan. Based on the LPA, Chunghwa and its domestic subsidiaries make monthly contributions to employees’ individual pension accounts at 6% of monthly salaries and wages. Its foreign subsidiaries would make monthly contributions based on the local pension requirements. The amountamounts recognized as an expenseexpenses for defined contribution plans were $311$375 million, $441 million and $375$489 million for the years ended December 31, 20122013, 2014 and 2013,2015, respectively.

 

 b.Defined benefit plans

Chunghwa completed its privatization plans on August 12, 2005. Chunghwa is required to pay all accrued pension obligations including service clearance payment, lump sum payment under civil service plan, additional separation payments, etc. upon the completion of the privatization in accordance with the Statute Governing Privatization of Stated-owned Enterprises. After paying all pension obligations for privatization, the plan assets of Chunghwa should be transferred to the Fund for

Privatization of Government-owned Enterprises (the “Privatization Fund”) under the Executive Yuan. On August 7, 2006, Chunghwa transferred the remaining balance of fund to the Privatization Fund. However, according to the instructions of MOTC, Chunghwa was requested to administer the distributions to employees on behalf of MOTC for pension obligations including service clearance payment, lump sum payment under civil service plan, additional separation payments, etc. upon the completion of the privatization and recognized such receivable from MOTC in other current monetary assets.

The Company’sChunghwa and its subsidiaries SENAO, CHIEF, CHSI, and SHE with the pension planmechanism under the Labor Standards Law isare considered as a defined benefit plan thatplans. These pension plans provide benefits based on an employee’s length of service and average last six-month salary prior to retirement. Chunghwa and its subsidiaries contribute an amount no more than 15% 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 names of the Committees in the Bank of Taiwan. ToThe plan assets are held in a commingled fund which is operated and managed by the government’s designated authorities; as such, the Company does not have any right to intervene in the investments of the funds. According to the Article 56 of the Labor Standards Law of the ROC revised in February 2015, entities are required to contribute the difference in one appropriation to the Funds before the end of next March when the balance of the Funds is insufficient to pay employees who will meet the minimum funding requirement, the Company is to make monthly contributions of at least 2% of eligible employees.retirement eligibility criteria within next year.

The most recent actuarial valuation of plan assets and the present value of the defined benefit obligation were carried out at December 31, 2013 by an independent actuary. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the Projected Unit Credit Method.

The principal assumptions used for the purpose of the actuarial valuations were as follows:

   Measurement Date
   January 1, 2012  December 31,
2012
  December 31,
2013

Discount rates

  1.75%  1.60%  2.00%

Expected rates of salary increase

  1.00%-3.00%  1.00%-2.75%  1.00%-2.75%

Amounts recognized in consolidated statement of comprehensive income in respect of these defined benefit plans are as follows.

   Year Ended December 31 
           2012                   2013         
   NT$   NT$ 
   (In Millions) 

Current service cost

  $2,836    $2,906  

Net interest expense

   26     53  
  

 

 

   

 

 

 

Components of defined benefit costs recognized in profit or loss

   2,862     2,959  
  

 

 

   

 

 

 

Remeasurement on the net defined benefit liability:

    

Return on plan assets

   132     (226

Actuarial gains and losses arising from changes in demographic assumptions

   534     (3

Actuarial gains and losses arising from changes in financial assumptions

   300     (858

Actuarial gains and losses arising from experience adjustments

   573     1,704  
  

 

 

   

 

 

 

Components of defined benefit costs recognized in other comprehensive income

   1,539     617  
  

 

 

   

 

 

 
  $4,401    $3,576  
  

 

 

   

 

 

 

An analysis by function

    

Operating cost

  $1,719    $1,762  

Marketing expenses

   803     858  

General and administrative expenses

   158     162  

Research and development expenses

   105     100  
  

 

 

   

 

 

 
  $2,785    $2,882  
  

 

 

   

 

 

 

The cumulative amount of actuarial gains and losses recognized in other comprehensive income as of December 31, 2012 and 2013 was $1,539 million and $2,156 million, respectively.

The amountamounts included in the consolidated balance sheets arising from the Company’s obligation in respect of its defined benefit plans iswere as follows:

 

   January 1, 2012  December 31,
2012
  December 31,
2013
 
   NT$  NT$  NT$ 
      (In Millions)    

Present value of funded defined benefit obligation

  $18,697   $22,100   $25,457  

Fair value of plan assets

   (15,750  (17,528  (19,982
  

 

 

  

 

 

  

 

 

 

Net liability arising from defined benefit obligation

  $2,947   $4,572   $5,475  
  

 

 

  

 

 

  

 

 

 

Accrued pension liabilities

  $2,950   $4,577   $5,482  

Prepaid pension cost (included in other noncurrent assets—others)

   (3  (5  (7
  

 

 

  

 

 

  

 

 

 
  $2,947   $4,572   $5,475  
  

 

 

  

 

 

  

 

 

 

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Present value of funded defined benefit obligation

  $27,958    $30,882  

Fair value of plan assets

   (21,496   (23,794
  

 

 

   

 

 

 

Funded status

  $6,462    $7,088  
  

 

 

   

 

 

 

Net defined benefit liabilities

  $6,470    $7,099  

Net defined benefit assets (included in other noncurrent assets—others)

   (8   (11
  

 

 

   

 

 

 
  $6,462    $7,088  
  

 

 

   

 

 

 

Movements in the present value of the defined benefit obligation in the current year were as follows.

   Year Ended December 31 
         2012              2013       
   NT$  NT$ 
   (In Millions) 

Balance, beginning of the year

  $18,697   $22,100  

Current service cost

   2,836    2,906  

Interest cost

   321    347  

Remeasurement on the net defined benefit liability:

   

Actuarial gains and losses arising from changes in demographic assumptions

   534    (3

Actuarial gains and losses arising from changes in financial assumptions

   300    (858

Actuarial gains and losses arising from experience adjustments

   573    1,704  

Benefits paid from plan assets

   (1,026  (632

Benefits paid directly by the Company

   (135  (107
  

 

 

  

 

 

 

Balance, end of the year

  $22,100   $25,457  
  

 

 

  

 

 

 

Movements in the fair value of the plan assets were as follows.

   Year Ended December 31 
           2012                  2013         
   NT$  NT$ 
   (In Millions) 

Balance, beginning of the year

  $15,750   $17,528  

Interest income

   295    294  

Return on plan assets

   (132  226  

Contributions from employer

   2,641    2,566  

Benefits paid from plan assets

   (1,026  (632
  

 

 

  

 

 

 

Balance, end of the year

  $17,528   $19,982  
  

 

 

  

 

 

 

The major categories of plan assetsadjusted and the fair value of plan assets at the end of the reporting period for each category, were as follows:

 

   Fair Value of Plan Assets 
   January 1,   December 31,   December 31, 
   2012   2012   2013 

Stock and beneficiary certificates

  $6,418    $6,677    $8,946  

Fixed income investments

   5,552     6,417     6,310  

Cash

   3,760     4,296     4,568  

Others

   20     138     158  
  

 

 

   

 

 

   

 

 

 
  $15,750    $17,528    $19,982  
  

 

 

   

 

 

   

 

 

 
   Present Value
of Funded
Defined Benefit
Obligation
   Fair Value of
Plan Assets
   Net Defined
Benefit
Liabilities
(Assets)
 
   NT$   NT$   NT$ 
       (In Millions)     

Balance on January 1, 2013

  $22,100    $17,528    $4,572  
  

 

 

   

 

 

   

 

 

 

Current service cost

   2,906     —       2,906  

Interest expense/interest income

   347     294     53  
  

 

 

   

 

 

   

 

 

 

Amounts recognized in profit or loss

   3,253     294     2,959  
  

 

 

   

 

 

   

 

 

 

Remeasurement on the net defined benefit liability

      
     (Continued)  

   Present Value
of Funded
Defined Benefit
Obligation
   Fair Value of
Plan Assets
   Net Defined
Benefit
Liabilities
(Assets)
 
   NT$   NT$   NT$ 
       (In Millions)     

Return on plan assets (excluding amounts included in net interest)

   —       226     (226

Actuarial gains recognized from changes in demographic assumptions

   (3   —       (3

Actuarial gains recognized from changes in financial assumptions

  $(858  $—      $(858

Actuarial losses recognized from experience adjustments

   1,704     —       1,704  
  

 

 

   

 

 

   

 

 

 

Amounts recognized in other comprehensive income

   843     226     617  
  

 

 

   

 

 

   

 

 

 

Contributions from employer

   —       2,566     (2,566

Benefits paid

   (632   (632   —    

Benefits paid directly by the Company

   (107   —       (107
  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2013

   25,457     19,982     5,475  
  

 

 

   

 

 

   

 

 

 

Service cost

      

Current service cost

   2,920     —       2,920  

Loss on settlements

   76     —       76  

Interest expense/interest income

   509     415     94  
  

 

 

   

 

 

   

 

 

 

Amounts recognized in profit or loss

   3,505     415     3,090  
  

 

 

   

 

 

   

 

 

 

Remeasurement on the net defined benefit liability

      

Return on plan assets (excluding amounts included in net interest)

   —       52     (52

Actuarial losses recognized from changes in demographic assumptions

   4     —       4  

Actuarial gains recognized from changes in financial assumptions

   (5   —       (5

Actuarial losses recognized from experience adjustments

   545     —       545  
  

 

 

   

 

 

   

 

 

 

Amounts recognized in other comprehensive income

   544     52     492  
  

 

 

   

 

 

   

 

 

 

Contributions from employer

   —       2,486     (2,486

Benefits paid

   (454   (454   —    
     (Continued)  

   Present Value
of Funded
Defined Benefit
Obligation
   Fair Value of
Plan Assets
   Net Defined
Benefit
Liabilities
(Assets)
 
   NT$   NT$   NT$ 
       (In Millions)     

Settlements

   (993   (985   (8

Benefits paid directly by the Company

   (101   —       (101
  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2014

   27,958     21,496     6,462  
  

 

 

   

 

 

   

 

 

 

Current service cost

   2,884     —       2,884  

Interest expense/interest income

   546     444     102  
  

 

 

   

 

 

   

 

 

 

Amounts recognized in profit or loss

   3,430     444    

 

2,986

  

  

 

 

   

 

 

   

 

 

 

Remeasurement on the net defined benefit liability

      

Return on plan assets (excluding amounts included in net interest)

   —       136     (136

Actuarial losses recognized from changes in demographic assumptions

   11     —       11  

Actuarial gains recognized from changes in financial assumptions

   (1   —       (1

Actuarial losses recognized from experience adjustments

   357     —       357  
  

 

 

   

 

 

   

 

 

 

Amounts recognized in other comprehensive income

   367     136     231  
  

 

 

   

 

 

   

 

 

 

Contributions from employer

  $—      $2,435    $(2,435

Benefits paid

   (717   (717   —    

Benefits paid directly by the Company

   (156   —       (156
  

 

 

   

 

 

   

 

 

 

Balance on December 31, 2015

  $30,882    $23,794    $7,088  
  

 

 

   

 

 

   

 

 

 
     (Concluded)  

Relevant pension costs recognized in profit and loss for defined benefit plans were as follows:

   Year Ended December 31 
   2013   2014   2015 
   NT$   NT$   NT$ 
       (In Millions)     

Operating costs

  $1,762    $1,849    $1,794  

Marketing expenses

   858     888     856  

General and administrative expenses

   162     169     162  

Research and development expenses

   100     106     102  
  

 

 

   

 

 

   

 

 

 
  $2,882    $3,012    $2,914  
  

 

 

   

 

 

   

 

 

 

The Company is exposed to following risks for the defined benefits plans under the Labor Standards Law:

a.Investment risk

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. The plan assets are held in a commingled fund mainly invested in foreign and domestic equity and debt securities and bank deposits which is operated and managed by the government’s designated authorities; as such, the Company does not have any right to intervene in the investments of the funds.

b.Interest rate risk

The decline in government bond interest rate will increase the present value of the obligation on the defined benefit plan, while the return on plan assets will increase. The net effect on the present value of the obligation on defined benefit plan is partially offset by the return on plan assets.

c.Salary risk

Significant actuarial assumptions forThe calculation of the determinationpresent value of defined benefit obligation is referred to the plan participants’ future salary. Hence, the increase in plan participants’ salary will increase the present value of the defined benefit obligation.

The most recent actuarial valuation of plan assets and the present value of the defined benefit obligation are discount rate and expected salary increase. were carried out by the independent actuary.

The sensitivity analyses below have been determined based onprincipal assumptions used for the purpose of the actuarial valuations were as follows:

   Measurement Date
   December 31
   2014  2015

Discount rates

  2.00%  2.00%

Expected rates of salary increase

  1.00%-2.00%  1.00%-2.00%

If reasonably possible changes of the respective significant actuarial assumptions occurringoccur at the end of the reporting period,periods, while holding all other assumptions constant.

Ifconstant, the discount rate is 0.5% higher, the defined benefit obligation would decrease by $1,027 million. If the discount rate is 0.5% lower,present value of the defined benefit obligation would increase by $1,097 million.(decrease) as follows:

If the expected salary growth increases by 0.5%, the defined benefit obligation would increase by $1,153 million. If the expected salary growth decreases by 0.5%, the defined benefit obligation would decrease by $1,131 million.

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Discount rates

    

0.5% increase

  $(1,061  $(977
  

 

 

   

 

 

 

0.5% decrease

  $1,131    $1,261  
  

 

 

   

 

 

 

Expected rates of salary increase

    

0.5% increase

  $1,134    $1,332  
  

 

 

   

 

 

 

0.5% decrease

  $(1,129  $(1,052
  

 

 

   

 

 

 

The sensitivity analysis presented above may not be representative of the actual change in the present value of the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognisedrecognized in the consolidated balance sheets.

The average duration ofThere is no change in the benefit obligation at 31 December, 2013 ismethods and assumptions used in preparing the sensitivity analyses from 8 to 18 years.the previous period.

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

The expected contributions to the plan for the next year

  $2,508    $11,302  
  

 

 

   

 

 

 

The average duration of the defined benefit obligation

   8-14 years     6-15 years  

The Company’s maturity analysis of the undiscounted benefit payments as of December 31, 2015 was as follows.follows:

 

Year

  Amount 
   NT$ 
   (In Millions) 

2014

  $1,184  

2015

   1,807  

2016

   2,892  

2017

   3,993  

2018 and thereafter

   48,096  

The Company expects to make a contribution of $2,590 million to the defined benefit plans in the next twelve months starting from December 31, 2013.

Year

  Amount 
   NT$ 
   (In Millions) 

2016

  $1,798  

2017

   3,257  

2018

   5,086  

2019

   6,769  

2020 and thereafter

   41,289  
  

 

 

 
  $58,199  
  

 

 

 

 

28.29.EQUITY

 

 a.Share capital

 

 1)Common stockstocks

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
       (In Millions)     

Number of authorized shares

   12,000     12,000     12,000  
  

 

 

   

 

 

   

 

 

 

Authorized shares

  $120,000    $120,000    $120,000  
  

 

 

   

 

 

   

 

 

 

Number of shares issued and outstanding

   7,757     7,757     7,757  
  

 

 

   

 

 

   

 

 

 

Issued and outstanding shares

  $77,574    $77,574    $77,574  
  

 

 

   

 

 

   

 

 

 

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Number of authorized shares

   12,000     12,000  
  

 

 

   

 

 

 

Authorized shares

  $120,000    $120,000  
  

 

 

   

 

 

 

Number of issued and paid shares

   7,757     7,757  
  

 

 

   

 

 

 

Issued and outstanding shares

  $77,574    $77,574  
  

 

 

   

 

 

 

The issued common stockstocks of a par value at $10 per share entitled the right to vote and receive dividends.

 

 2)Global depositary receipts

For the purpose of privatizing Chunghwa, the MOTC sold 1,110 million shares of common stockstocks of Chunghwa in an international offering of securities in the form of American Depositary Shares (“ADS”) amounting to 111 million units (one ADS represents ten shares of10 common stock)stocks) on the New York

Stock Exchange on July 17, 2003. Afterwards, the MOTC sold 1,351 million common sharesstocks in the form of ADS amounting to 135 million units on August 10, 2005. Subsequently, the MOTC and Taiwan Mobile Co., Ltd. sold 505 million and 59 million common sharesstocks of Chunghwa, respectively, in the form of ADS totally amounting to 56 million units on September 29, 2006. The MOTC and Taiwan Mobile Co., Ltd. have sold 3,025 million common sharesstocks in the form of ADS amounting to 302 million units. As of December 31, 2013, there2015, the outstanding ADSs were 28 million ADSs outstanding, which represent 283345 million common shares, representing 3.64%stocks, which equaled 35 million units and represented 4.45% of Chunghwa’s total outstanding common shares.stocks.

The ADS holders generally have the same rights and obligations as other common stockholders, subject to the provision of relevant laws. The exercise of such rights and obligations shall comply with the related regulations and deposit agreement, which stipulate, among other things, that ADS holders can, through deposit agents:

 

 a)Exercise their voting rights,

 

 b)Sell their ADSs, and

 

 c)Receive dividends declared and subscribe to the issuance of new shares.

 

 b.AdditionAdditional paid-in capital

The adjustment of additional paid-in capital for the years ended December 31, 20122013, 2014 and 20132015 were as follows:

 

   Share
Premium
  Donated
Capital
   Movements
of Paid-in
Capital for
Associates
Accounted
for Using
Equity
Method
   Share-based
Payment
Transactions
   Stockholders’
Contribution
Due to
Privatization
   Total 
   NT$  NT$   NT$   NT$   NT$   NT$ 
   (In Millions) 

Balance on January 1, 2012

  $148,211   $13    $—      $—      $20,648    $168,872  

Exercise of employee stock option of a subsidiary

   —      —       —       5     —       5  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on December 31, 2012

  $148,211   $13    $—      $5    $20,648    $168,877  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on January 1, 2013

  $148,211   $13    $—      $5    $20,648    $168,877  

Cash distributed from capital surplus

   (5,589  —       —       —       —       (5,589

Exercise of employee stock option of subsidiaries

   —      —       6     —       —       6  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on December 31, 2013

  $142,622   $13    $6    $5    $20,648    $163,294  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  Share
Premium
  Movements of
Additional
Paid-in
Capital
Arising from
Changes in
Equities of
Subsidiaries
  Share-based
Payment
Transactions
  Difference
between
Consideration
Received and
Carrying
Amount of the
Subsidiaries’
Net Assets
upon Disposal
  Donated
Capital
  Stockholders’
Contribution
Due to
Privatization
  Total 
  NT$  NT$  NT$  NT$  NT$  NT$  NT$ 
  (In Millions) 

Balance on January 1, 2013

 $148,211   $—     $5   $—     $13   $20,648   $168,877  

Cash distributed from additional paid-in capital

  (5,589  —      —      —      —      —      (5,589

Exercise of employee stock option of subsidiaries

  —      —      6    —      —      —      6  

Employee stock bonus issued by a subsidiary

  —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2013

 $142,622   $—     $11   $—     $13   $20,648   $163,294  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on January 1, 2014

 $142,622   $—     $11   $—     $13   $20,648   $163,294  

Cash distributed from additional paid-in capital

  (16,577  —      —      —      —      —      (16,577

Change in additional paid-in capital from share subscription not based on original ownership of a subsidiary

  —      3    —      —      —      —      3  

Employee stock bonus issued by a subsidiary

  —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2014

 $126,045   $3   $11   $—     $13   $20,648   $146,720  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
      (Continued)  

  Share
Premium
  Movements of
Additional
Paid-in
Capital
Arising from
Changes in
Equities of
Subsidiaries
  Share-based
Payment
Transactions
  Difference
between
Consideration
Received and
Carrying
Amount of the
Subsidiaries’
Net Assets
upon Disposal
  Donated
Capital
  Stockholders’
Contribution
Due to
Privatization
  Total 
  NT$  NT$  NT$  NT$  NT$  NT$  NT$ 
  (In Millions) 

Balance on January 1, 2015

 $126,045   $3   $11   $—     $13   $20,648   $146,720  

Partial disposal of interests in subsidiaries

  —      —      —      27    —      —      27  

Other changes in additional paid-in capital in subsidiaries

  —      1    —      —      —      —      1  

Subsidiary purchased its treasury stock

  —      (15  —      —      —      —      (15
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance on December 31, 2015

 $126,045   $(11 $11   $27   $13   $20,648   $146,733  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
      (Concluded)  

Additional paid-in capital may only be utilized to offset deficits. However, the additional paid-in capital from shares issued in excessshare premium, donated capital and the difference between consideration received and the carrying amount of par and donationsthe subsidiaries’ net assets upon disposal may be distributed in cash or capitalized when a company has no deficit, which however is limited to a certain percentage of Chunghwa’s paid-in capital.

The additional paid-in capital from movements of paid-in capital arising from changes in equities of subsidiaries may only be utilized to offset deficits. Additional paid-in capital from investments accounted for using equity method may not be used for any purpose.

The additional paid-in capital due to privatization relates to the retrospective adjustment at the date of transition to IFRSs. Please refer to Note 43 to the consolidated financial statement for further details.

 

 c.Retained earnings and dividends policy

Before distributing a dividend or making any other distribution to stockholders, Chunghwa must pay all outstanding taxes, offset deficits in prior years and set aside a legal reserve equal to 10% of its net income, except when the accumulated amount of such legal reserve equals to the Company’s total authorized capital, and depending on its business needs or requirements, may also set aside or reverse special reserves. In accordance with Chunghwa’s Articles of Incorporation, no less than 50% of the remaining earnings comprising remaining balance of net income, if any, plus cumulative undistributed earnings shall be distributed in the following order: (a) from 2% to 5% of distributable earnings shall be distributed to employees as employee bonus; (b) no more than 0.2% of distributable earnings shall be distributed to board of directors and supervisors as remuneration; and (c) cash dividends to be distributed shall not be less than 50% of the total amount of dividends to be distributed. If cash dividend to be distributed is less than $0.10 per share, such cash dividend shall be distributed in the form of common stocks.

ForIn accordance with the amendments to the Company Act of the ROC in May 2015, the recipients of dividends and bonuses are limited to shareholders and do not include employees. The consequential amendments to Chunghwa’s Articles of Incorporation had been proposed by Chunghwa’s Board of Directors on March 11, 2016 and are subject to the resolution of the shareholders in their meeting to be held on June 24, 2016. Information on the employee remuneration, employee bonus, and remuneration for the directors for the years ended December 31, 20122014 and 2013, the accrual amounts for bonuses to employees and remuneration to directors and supervisors were accrued based on past experiences2015, and the probable amountactual distribution for 2013 and 2014, please refer to be paid in accordance with Chunghwa’s Articles of Incorporation and Implementation Guidance for the Employee’s Bonus Distribution of Chunghwa Telecom Co., Ltd.

If the initial accrual amounts of the aforementioned bonus are significantly different from the amounts proposed by the board of directors, the difference is charged to the earnings of the year making the initial estimate. Otherwise, the difference between initial accrual amount and the amount resolved in the shareholders’ meeting is charged to the earnings of the following year as a result of change in accounting estimate. If the shareholders’ meeting approved to distribute the employee bonus as stocks, the share number of the stock bonus were determined by the amount of bonus divided by the fair value of the common stocks which was the closing market prices one day before shareholders’ meeting after taking into account the effects of ex-rights and ex-dividends.Note 31.g. Employee benefit expenses.

Special reserve was appropriated in accordance with the relevant laws and regulations or as requested by local authority. Pursuant to existing regulations, the CompanyChunghwa is required to set aside additional special

reserve equivalent to debit balances under stockholder’s equity. For subsequent decrease in the deduction amount to stockholder’s equity, the decreased amount could be reversed from the special reserve to retained earnings.

The appropriation for legal reserve shall be made until the accumulated reserve equals the aggregate par value of the outstanding capital stock of Chunghwa. This reserve can only be used to offset a deficit, or, when the legal reserve has exceeded 25% of the Company’sChunghwa’s paid-in capital, the excess may be transferred to capital or distributed in cash.

Except for non-ROC resident shareholders, all shareholders receiving the dividends are entitled a tax credit equal to their proportionate share of the income tax paid by the Company. Starting from 2015, the allowed tax credit is adjusted to 50% of the income tax paid in the ROC by the Company for ROC resident shareholders.

The appropriations and distributions of the 20112013 earnings of Chunghwa approved by the stockholders’ meeting on June 24, 2014 and 2012the appropriations of the 2014 earnings of Chunghwa have been approved by the stockholdersstockholders’ meeting on June 22, 2012 and June 25, 201326, 2015 were as follows:

 

  Appropriation of Earnings   Dividends Per Share   Appropriation of
Earnings
   Dividends Per Share 
  For Fiscal
Year 2011
   For Fiscal
Year 2012
   For Fiscal
Year 2011
   For Fiscal
Year 2012
   For Fiscal
Year 2013
   For Fiscal
Year 2014
   For Fiscal
Year 2013
   For Fiscal
Year 2014
 
  NT$   NT$   NT$   NT$   NT$   NT$   NT$   NT$ 
  (In Millions)           (In Millions)         

Legal reserve

  $4,707    $3,990        $2,074    $681      

Special reserve

   144     (144    

Cash dividends

   42,362     35,913    $5.46    $4.63     18,526     37,673    $2.39    $4.86  

TheIn addition, the stockholders of Chunghwa resolved to distribute cash $0.72$2.14 per share and the total amount of $5,589$16,577 million from additional paid-in capital on June 25, 2013. Such amount was subsequently paid in August 2013.

The bonuses to the employees and remuneration to the directors and supervisors of the 2011 and 2012 approved by the board of directors and the stockholders on June 22, 2012 and June 25, 2013 were as follows:

   2011   2012 
   Cash Bonus   Cash Bonus 
   NT$   NT$ 
   (In Millions) 

Bonus distributed to the employees

  $2,040    $1,533  

Remuneration paid to the directors and supervisors

   44     37  

There was no difference between the initial accrual amounts and the amounts resolved in shareholders’ meeting of the aforementioned bonuses to employees and the remuneration to directors and supervisors on June 22, 2012 and June 25, 2013.

Chunghwa’s distributable earnings, bonus distributed to the employees and remuneration paid to the directors and supervisors as of the end of the period were based on the consolidated financial statements of 2012 prepared in conformity with the pre-revised Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the ROC (“ROC GAAP”).24, 2014.

The appropriations of earnings for 20132015 had been approved by Chunghwa’s boardBoard of directorsDirectors on March 25, 2014.11, 2016. The appropriations and dividends per share were as follows:

 

   Appropriation of Earnings 
   For Fiscal
Year 2013
   For Fiscal
Year 2013
 
   NT$   NT$ 
   (In Millions) 

Legal reserve

  $2,074    

Special reserve

   144    

Cash dividends

   18,526    $2.39  
   For Fiscal Year 2015 
   Appropriation
of Earnings
   Dividends
Per Share
 
   NT$   NT$ 
   (In Millions)     

Cash dividends

  $42,551    $5.49  

In addition, Chunghwa’s boardThe appropriations of directors resolvedearnings for 2015 are subject to distribute cash from additional paid-in-capital of $16,578 million, $2.14 per share, on March 25, 2014.

Informationthe resolution of the appropriation of Chunghwa’s earnings, employees bonuses and remunerationshareholders’ meeting to directors and supervisors resolved by the board of directors and approved by the stockholders is availablebe held on the Market Observation Post System website.

d.Special reserves in accordance with local regulations

Under local regulation, on the first-time adoption of IFRSs, a company should appropriate a special reserve of an amount the same as that of unrealized revaluation increment and cumulative translation differences (gain) transferred to retained earnings as a result of the Company’s use of exemptions under IFRS 1. However, at the date of transitions to IFRSs, if the increase in retained earnings that resulted from all IFRSs adjustments is not enough for this appropriation, only the increase in retained earnings that resulted from all IFRSs adjustments will be appropriated to special reserve. No appropriation of earnings shall be made until any shortage of the aforementioned special reserve is appropriated in subsequent years if the Company has earnings and the original need to appropriate a special reserve is not eliminated.

The adjustments of IFRSs adoption resulted in the decrease of retained earnings of the Company; therefore, the Company is not required to appropriate any amount to the special reserve.June 24, 2016.

 

 e.d.Other equity items

 

 1)Exchange differences arising from the translation of the foreign operations

The exchange differences arising from the translation of the foreign operations from their functional currency to New Taiwan dollars were recognized as exchange differences arising from the translation of the foreign operations in other comprehensive income.

 2)Unrealized gain (loss) on available-for-sale financial assets

 

  Year Ended December 31   Year Ended December 31 
          2012                 2013           2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Beginning balance

  $68   $258    $258    $(150  $740  

Unrealized gain (loss) on available-for-sale financial assets

   192   (560   (560   926     (670

Income tax relating to unrealized gain (loss) on available-for-sale financial assets

   —     (6   (6   3     (2

Amount reclassified from equity to profit or loss on disposal

   (26 158     158     (39   —    

Amount reclassified from equity to impairment loss

   24    —    

Amount reclassified from equity to profit or loss on impairment

   —       —       23  
  

 

  

 

   

 

   

 

   

 

 

Ending balance

  $258   $(150  $(150  $740    $91  
  

 

  

 

   

 

   

 

   

 

 

Unrealized gain (loss) on available-for-sale financial assets were accumulated gains and losses on the available-for-sale financial assets measured at fair value, which were recognized in other comprehensive income and were included in the calculation of the related disposal gain and loss or impairment loss of such financial assets upon reclassified to profits or losses.

 f.e.Noncontrolling interests

 

   Year Ended December 31 
         2012              2013       
   NT$  NT$ 
   (In Millions) 

Beginning balance

  $4,181   $4,336  

Attributable to noncontrolling interests

   

Cash dividends paid by subsidiaries to noncontrolling interests

   (893  (811

Net income of current period

   1,125    1,124  

Actuarial gains (loss) on the defined benefit plans

   (20  3  

Income tax related to actuarial gains and losses

   2    (1

Exchange differences arising from the translation of the net investment in foreign operations

   (7  27  

Share of exchange differences arising from the translation of the net investment in foreign operations of associates

   (1  3  

Unrealized gain on available-for-sale financial assets

   2    11  

Income tax relating to unrealized loss on available-for-sale financial assets

   —      (1

Exercise of employee stock option of subsidiaries

   38    44  

Compensation cost of employee stock options of a subsidiary

   —      70  

Employee stock bonus issued by a subsidiary

   —      2  

Increase (decrease) in noncontrolling interests

   (91  39  
  

 

 

  

 

 

 

Ending balance

  $4,336   $4,846  
  

 

 

  

 

 

 
   Year Ended December 31 
   2013   2014   2015 
   NT$   NT$   NT$ 
   (In Millions) 

Beginning balance

  $4,336    $4,846    $4,924  

Attributable to noncontrolling interests

      

Cash dividends distributed by subsidiaries

   (811   (797   (350

Partial disposal of interests in subsidiaries

   —       —       18  

Other changes in additional paid-in capital in subsidiaries

   —       —       2  

Net income of the year

   1,124     597     813  

Remeasurements of defined benefit pension plans

   3     (3   (3

Income tax relating to remeasurements of defined benefit pension plans

   (1   1     1  

Exchange differences arising from the translation of the net investment in foreign operations

   27     24     (3

Share of exchange differences arising from the translation of the net investment in foreign operations of associates

   3     5     2  

Unrealized gain (loss) on available-for-sale financial assets

   11     (9   2  

Income tax relating to unrealized loss on available-for-sale financial assets

   (1   —       —    

Exercise of employee stock option of subsidiaries

   44     —       —    
   (Continued)  

   Year Ended December 31 
   2013   2014   2015 
   NT$   NT$   NT$ 
   (In Millions) 

Compensation cost of employee stock options of subsidiaries

   70     93     36  

Employee stock bonus issued by a subsidiary

   2     5     —    

Subsidiary purchased its treasury stock

   —       —       (416

Increase in noncontrolling interests

   39     162     39  
  

 

 

   

 

 

   

 

 

 

Ending balance

  $4,846    $4,924    $5,065  
  

 

 

   

 

 

   

 

 

 
   (Concluded)  

 

29.30.REVENUE

The main source of revenue of the Company includes various telecommunications services in various different streams, and the related information werewas as discussed in Note 42.43.

 

30.31.NET PROFIT (LOSS)INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)

 

 a.Other income and expenses

 

  Year Ended December 31   Year Ended December 31 
        2012             2013         2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Gain (loss) on disposal of property, plant and equipment, net

  $(2 $85  

Gain (loss) on disposal of property, plant and equipment

  $85    $26    $(109

Gain on disposal of investment properties

   —       605     —    

Impairment loss on property, plant and equipment

   (301 (254   (254   —       (138

Reversal gain (impairment loss) on investment properties

   (1,261 246  

Reversal gain on investment properties

   246     —       142  

Loss on disposal of intangible assets

   —       —       —    

Impairment loss on intangible assets

   (5 (18   (18   —       —    
  

 

  

 

   

 

   

 

   

 

 
  $(1,569 $59    $59    $631    $(105
  

 

  

 

   

 

   

 

   

 

 

 b.Other income

 

  Year Ended December 31   Year Ended December 31 
          2012                   2013           2013   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Dividends income

  $21    $79  

Dividend income

  $79    $78    $218  

Income from Piping Fund

   —       200     202  

Rental income

   43     43     43     45     38  

Others

   377     234     234     264     192  
  

 

   

 

   

 

   

 

   

 

 
  $441    $356    $356    $587    $650  
  

 

   

 

   

 

   

 

   

 

 

 c.Other gains and losses

 

  Year Ended December 31   Year Ended December 31 
          2012                 2013           2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Net foreign currency exchange gains (losses)

  $34   $(100  $(100  $201    $63  

Gain on disposal of financial instruments, net

   113   76  

Gain on disposal of investments accounted for using equity method

   —     13  

Valuation loss on financial instruments at fair value through profit or loss, net

   (1 (1

Gain (loss) on disposal of financial instruments

   76     46     —    

Gain (loss) on disposal of investments accounted for using equity method

   13     (7   4  

Valuation gain (loss) on financial instruments at fair value through profit or loss, net

   (1   1     —    

Impairmet loss on investments accounted for using equity method

   —       —       (8

Impairment losses on available-for-sale financial assets

  $(66  $(23  $(107

Loss arising on derivatives as designated hedging instruments in fair value hedges, net

   —     (93   (93   —       —    

Gain arising on adjustments for hedged item attributable to the hedged risk in a designated fair value hedge accounting relationship, net

   —     93     93     —       —    

Impairment losses on available-for-sale financial assets

   (203 (66

Others

   (82 (46   (46   (94   (180
  

 

  

 

   

 

   

 

   

 

 
  $(139 $(124  $(124  $124    $(228
  

 

  

 

   

 

   

 

   

 

 

 

 d.Finance costsImpairment loss on financial instruments

 

   Year Ended December 31 
           2012                   2013         
   NT$   NT$ 
   (In Millions) 

Interest on bank borrowings

  $20    $33  

Other interest expenses

   2     3  
  

 

 

   

 

 

 
  $22    $36  
  

 

 

   

 

 

 
   Year Ended December 31 
   2013   2014   2015 
   NT$   NT$   NT$ 
       (In Millions)     

Notes and accounts receivable

  $239    $292    $480  
  

 

 

   

 

 

   

 

 

 

Other receivables

  $14    $34    $39  
  

 

 

   

 

 

   

 

 

 

Available-for-sale financial assets

  $66    $23    $107  
  

 

 

   

 

 

   

 

 

 

 

 e.Impairment loss (reversal gain)of impairment loss) on financial instrumentsnon-financial assets

 

   Year Ended December 31 
           2012                  2013         
   NT$  NT$ 
   (In Millions) 

Notes and account receivables

  $(1,473 $239  
  

 

 

  

 

 

 

Other receivables

  $22   $14  
  

 

 

  

 

 

 

Available-for-sale financial assets

  $203   $66  
  

 

 

  

 

 

 
   Year Ended December 31 
   2013   2014   2015 
   NT$   NT$   NT$ 
   (In Millions) 

Inventories

  $203    $288    $198  
  

 

 

   

 

 

   

 

 

 

Property, plant and equipment

  $254    $—      $138  
  

 

 

   

 

 

   

 

 

 

Investments accounted for using equity method

  $—      $—      $8  
  

 

 

   

 

 

   

 

 

 

Investment properties

  $(246  $—      $(142
  

 

 

   

 

 

   

 

 

 

Intangible assets

  $18    $—      $—    
  

 

 

   

 

 

   

 

 

 

 f.Impairment loss (reversal gain) on non-fianacial assets

   Year Ended December 31 
         2012               2013       
   NT$   NT$ 
   (In Millions) 

Inventories

  $113    $203  
  

 

 

   

 

 

 

Property, plant and equipment

  $301    $254  
  

 

 

   

 

 

 

Investment properties

  $1,261    $(246
  

 

 

   

 

 

 

Intangible assets

  $5    $18  
  

 

 

   

 

 

 

g.Depreciation and amortization expenses

 

  Year Ended December 31   Year Ended December 31 
        2012               2013         2013   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Property, plant and equipment

  $31,021    $30,937    $30,937    $31,880    $30,350  

Investment properties

   16     17     17     16     18  

Intangible assets

   1,123     1,238     1,238     2,218     3,080  
  

 

   

 

   

 

   

 

   

 

 

Total depreciation and amortization expenses

  $32,160    $32,192    $32,192    $34,114    $33,448  
  

 

   

 

   

 

   

 

   

 

 

Depreciation expenses summarized by functions

          

Operating costs

  $29,089    $28,813    $28,813    $29,682    $28,292  

Operating expenses

   1,948     2,141     2,141     2,214     2,076  
  

 

   

 

   

 

   

 

   

 

 
  $31,037    $30,954    $30,954    $31,896    $30,368  
  

 

   

 

   

 

   

 

   

 

 

Amortization expenses summarized by functions

          

Operating costs

  $865    $987    $987    $1,915    $2,742  

Operating expenses

   258     251  

Marketing expenses

   115     161     178  

General and administrative expenses

   89     97     116  

Research and development expenses

   47     45     44  
  

 

   

 

   

 

   

 

   

 

 
  $1,123    $1,238    $1,238    $2,218    $3,080  
  

 

   

 

   

 

   

 

   

 

 

(Concluded)

 h.g.Employee benefit expenses

 

  Year Ended December 31   Year Ended December 31 
        2012               2013         2013   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Post-employment benefit

          

Defined contribution plans

  $311    $375    $375    $441    $489  

Defined benefit plans

   2,785     2,882     2,882     3,012     2,914  
  

 

   

 

   

 

   

 

   

 

 
   3,096     3,257     3,257     3,453     3,403  
  

 

   

 

   

 

   

 

   

 

 

Share-based payment

          

Equity-settled share-based payment

   —       70     70     93     36  
  

 

   

 

   

 

   

 

   

 

 

Other employee benefit

          

Salaries

   24,333     24,942     24,942     24,857     25,526  

Insurance

   2,288     2,450     2,450     2,565     2,643  

Other

   14,679     14,411  

Others

   14,411     15,659     15,717  
  

 

   

 

   

 

   

 

   

 

 
   41,300     41,803     41,803     43,081     43,886  
  

 

   

 

   

 

   

 

   

 

 

Total employee benefit expenses

  $44,396    $45,130    $45,130    $46,627    $47,325  
  

 

   

 

   

 

   

 

   

 

 

Summary by functions

          

Operating costs

  $24,928    $25,038    $25,038    $26,362    $25,320  

Operating expenses

   19,468     20,092     20,092     20,265     22,005  
  

 

   

 

   

 

   

 

   

 

 
  $44,396    $45,130    $45,130    $46,627    $47,325  
  

 

   

 

   

 

   

 

   

 

 

As of December 31, 2014 and 2015, the Company had 32,596 and 32,734 employees, respectively.

The bonus to employees and the remuneration to directors as of December 31, 2014 were accrued based on past experiences and the probable amount to be paid in accordance with Chunghwa’s Articles

of Incorporation and Implementation Guidance for the Employee’s Bonus Distribution of Chunghwa Telecom Co., Ltd. In order to compliance with the Company Act of the ROC as amended in May 2015, the amendments to Chunghwa’s Articles of Incorporation was proposed by the Chunghwa’s Board of Directors on March 11, 2016 which stipulated to distribute employees’ compensation at the rates from 1.7% to 4.3% and remuneration to directors at the rate no higher than 0.17%, respectively, of pre-tax income. As of December 31, 2015, the payables of the employees’ compensation and of the remuneration to directors were $1,928 million and $45 million, respectively. Such amounts have been approved by the Chunghwa’s Board of Directors on March 11, 2016 and are subject to the resolution of the shareholders in their meeting to be held on June 24, 2016.

Material differences between such estimated amounts and the amounts proposed by the Board of Directors on or before the annual financial statements are authorized for issue are adjusted in the year the bonus and remuneration were recognized. If there is a change in the proposed amounts after the annual financial statements are authorized for issue, the differences are recorded as a change in accounting estimate.

The appropriations of the 2014 bonuses to employees and remuneration to directors of Chunghwa have been approved by the stockholder’s meeting on June 26, 2015 and the appropriations of the 2013 bonuses to employees and remuneration to directors of Chunghwa approved by the stockholders’ meeting on June 24, 2014 were as follows:

   2013   2014 
   Cash Bonus   Cash Bonus 
   NT$   NT$ 
   (In Millions) 

Bonus distributed to the employees

  $759    $1,510  

Remuneration paid to the directors

   19     39  

There was no difference between the initial accrual amounts and the amounts resolved in shareholders’ meeting on June 26, 2015 and June 24, 2014 of the aforementioned bonuses to employees and the remuneration to directors.

 

 i.h.Components of others comprehensive income—unrealized gain (loss) on available-for-sale financial assets

 

  Year Ended December 31   Year Ended December 31 
        2012             2013         2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Gains (losses) arising during the year

  $209   $(548

Unrealized gain (loss) on available-for-sale financial assets

      

Arising during the year

  $(548  $925    $(671

Reclassification adjustments

         

Upon disposal

   (44 156     156     (47   —    

Upon impairment

   27    —       —       —       26  
  

 

  

 

   

 

   

 

   

 

 
  $192   $(392  $(392  $878    $(645
  

 

  

 

   

 

   

 

   

 

 

Cash flow hedges

      

Gain (loss) arising during the year

  $—      $(18  $18  

Reclassification adjustments for losses included in profit or loss

   —       —       1  

Adjusted against the carrying amount of hedged items

   —       18     (18
  

 

   

 

   

 

 
  $—      $—      $1  
  

 

   

 

   

 

 

31.32.INCOME TAX

 

a.Income tax recognized in profit or loss

The major components of income tax expense are as follows:

 

  Year Ended December 31   Year Ended December 31 
      2012         2013       2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Current tax

         

Current tax expenses recognized for the current period

  $7,960   $8,138  

Income tax benefit of unappropriated earnings

   (676 (1,704

Current tax expenses recognized for the year

  $8,138    $7,516    $8,570  

Tax on unappropriated earnings

   (1,704   1,626     821  

Income tax adjustments on prior years

   32   124     124     4     (83

Others

   24   21     21     41     15  
  

 

  

 

   

 

   

 

   

 

 
   7,340    6,579     6,579     9,187     9,323  
  

 

  

 

   

 

   

 

   

 

 

Deferred tax

         

Deferred tax expense recognized for the current period

   (4  (101

Deferred tax expense recognized for the year

   (101   (202   (222
  

 

  

 

   

 

   

 

   

 

 

Income tax recognized in profit or loss

  $7,336   $6,478    $6,478    $8,985    $9,101  
  

 

  

 

   

 

   

 

   

 

 

A reconciliationReconciliation of income tax expense calculated at the statutory rateaccounting profit and income tax expense was as follows:

 

  Year Ended December 31   Year Ended December 31 
      2012         2013       2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Income before income tax

  $49,953   $49,096    $49,096    $46,552    $51,953  
  

 

  

 

   

 

   

 

   

 

 

Income tax expense calculated at the statutory rate (17%)

   8,492    8,346    $8,346    $7,914    $8,832  

Nondeductible expenses in determining taxable income

   221    (2

Nondeductible revenues and expenses in determining taxable income

   (2   47     28  

Imputed income on tax

   2    2    $2    $1    $—    

Temporary difference

   (177  67  

Unrecognized deductible temporary differences

   67     (66   11  

Unrecognized loss carryforwards

   129     161     83  

Tax-exempt income

   (321  (265   (265   (399   (183

10% tax on unappropriated earnings

   (676  (1,704

Income tax on unappropriated earnings

   (1,704   1,626     821  

Investment credits

   (400  (233   (233   (314   (329

Loss carryforwards

   107    129  

Effect of different tax rates of group entities operating in other jurisdictions

   (1  (10   (10   (25   (94

Adjustments of tax expense on previous years

   32    124  

Adjustments of tax expense on prior years

   124     4     (83

Others

   57    24     24     36     15  
  

 

  

 

   

 

   

 

   

 

 

Income tax expense recognized in profit or loss

  $7,336   $6,478    $6,478    $8,985    $9,101  
  

 

  

 

   

 

   

 

   

 

 

The applicable tax rate used above is the corporate tax rate of 17% payable by the entities subject to the Income Tax Law of the Republic of China, while the applicable tax rate used by subsidiaries in China is 25%. Tax rates used by other entities in the Company operating in other jurisdictions are based on the tax laws in those jurisdictions.

b.Income tax expense (benefit) recognized in other comprehensive income

 

   Year Ended December 31 
       2012          2013     
   NT$  NT$ 
   (In Millions) 

Deferred tax benefit

   

In respect of the current year:

   

Unrealised loss on available-for-sale financial assets

  $—     $6  

Actuarial gains and losses on defined benefit plan

   (265  (105
  

 

 

  

 

 

 

Income tax recognized in other comprehensive incomes

  $(265 $(99
  

 

 

  

 

 

 
   Year Ended December 31 
   2013   2014   2015 
   NT$   NT$   NT$ 
   (In Millions) 

Deferred tax expense (benefit)

      

Unrealized (gain) loss on available-for-sale financial assets

  $6    $(3  $2  

Remeasurement on defined benefit plan

   (105   (84   (39
  

 

 

   

 

 

   

 

 

 

Total income tax benefit recognized in other comprehensive income

  $(99  $(87  $(37
  

 

 

   

 

 

   

 

 

 

 

c.Current tax assets and liabilities

 

  December 31 
  January 1,
2012
   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Current tax assets

          

Tax refund receivable (included in other current asset-others)

  $1    $1    $1  

Tax refund receivable (included in other current assets - other)

  $333    $8  
  

 

   

 

   

 

   

 

   

 

 

Current tax liabilities

          

Income tax payable

  $8,044    $7,139    $6,171    $6,982    $9,171  
  

 

   

 

   

 

   

 

   

 

 

 

d.Deferred income tax assets and liabilities

The movements of deferred income tax assets and deferred income tax liabilities were as follows:

For the year ended December 31, 20122013

 

Deferred Income Tax Assets

  January 1,
2012
   Recognized in
Profit or Loss
  Recognized in
Other
Comprehensive
Income
   December 31,
2012
 
   NT$   NT$  NT$   NT$ 

Temporary differences

       

Defined benefit obligation

  $495    $13   $265    $773  

Share of the profit of associates and joint venture accounted for using equity method

   41     48    —       89  

Deferred revenue

   334     (102  —       232  

Impairment loss on property, plant and equipment

   12     47    —       59  

Valuation loss on inventory

   62     (18  —       44  

Estimated warranty liabilities

   8     18    —       26  

Accrued award credits liabilities

   14     (2  —       12  

Unrealized foreign exchange loss (gain), net

   —       19    —       19  

Others

   13     4    —       17  
  

 

 

   

 

 

  

 

 

   

 

 

 
   979     27    265     1,271  
  

 

 

   

 

 

  

 

 

   

 

 

 

Loss carryforwards

   74     (42  —       32  

Investment credits

   3     —      —       3  
  

 

 

   

 

 

  

 

 

   

 

 

 
  $1,056    $(15 $265    $1,306  
  

 

 

   

 

 

  

 

 

   

 

 

 

(Concluded)

Deferred Income Tax Assets

  December 31,
2012
   Recognized in
Profit or Loss
   Recognized in
Other
Comprehensive
Income
   December 31,
2013
 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Temporary differences Defined benefit obligation

  $773    $50    $105    $928  

Share of the profit of associates and joint ventures accounted for using equity method

   89     86     —       175  

Allowance for doubtful receivables over quota

   2     —       —       2  

Deferred revenue

   232     (45   —       187  

Impairment loss on property, plant and equipment

   59     —       —       59  

Valuation loss on inventory

   44     12     —       56  

Accrued award credits liabilities

   12     9     —       21  

Unrealized foreign exchange loss, net

   19     (8   —       11  
       (Continued)  

Deferred Income Tax Liabilities

  January 1,
2012
  Recognized
in Profit or
Loss
   Recognized in
Other
Comprehensive
Income
   December 31,
2012
 
   NT$  NT$   NT$   NT$ 

Temporary differences

       

Land value incremental tax

  $(95 $—      $—      $(95

Unrealized foreign exchange loss (gain), net

   (13  13     —       —    

Others

   (3  —       —       (3
  

 

 

  

 

 

   

 

 

   

 

 

 
  $(111 $13    $—      $(98
  

 

 

  

 

 

   

 

 

   

 

 

 

Deferred Income Tax Assets

  December 31,
2012
   Recognized in
Profit or Loss
   Recognized in
Other
Comprehensive
Income
   December 31,
2013
 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Estimated warranty liabilities

   26     (2   —       24  

Others

   15     1     —       16  
  

 

 

   

 

 

   

 

 

   

 

 

 
   1,271     103     105     1,479  

Loss carryforwards

   32     (5   —       27  

Investment credits

   3     (3   —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $1,306    $95    $105    $1,506  
  

 

 

   

 

 

   

 

 

   

 

 

 
       (Concluded)  

Deferred Income Tax Liabilities

  December 31,
2012
   Recognized in
Profit or Loss
   Recognized in
Other
Comprehensive
Income
   December 31,
2013
 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Temporary differences

        

Land value incremental tax

  $(95  $—      $—      $(95

Valuation gain on financial instruments, net

   —       —       (6   (6

Others

   (3   3     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $(98  $3    $(6  $(101
  

 

 

   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 20132014

 

Deferred Income Tax Assets

  December 31,
2012
   Recognized
in Profit or
Loss
  Recognized in
Other
Comprehensive
Income
   December 31,
2013
 
   NT$   NT$  NT$   NT$ 

Temporary differences

       

Defined benefit obligation

  $773    $50   $105    $928  

Share of the profit of associates and joint venture accounted for using equity method

   89     86    —       175  

Deferred revenue

   232     (45  —       187  

Impairment loss on property, plant and equipment

   59     —      —       59  

Valuation loss on inventory

   44     12    —       56  

Estimated warranty liabilities

   26     (2  —       24  

Accrued award credits liabilities

   12     9    —       21  

Unrealized foreign exchange loss (gain), net

   19     (8  —       11  

Others

   17     1    —       18  
  

 

 

   

 

 

  

 

 

   

 

 

 
   1,271     103    105     1,479  
  

 

 

   

 

 

  

 

 

   

 

 

 

Loss carryforwards

   32     (5  —       27  

Investment credits

   3     (3  —       —    
  

 

 

   

 

 

  

 

 

   

 

 

 
  $1,306    $95   $105    $1,506  
  

 

 

   

 

 

  

 

 

   

 

 

 

(Concluded)

Deferred Income Tax Liabilities

  December 31,
2012
  Recognized in
Profit or Loss
   Recognized in
Other
Comprehensive
Income
  December 31,
2013
 
   NT$  NT$   NT$  NT$ 

Temporary differences

      

Land value incremental tax

  $(95 $—      $—     $(95

Valuation gain on financial instruments, net

   —      —       (6  (6

Others

   (3  3     —      —    
  

 

 

  

 

 

   

 

 

  

 

 

 
  $(98 $3    $(6 $(101
  

 

 

  

 

 

   

 

 

  

 

 

 

Deferred Income Tax Assets

  December 31,
2013
   Recognized in
Profit or Loss
   Recognized in
Other
Comprehensive
Income
   December 31,
2014
 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Temporary differences

        

Defined benefit obligation

  $928    $84    $84    $1,096  

Share of the profit of associates and joint ventures accounted for using equity method

   175     102     —       277  

Allowance for doubtful receivables over quota

   2     112     —       114  

Deferred revenue

   187     (31   —       156  

Impairment loss on property, plant and equipment

   59     (27   —       32  

Valuation loss on inventory

   56     (15   —       41  

Accrued award credits liabilities

   21     7     —       28  

Unrealized foreign exchange loss, net

   11     (11   —       —    

Estimated warranty liabilities

   24     (5   —       19  

Others

   16     18     —       34  
  

 

 

   

 

 

   

 

 

   

 

 

 
   1,479     234     84     1,797  

Loss carryforwards

   27     2     —       29  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $1,506    $236    $84    $1,826  
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred Income Tax Liabilities

  December 31,
2013
   Recognized in
Profit or Loss
   Recognized in
Other
Comprehensive
Income
   December 31,
2014
 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Temporary differences

        

Land value incremental tax

  $(95  $—      $—      $(95

Valuation loss (gain) on financial instruments, net

   (6   —       3     (3

Unrealized foreign exchange gain, net

   —       (29   —       (29

Others

   —       (5   —       (5
  

 

 

   

 

 

   

 

 

   

 

 

 
  $(101  $(34  $3    $(132
  

 

 

   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2015

Deferred Income Tax Assets

  December 31,
2014
   Recognized in
Profit or Loss
  Recognized in
Other
Comprehensive
Income
   From
Business
Combination
   December 31,
2015
 
   NT$   NT$  NT$   NT$   NT$ 
   (In Millions) 

Temporary differences

         

Defined benefit obligation

  $1,096    $71   $39    $—      $1,206  

Share of the profit of associates and joint ventures accounted for using equity method

   277     48    —       —       325  

Allowance for doubtful receivables over quota

   114     55    —       —       169  

Deferred revenue

   156     (20  —       —       136  

Impairment loss on property, plant and equipment

   32     12    —       —       44  

Valuation loss on inventory

   41     (8  —       —       33  

Accrued award credits liabilities

   28     (6  —       —       22  

Unrealized foreign exchange loss, net

   —       18    —       —       18  

Estimated warranty liabilities

   19     (1  —       —       18  

Property, plant and equipment

   —       —      —       2     2  

Others

   34     6    —       —       40  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 
   1,797     175    39     2     2,013  

Loss carryforwards

   29     17    —       2     48  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 
  $1,826    $192   $39    $4    $2,061  
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

Deferred Income Tax Liabilities

  December 31,
2014
  Recognized in
Profit or Loss
  Recognized in
Other
Comprehensive
Income
  From
Business
Combination
  December 31,
2015
 
   NT$  NT$  NT$  NT$  NT$ 
   (In Millions) 

Temporary differences

      

Land value incremental tax

  $(95 $—     $—     $—     $(95

Intangible assets

   —      1    —      (44  (43

Valuation loss (gain) on financial instruments, net

   (3  —      (2  —      (5

Defined benefit obligation

   —      (1  —      —      (1

Unrealized foreign exchange gain, net

   (29  28    —      —      (1

Others

   (5  2    —      —      (3
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $(132 $30   $(2 $(44 $(148
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

e.Items for which no deferred income tax assets have not been recognized

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
       (In Millions)     

Loss carryforwards

      

Expire in 2016

  $—      $38    $38  

Expire in 2017

   —       65     65  

Expire in 2018

   —       —       130  

Expire in 2019

   —       —       —    

Expire in 2020

   —       —       —    

Expire in 2021

   1     1     —    

Expire in 2022

   —       4     4  

Expire in 2023

   —       —       —    
  

 

 

   

 

 

   

 

 

 
  $1    $108    $237  
  

 

 

   

 

 

   

 

 

 

Investment credits

      

Purchase of machinery and equipment

  $—      $—      $—    

Research and development

   3     —       —    

Personnel training expenditures

   —       —       —    
  

 

 

   

 

 

   

 

 

 
  $3    $—      $—    
  

 

 

   

 

 

   

 

 

 

Deductible temporary differences

  $177    $—      $67  
  

 

 

   

 

 

   

 

 

 

(Concluded)
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Loss carryforwards

    

Expire in 2016

  $38    $37  

Expire in 2017

   65     67  

Expire in 2018

   130     126  

Expire in 2019

   164     157  

Expire in 2020

   —       80  

Expire in 2021

   —       —    

Expire in 2022

   1     2  

Expire in 2023

   —       —    

Expire in 2024

   —       —    

Expire in 2025

   —       15  
  

 

 

   

 

 

 
  $398    $484  
  

 

 

   

 

 

 

Deductible temporary differences

  $1    $12  
  

 

 

   

 

 

 

f.Information about unused loss carryforwards

As of December 31, 2013,2015, unused loss carryforwards was comprised of:as follows:

 

Remaining

Creditable Amount

  

Expiry Year

 

NT$

(In Millions)

    
 $ 38    2016  
 65    2017  
 130    2018  
 7    2019  
 8    2020  
 10    2021  
 4    2022  
 2    2023  

 

 

  
 $264   

 

 

  

Remaining

Creditable
Amount

   

Expiry Year

NT$ (In Millions)    
$37    2016
 67    2017
 126    2018
 159  �� 2019
 88    2020
 10    2021
 2    2022
 3    2023
 5    2024
 35    2025

 

 

   
$532    

 

 

   

g.The related information under the Integrated Income Tax System iswas as follows:

Imputation credit accountUndistributed earnings information

All Chunghwa’s earnings generated prior to June 30, 1988 have been appropriated.

Imputation credit account

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
       (In Millions)     

Balance of Imputation Credit Account (“ICA”)

  $4,899    $4,553    $4,038  
  

 

 

   

 

 

   

 

 

 

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Balance of Imputation Credit Account (“ICA”)

  $8,269    $7,577  
  

 

 

   

 

 

 

The creditable ratioratios for distribution of earnings of 20122014 and 2013 was 19.23%2015 were 20.48% and 20.48% (expected ratio), respectively. Effective from January 1, 2015, the creditable ratio for individual shareholders residing in the Republic of China is half of the original creditable ratio according to the revised Article 66-6 of the Income Tax Law of the ROC.

When Chunghwa appropriated the earnings generated in and after 1998, the imputation credit allocated to local shareholders’ was based on the creditable rate as of the date of the dividends distribution date. The actual imputation credits allocated to shareholders of the Chunghwa was based on the balance of the Imputation Credit Accounts (ICA) as of the date of dividend distribution. Therefore, the expected creditable ratio for the 20132015 earnings may differ from the actual creditable ratio to be used in allocating imputation credits to the shareholders.

According to legal interpretation No. 10204562810 announced by the Taxation Administration of the Ministry of Finance, when calculating imputation credits in the year of first-time adoption of IFRSs, the cumulative retained earnings include the net increase or net decrease in retained earnings arising from first-time adoption of IFRSs.

 

h.Income tax examinations

Chunghwa’s incomeIncome tax returns of Chunghwa have been examined by the tax authorities through 2011 except for 2008. The following subsidiaries income2012. Income tax returns of SENAO, CHIEF, CHSI, CHPT, LED and Youth have been examined by the tax authorities through 2011: SENAO, CHPT, CHSI, CHIEF, CHI, SHE, LED, CHIYP, YYRP, CEI and CHST. Unigate and SFDs’ income2013. Income tax returns of CHST, CHYP, Unigate, SFD, ISPOT, Youyi, SHE, CEI, CHI and HHI have been assessedexamined by the tax authorities through 2012.2014.

Chunghwa’s income tax returns for 2008 is still under discussion with the tax authorities; however, the disputed amount of $84 million was accrued in 2013.

32.33.EARNINGS PER SHARE

Net income and weighted average number of common stockstocks used in the calculation of earnings per share were as follows:

 

    Net Income

 

  Year Ended December 31   Year Ended December 31 
      2012         2013       2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Net income used to compute the basic earnings per share

         

Net income attributable to the parent

  $41,492   $41,494    $41,494    $36,970    $42,039  

Assumed conversion of all dilutive potential common stock Employee stock options of subsidiaries

   (4 (3

Assumed conversion of all dilutive potential common stocks

      

Employee stock options, bonus and remunerations of subsidiaries

   (3   —       (1
  

 

  

 

   

 

   

 

   

 

 

Net income used to compute the diluted earnings per share

  $41,488   $41,491    $41,491    $36,970    $42,038  
  

 

  

 

   

 

   

 

   

 

 

    Weighted Average Number of Common Stock

(Millions Shares)

   Year Ended December 31 
       2012           2013     
   (Millions Shares) 

Weighted average number of common stock used to compute the basic earnings per share

   7,757     7,757  

Assumed conversion of all dilutive potential common stock Employee stock bonus

   12     20  
  

 

 

   

 

 

 

Weighted average number of common stock used to compute the diluted earnings per share

   7,769     7,777  
  

 

 

   

 

 

 

   Year Ended December 31 
   2013   2014   2015 

Weighted average number of common stocks used to compute the basic earnings per share

   7,757     7,757     7,757  

Assumed conversion of all dilutive potential common stocks

      

Employee bonus or employee remuneration

   12     13     19  
  

 

 

   

 

 

   

 

 

 

Weighted average number of common stocks used to compute the diluted earnings per share

   7,769     7,770     7,776  
  

 

 

   

 

 

   

 

 

 

If Chunghwa may settle the employee bonus or employee remuneration in shares or cash, Chunghwa shall presume that it will be settled in shares and takes those shares into consideration when calculating the weighted average number of outstanding shares used in the calculation of diluted EPS if the shares have a dilutive effect. The dilutive effect of the shares needs to be considered until the stockholders approve the number of shares to be distributed to employees in their meeting in the following year.

 

33.34.SHARE-BASED PAYMENT ARRANGEMENT

 

 a.SENAO share-based compensation plans (“SENAO Plans”) described as follows:

SENAO share-based compensation plans (“SENAO Plans”) described as follows:

Effective Date  Grant Date  Stock Options   Exercise Price
      (In Thousands)   NT$

2005.09.30

  2006.05.05   10,000    $12.1 (Original price $16.9)

2007.10.16

  2007.10.31   6,181    $42.6 (Original price $44.2)

2012.05.28

  2013.04.29   10,000    $89.4 (Original price $93.0)
    

 

 

   
     26,181    
    

 

 

   
Effective Date Grant Date Stock Options Units   Exercise Price
    (In Thousands)   NT$

2007.10.16 (“2007 Plan”)

 2007.10.31  6,181    $42.60 (Original price $44.20)

2012.05.28 (“2013 Plan”)

 2013.05.07  10,000    $81.40 (Original price $93.00)

Each option is eligible to subscribe for one common stock of SENAOshare when exercisable. Under the terms of the SENAO Plans, the options are granted at an exercise price atequal to the closing price of the SENAO’s

common stocks listed on the TSE on the grant dates except when thehigher of closing price is lower than par value, the option exercise price would becomeor par value. The SENAO Plans have exercise price adjustment formula upon the issuance of new common stocks, capitalization of retained earnings and/or capital reserves, stock split as well as distribution of cash dividends (except for 2007 Plan), except (i) in the case of issuance of new shares in connection with mergers and in the case of cancellation of outstanding shares in connection with capital reduction (2007 Plan is out of this exception), and (ii) except if the exercise price after adjustment exceeds the exercise price before adjustment. The options of all theSENAO Plans are valid for six years and the graded vesting schedule for which 50% of option granted will vest two years after the grant date and another two tranches of 25%, each will vest three and four years after the grant date respectively.

SENAO elected not to apply IFRS 2 retrospectively for the share-based payment transactions which were granted and vested before the transition date.date, January 1, 2012.

Stock options granted on May 7, 2013 applied IFRS 2. The recognized compensation cost wascosts were $70 million, $93 million and $35 million for the period from May 7 toyears ended December 31, 2013.

2013, 2014 and 2015, respectively.

SENAO modified the plan terms of the outstanding stock options in June 2013, July 2014 and August 2015 for 2013 Plan, the exercise price changed from $93.00 to $89.40 per share, $89.40 to $84.30 per share and $84.30 to $81.40 per share, respectively. The modification did not cause any incremental fair value.

Information about SENAO’s outstanding stock options for the years ended December 31, 2013, 2014 and 2015 were as follows:

   Year Ended December 31, 2013 
   Granted on October 31, 2007   Granted on May 7, 2013 
   Number of
Options
   Weighted-
average
Exercise
Price
   Number of
Options
   Weighted-
average
Exercise

Price
 
   (In Thousands)   NT$   (In Thousands)   NT$ 

Employee stock options

        

Options outstanding at beginning of the year

   1,051    $42.60     —      $—    

Options granted

   —       —       10,000     93.00  

Options exercised

   (980  $42.60     —      $—    

Options forfeited

   (71   —       (128   —    
  

 

 

     

 

 

   

Options outstanding at end of the year

   —       —       9,872     89.40  
  

 

 

     

 

 

   

Options exercisable at end of the year

   —       —       —       —    
  

 

 

     

 

 

   

   Year Ended December 31, 2014 
   Granted on May 7, 2013 
   Number of
Options
   Weighted-
average
Exercise Price
 
   (In Thousands)   NT$ 

Employee stock options

    

Options outstanding at beginning of the year

   9,872    $89.40  

Options forfeited

   (845   —    
  

 

 

   

Options outstanding at end of the year

   9,027     84.30  
  

 

 

   

Options exercisable at end of the year

   —       —    
  

 

 

   

   Year Ended December 31, 2015 
   Granted on May 7, 2013 
   Number of
Options
   Weighted-
average
Exercise
Price
 
   (In Thousands)   NT$ 

Employee stock options

    

Options outstanding at beginning of the year

   9,027    $84.30  

Options forfeited

   (1,240   —    
  

 

 

   

Options outstanding at end of the year

   7,787     81.40  
  

 

 

   

Options exercisable at end of the year

   4,049     81.40  
  

 

 

   

As of December 31, 2014 information about employee stock options outstanding was as follows:

Options Outstanding

  Options Exercisable

Range of Exercise

Price

  Number of
Options
  Weighted-
average
Remaining
Contractual
Life
  Weighted-
average
Exercise

Price
  Number of
Options
  Weighted-
average
Exercise

Price
NT$  (In Thousands)  (Years)  NT$  (In Thousands)  NT$

$84.30

  9,027  4.35  $84.30  —    $—  

As of December 31, 2015 information about employee stock options outstanding are as follows:

Options Outstanding

  Options Exercisable

Range of Exercise

Price

  Number of
Options
  Weighted-
average
Remaining
Contractual
Life
  Weighted-
average
Exercise

Price
  Number of
Options
  Weighted-
average
Exercise

Price
NT$  (In Thousands)  (Years)  NT$  (In Thousands)  NT$

$81.40

  7,787  3.35  $81.40  4,049  $81.40

SENAO used the fair value method to evaluate the options using the Black-Scholes model and the related assumptions and the fair value of the options were as follows:

 

   Stock Options
Granted on
May 7, 2013
 

Dividends yield

   —    

Risk-free interest rate

   0.91%  

Expected life

   4.375 years  

Expected volatility

   36.22%  

Weighted-average fair value of grants (NT$)

  $28.72  

Information about SENAO’s outstanding stock options for the years ended December 31, 2012 and 2013 were as follows:
   Stock Options
Granted on
May 7, 2013
 

Grant-date share price (NT$)

  $93.00  

Dividends yield

   —    

Risk-free interest rate

   0.91

Expected life

   4.375 years  

Expected volatility

   36.22

Weighted-average fair value of grants (NT$)

  $28.72  

   Year Ended December 31, 2012 
   Granted on May 5, 2006   Granted on October 31, 2007 
   Number of
Options
  Weighted-
average
Exercise
Price
   Number of
Options
  Weighted-
average
Exercise
Price
 
   (In Thousands)  NT$   (In Thousands)  NT$ 

Employee stock options

      

Options outstanding at beginning of the year

   280   $12.10     1,998   $42.60  

Options exercised

   (275  12.10     (947  42.60  

Options forfeited

   (5  —       —      —    
  

 

 

    

 

 

  

Options outstanding at end of the year

   —      —       1,051    42.60  
  

 

 

    

 

 

  

Options exercisable at end of the year

   —      —       1,051    42.60  
  

 

 

    

 

 

  

   Year Ended December 31, 2013 
   Granted on October 31, 2007   Granted on May 7, 2013 
   Number of
Options
  Weighted-
average
Exercise
Price
   Number of
Options
  Weighted-
average
Exercise
Price
 
   (In Thousands)  NT$   (In Thousands)  NT$ 

Employee stock options

      

Options outstanding at beginning of the year

   1,051   $42.60     —     $—    

Options granted

   —      —       10,000    93.00  

Options exercised

   (980  42.60     —      —    

Options forfeited

   (71  —       (128  —    
  

 

 

    

 

 

  

Options outstanding at end of the year

   —      —       9,872    89.40  
  

 

 

    

 

 

  

Options exercisable at end of the year

   —      —       —      —    
  

 

 

    

 

 

  

As of December 31, 2012 information about employee stock options outstanding are as follows:

Options Outstanding

   Options Exercisable 

Range of Exercise
Price

  Number of
Options
   Weighted-
average
Remaining
Contractual
Life
   Weighted-
average
Exercise

Price
   Number of
Options
   Weighted-
average
Exercise

Price
 
NT$  (In Thousands)   (Years)   NT$   (In Thousands)   NT$ 

$42.60

   1,051     0.92    $42.60     1,051    $42.60  

As of December 31, 2013 information about employee stock options outstanding are as follows:

Options Outstanding

   Options Exercisable 

Range of Exercise
Price

  Number of
Options
   Weighted-
average
Remaining
Contractual
Life
   Weighted-
average
Exercise

Price
   Number of
Options
   Weighted-
average
Exercise

Price
 
NT$  (In Thousands)   (Years)   NT$   (In Thousands)   NT$ 

$89.40

   9,872     5.35    $89.40     —      $—    

Had SENAO used the fair value method to evaluate the options using the Black-Scholes model, the assumptions SENAO used and the fair value of the options would have been as follows:

 

  Stock Options
Granted on
October 31,
2007
   Stock Options
Granted on
May 5, 2006
   Stock Options
Granted on
October 31, 2007
 

Grant-date share price (NT$)

  $44.20  

Dividends yield

   1.49%     —       1.49

Risk-free interest rate

   2.00%     1.75%     2.00

Expected life

   4.375 years     4.375 years     4.375 years  

Expected volatility

   39.82%     39.63%     39.82

Weighted-average fair value of grants (NT$)

  $13.69    $5.88    $13.69  

Expected volatility was based on the historical share price volatility of SENAO over the period equal to the expected life of SENAO Plans.

 

 b.CHTPCHPT share-based compensation plan decribed as follows:

CHTPCHPT granted one thousand1,000 stock options to some of its qualified employees in December 2008. Under the terms of CHTP Plan,CHPT option plan, each stock option entitles the holder to subscribe for one thousand common shares at $12.6$12.60 per share when exercisable.share. The options are valid for 5 years and based on the graded vesting schedule, two tranches of 30% of the option will vest two and three years after the grant date, respectively, and the remaining 40% will vest four years after the grant date. There is an exercise price adjustment formula upon the issuance of new common shares, capitalization of retained earnings and/or capital reserves, stock split, issuance of new shares in connection with mergers, issuance of global depositary receipts as well as distribution of cash dividends, except if the exercise price after adjustment exceeds the exercise price before adjustment.

For the yearsyear ended December 31, 2012 and 2013 information about CHTP’sCHPT’s outstanding stock options werewas as follows:

 

   Year Ended December 31 
   2012   2013 
   Number of
Options
   Weighted-
average
Exercise
Price
   Number of
Options
  Weighted-
average
Exercise
Price
 
       NT$      NT$ 

Employee stock options

       

Options outstanding at beginning of the period

   920    $10.10     920   $10.10  

Options exercised

   —       —       (810  10.10  

Options expired

   —       —       (110  10.10  
  

 

 

     

 

 

  

Options outstanding at end of the period

   920     10.10     —      —    
  

 

 

     

 

 

  

Options exercisable at end of the period

   920     10.10     —      —    
  

 

 

     

 

 

  

   Year Ended December 31, 2013 
   Number of
Options
   Weighted-
average
Exercise
Price
 
       NT$ 

Employee stock options

    

Options outstanding at beginning of the period

   920    $10.10  

Options exercised

   (810   10.10  

Options expired

   (110   10.10  
  

 

 

   

Options outstanding at end of the period

   —       —    
  

 

 

   

Options exercisable at end of the period

   —       —    
  

 

 

   

The share registration of 810 thousand employee stock options exercised in 2013 has been completed. 110 thousand of unexercised employee stock options were expired in December 2013. As of December 31, 2012, information about2013, 2014 and 2015, CHPT has no outstanding employee stock options outstanding is as follows:options.

Options Outstanding

   Options Exercisable 

Range of Exercise
Price

  Number of
Options
   Weighted-
average
Remaining
Contractual
Life
   Weighted-
average
Exercise

Price
   Number of
Options
   Weighted-
average
Exercise

Price
 
NT$      (Years)   NT$       NT$ 

$10.10

   920     1    $10.10     920    $10.10  

CHPT used the fair value to evaluate the options using the Black-Scholes model, the assumptions and the fair value of the options of CHPT would have been as follows:

 

  Stock Options
Granted on
December 31,
2008
   Stock Options
Granted on
December 31, 2008
 

Grant-date share price (NT$)

  $12.60  

Dividends yield

   —       —    

Risk free interest rate

   2.00%     2.00

Expected life

   3.1 years     3.1 years  

Expected volatility

   20%     20

Weighted-average fair value of grants

  $3.8    $3.80  

 

34.c.CHIEF share-based compensation plan (“CHIEF Plan”) described as follows:

Effective Date

  Resolution Date by CHIEF’s
Board of Directors
   Stock Options
Units
   Exercise Price 
           NT$ 

2015.10.22

   2015.10.22     2,000    $43.00  

Each option is eligible to subscribe for one thousand common shares when exercisable. Under the terms of the CHIEF Plan, the options are granted at an exercise price equal to $43.00. The options are granted to specific employees that meet the vesting conditions. The CHIEF Plan has exercise price adjustment formula upon the changes in common stocks or distribution of cash dividends. The options of CHIEF Plan are valid for five years and the graded vesting schedule will vest two years after the grant date.

Stock options granted on October 22, 2015 applied IFRS 2. The recognized compensation cost was $1 million for the year ended December 31, 2015.

Information about CHIEF’s outstanding stock options for the year ended December 31, 2015 was as follows:

   Year Ended December 31, 2015 
   Granted on October 22, 2015 
   Number of
Options
   Weighted
Average
Exercise Price
 
       NT$ 

Employee stock options

    

Options outstanding at beginning of the year

   —      $—    

Options granted

   2,000     43.00  
  

 

 

   

Options outstanding at end of the period

   2,000     43.00  
  

 

 

   

Option exercisable at end of the year

   —       —    
  

 

 

   

As of December 31, 2015, information about employee stock options outstanding was as follows:

Options Outstanding

  Options Exercisable

Range of Exercise
Price

  Number of
Options
  Weighted
Average
Remaining
Contractual
Life
  Weighted
Average
Exercise

Price
  Number of
Options
  Weighted
Average
Exercise

Price
NT$     (Years)  NT$     NT$

$43.00

  2,000  4.81  $43.00  —    $—  

CHIEF used the fair value method to evaluate the options using the binomial option pricing model and the related assumptions and the fair value of the options were as follows:

   Stock Options
Granted on
October 22,
2015
 

Grant-date share price (NT$)

  $39.55  

Dividends yield

   —    

Risk-free interest rate

   0.86

Expected life

   5 years  

Expected volatility

   21.02

Weighted average fair value of grants (NT$)

  $4,863  

Expected volatility was based on the average annualized historical share price volatility of CHIEF’s comparable companies before the grant date.

35.NON-CASH TRANSACTIONS

For the years ended December 31, 20122013, 2014 and 2013,2015, the Company entered into the following non-cash investing activities:

 

  Year Ended December 31   Year Ended December 31 
      2012         2013       2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Increase in property, plant and equipment

  $33,721   $36,727    $36,727    $32,084    $24,451  

Other payables

   (441 (345   (345   475     633  
  

 

  

 

   

 

   

 

   

 

 
  $33,280   $36,382    $36,382    $32,559    $25,084  
  

 

  

 

   

 

   

 

   

 

 

 

35.36.OPERATING LEASE ARRANGEMENTS

 

 a.The Company as lessee

Leasing arrangements

Except for the ST-2 satellite referred in Note 3940 to the consolidated financial statement, the Company entered into several lease agreements with third parties for base stations located all over in Taiwan. The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Within one year

  $2,401    $2,837    $3,061    $3,050    $3,173  

Longer than one year but within five years

   5,750     5,842     6,389     5,808     5,614  

Longer than five years

   2,037     2,047     1,720     1,514     1,186  
  

 

   

 

   

 

   

 

   

 

 
  $10,188    $10,726    $11,170    $10,372    $9,973  
  

 

   

 

   

 

   

 

   

 

 

 b.The Company as lessor

The Company leaseleases out some land and buildings to third parties.buildings. The future aggregate minimum lease collection under non-cancellable operating leases are as follows:

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Within one year

  $454    $430    $445    $411    $399  

Longer than one year but within five years

   962     684     659     525     527  

Longer than five years

   117     100     165     395     374  
  

 

   

 

   

 

   

 

   

 

 
  $1,533    $1,214    $1,269    $1,331  �� $1,300  
  

 

   

 

   

 

   

 

   

 

 

 

36.37.CAPITAL MANAGEMENT

The Company manages its capital to ensure that entities in the Company will be able to continue as going concerns while maximisingmaximizing the return to stakeholders through the optimisationoptimization of the debt and equity balance.

The capital structure of the Company consists of debt of the Company and the equity attributable to the parent.

The management reviews the capital structure of the Company as needed. As part of this review, the management considers the cost of capital and the risks associated with each class of capital.

AtAccording to the managementmanagement’s suggestion, the Company maintains a balanced capital structure through paying cash dividends, increasing its share capital, purchasing treasury stock, and proceeds from new debt or repayment of debt.

 

37.38.FINANCIAL INSTRUMENTS

 

    Categories of Financial Instruments

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
       (In Millions)     

Financial assets

      

Measured at FVTPL

      

Held for trading (Note d)

  $6    $3    $—    

Designated as at FVTPL (Note d)

   40     —       —    

Held-to-maturity financial assets (Note e)

   14,696     16,046     11,766  

Loans and receivables (Note a)

   92,888     80,786     43,192  

Available-for-sale financial assets (Note b)

   5,317     7,996     5,494  

Financial Liabilities

      

Measured at FVTPL

      

Held for trading (Note d)

   4     2     —    

Measured at amortized cost (Note c)

   30,340     30,998     33,576  
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Financial assets

    

Measured at FVTPL

    

Held for trading

  $1    $—    

Hedging derivatives financial assets

   —       1  

Held-to-maturity financial assets

   7,485     4,021  

Loans and receivables (Note a)

   56,933     63,738  

Available-for-sale financial assets

   6,281     5,511  

Financial liabilities

    

Measured at FVTPL

    

Held for trading

  $—      $—    

Hedging derivative financial liabilities

   —       —    

Measured at amortized cost (Note b)

   39,683     36,365  

Note a:

  The balances included cash and cash equivalents, trade notes and accounts receivable, accounts receivable from related parties, other current monetary assets, and other financial assets (included inand refundable deposits (classified as other noncurrent assets). which were loans and receivables. Please refer to NoteNotes 7, 11, 14, 20 and 39.40.

Note b:

Please refer to Note 9.

Note c:

  The balances included short-term loans, trade notes and accounts payable, other payables, payables to related parties, partial other payables, customers’ deposits and long-term loans which were financial liabilities carried at amortized cost. Please refer to Notes 21, 22, 23, 24, 25 and 39.

Note d:

Please refer to Note 8.

Note e:

Please refer to Note 10.40.

Financial Risk Management Objectives

The main financial instruments of the Company include equity and debt investments, accounts receivable, accounts payables and loans. The Company’s Finance Department provides services to its business units, co-ordinates access to domestic and international capital markets, monitors and manages the financial risks relating to the operations of the Company through internal risk reports which analyze exposures by degree and magnitude of risks. These risks include market risk (including foreign currency risk, interest rate risk and other price risk), credit risk, and liquidity risk.

The Company seeks to manageminimize the effects of these risks by using derivative financial instruments to hedge risk exposures. The use of financial derivatives is governed by the Company’s policies approved by the boardBoard of directors.Directors. Those derivatives are used to hedge the risks of exchange rate and interest rate fluctuation arising from operating or investment activities. Compliance with policies and risk exposure limits is reviewedaudited by the Company’s Finance Department on a continuous basis. The Company does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

The CompanyChunghwa reports the significant risk exposures and related action plans timely and actively for the risks to the audit committee and if needed to the boardBoard of directors.Directors.

 

 a.Market risk

The Company is exposed to market risks of changes in foreign currency exchange rates and interest rates and the prices in equity investments.rates. The Company uses currency swap and forward exchange contracts to hedge the exchange rate risk arising from assets and liabilities denominated in foreign currencies.

There were no changes to the Company’s exposure to market risks or the manner in which these risks are managed and measured.

 1)Foreign currency risk management

The carrying amounts of the Company’s foreign currency denominated monetary assets and monetary liabilities at the end of the reporting periodperiods are as follows:

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Assets

          

USD

  $5,324    $4,251    $4,234    $5,308    $4,596  

EUR

   7     19     5     16     47  

SGD

   77     110  

RMB

   112     41  

JPY

   1     6     2     3     245  

SGD

   4     6     142  

Liabilities

          

USD

   4,051     3,561     3,612     5,366     4,172  

EUR

   1,099     1,311     1,298     767     1,293  

SGD

   2     3  

RMB

   —       —    

JPY

   5     5     11     6     14  

SGD

   83     21     1  

The carrying amount of the Company’s derivatives with exchange rate risk exposures at the end of the reporting period are as follows:

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Assets

          

USD

  $6    $3    $—      $1    $—    

EUR

   —       1  

Liabilities

          

USD

   4     2     —       —       —    

EUR

   —       —    

Foreign currency sensitivity analysis

The Company is mainly exposed to the fluctuations of the currencies listed above.

The following table details the Company’s sensitivity to a 5% increase and decrease in the functional currency against the relevant foreign currencies. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible changes in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and forward foreign exchange contracts and currency swap contracts. A positive number below indicates an increase in pre-tax profit or equity where the functional currency weakens 5% against the relevant currency. For a 5% strengthening of the functional currency against the relevant currency, there would be a comparable impact on the profit, and the balances below would be negative.

 

  Year Ended December 31   Year Ended December 31 
        2012             2013         2013   2014   2015 
  NT$ NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Profit or loss

         

Monetary assets and liabilities (a)

         

USD

  $35   $31    $31    $(3  $21  

EUR

   (65 (65   (65   (38   (62

SGD

   7     4     5  

RMB

   7     6     2  

JPY

   —      —       —       —       12  

SGD

   (1 7  

Derivatives(b)

   

Derivatives (b)

      

USD

   104   5     5     11     1  

EUR

   —       —       33  

Equity

      

Derivatives (c)

      

EUR

   —       (5   15  

 a)This is mainly attributable to the exposure on the outstandingto foreign currency denominated receivables and payables inof the Company outstanding at the end of the reporting period.
 b)This is mainly attributable to the swaps and forward exchange contracts.
c)This is mainly attributable to the changes in the fair value of derivatives that are designated as cash flow hedges.

For a 5% strengthening of the functional currency against the relevant currencies, there would be a comparable impact on the pre-tax profit or equity, and the balances above would be negative.

 2)Interest rate risk

The carrying amountamounts of the Company’s exposures to interest rates on financial assets and financial liabilities at the end of the reporting period are as follows:

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Fair value interest rate risk

          

Financial assets

  $62,468    $47,128    $5,682    $21,271    $26,238  

Financial liabilities

   179     115     224     564     110  

Cash flow interest rate risk

          

Financial assets

   4,403     5,445     10,609     4,625     6,461  

Financial liabilities

   1,656     2,054     1,730     1,900     1,750  

Interest rate sensitivity analysis

The sensitivity analyses below have been determined based on the exposure to interest rates for non-derivative instruments at the end of the reporting period. A 25 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

If interest rates had been 25 basis points higher/lower and all other variables were held constant, the Company’s pre-tax profitincome would increase/decrease by $22 million, $6 million and $12 million for the yearyears ended December 31, 2012 would increase/decrease by $8 million.2013, 2014 and 2015, respectively. This is mainly attributable to the Company’s exposure to floating interest rates on its financial assets and short-term and long-term loans; and other comprehensive income for the year ended December 31, 2012 would decrease/increase by $0.06 million, mainly as a result of the changes in the fair value of available-for-sale instruments with fixed rate.

If interest rates had been 25 basis points higher/lower and all other variables were held constant, the Company’s pre-tax profit for the year ended December 31, 2013 would increase/decrease by $22 million. This is mainly attributable to the Company’s exposure to floating interest rates on its financial assets and short-term and long-term loans.loan.

 

 3)Other price risks

The Company is exposed to equity price risks arising from listed equity investments. Equity investments are held for strategic rather than trading purposes. The management managed the risk through holding various risk portfolios. Further, the Company assigned finance and investment departments to monitor the price risk.

Equity price sensitivity analysis

The sensitivity analyses below have been determined based on the exposure to equity price risks at the end of the reporting period.

If equity prices of listed equity securities had been 5% higher/lower:

Other comprehensive income before income tax would increase/decrease by $270$153 million, $196 million and $153$162 million as a result of the changes in fair value of available-for-sale assets for the years ended December 31, 20122013, 2014 and 2013,2015, respectively.

b.Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The maximum credit exposure of the aforementioned financial instruments is equal to their carrying amounts recognized in consolidated balance sheet as of the balance sheet date.

The Company has large trade receivables outstanding with its customers. A substantial majority of the Company’s outstanding trade receivables are not covered by collateral or credit insurance.

The Company has implemented someongoing measures which have improved the collectability of our accounts receivable. These procedures, which include enhancedincluding enhancing credit assessments strengthenedand strengthening overall risk managementmanagement. While the Company has procedures to monitor and improvements in bill collection practices, have reduced thelimit exposure to uncollected receivables.

Accounts receivable are assessed for impairment at the end of each reporting periodcredit risk on trade receivables, there can be no assurance such procedures will effectively limit its credit risk and considered to be impairedavoid losses. This risk is heightened during periods when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the accounts receivable, the estimated future cash flows of the asset have been affected.

The Company maintains an allowance for doubtful accounts for estimated losses that result from the inability of our customers to make required payments. When determining the allowance, the Company considers the probability of recoverability based on past customer default experience and their credit status, and economic and industrial factors. Credit risks are assessed based on historical write-offs, net of recoveries, and an analysis of the aged accounts receivable balances with allowances generally increasing as the receivable ages. Accounts receivable may be fully reserved for when specific collection issues are known to exist, such as pending bankruptcy or catastrophes. The analysis of receivables is performed monthly, and the allowances for doubtful accounts are adjusted through expense accordingly.conditions worsen.

As the Company serves a large consumer base, the concentration of credit risk was limited.

 

c.Liquidity risk management

The Company manages and contains sufficient cash and cash equivalent position to support the operations and reduce the impact on fluctuation of cash flow.

 

 1)Liquidity and interest risk tables

The following table detailstables detailed the Company’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables had been drawn up based on the undiscounted cash flows of financial liabilities frombased on the earliest date on which the Company can beis required to pay.

 

  Weighted
Average
Effective
Interest Rate
(%)
   Less Than
1 Month
   1-3 Months   3 Months to
1 Year
   1-5 Years   Total   Weighted
Average
Effective
Interest Rate
(%)
   Less Than
1 Month
   1-3 Months   3 Months to
1 Year
   1-5 Years   More than 5
Year
   Total 
      NT$   NT$   NT$   NT$   NT$       NT$   NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

January 1, 2012

            

December 31, 2014

              

Non-derivative financial liabilities

                          

Non-interest bearing

   —      $39,009    $—      $2,346    $—      $41,355     —      $41,582    $  —      $1,680    $4,759    $  —      $48,021  

Floating interest rate instruments

   1.10     5     1     600     1,050     1,656     1.22     —       —       —       1,755     145     1,900  

Fixed interest rate instruments

   1.72     91     80     —       8     179     1.37     —       500     64     —       —       564  
    

 

   

 

   

 

   

 

   

 

     

 

   

 

   

 

   

 

   

 

   

 

 
    $39,105    $81    $2,946    $1,058    $43,190      $41,582    $500    $1,744    $6,514    $145    $50,485  
    

 

   

 

   

 

   

 

   

 

     

 

   

 

   

 

   

 

   

 

   

 

 

December 31, 2015

              

Non-derivative financial liabilities

              

Non-interest bearing

   —      $40,209    $—      $2,190    $4,726    $—      $47,125  

Floating interest rate instruments

   1.13     —       —       8     1,646     96     1,750  

Fixed interest rate instruments

   1.82     50     —       60     —       —       110  
    

 

   

 

   

 

   

 

   

 

   

 

 
    $40,259    $—      $2,258    $6,372    $96    $48,985  
    

 

   

 

   

 

   

 

   

 

   

 

 

   Weighted
Average
Effective
Interest Rate
(%)
   Less Than
1 Month
   1-3 Months   3 Months to
1 Year
   1-5 Years   Total 
       NT$   NT$   NT$   NT$   NT$ 
       (In Millions) 

December 31, 2012

            

Non-derivative financial liabilities

            

Non-interest bearing

   —      $38,660    $—      $1,793    $—      $40,453  

Floating interest rate instruments

   1.32     4     —       —       2,050     2,054  

Fixed interest rate instruments

   1.75     48     —       67     —       115  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $38,712    $—      $1,860    $2,050    $42,622  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013

            

Non-derivative financial liabilities

            

Non-interest bearing

   —      $41,958    $—      $980    $—      $42,938  

Floating interest rate instruments

   1.18     —       20     310     1,400     1,730  

Fixed interest rate instruments

   1.53     175     35     14     —       224  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $42,133    $55    $1,304    $1,400    $44,892  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table detailed the Company’s liquidity analysis for its derivative financial instruments. The table summarized the undiscounted contractual net cash inflows and outflowshas been drawn up based on derivative instruments that settle on a net basis and the undiscounted gross inflows and outflows on those derivatives that require gross settlement.

 

   Less Than
1 Month
  1-3 Months   3 Months to
1 Year
   1-5 Years   Total 
   NT$  NT$   NT$   NT$   NT$ 
   (In Millions) 

January 1, 2012

         

Net settled

         

Index future contracts

  $—     $—      $—      $—      $—    
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Gross settled

         

Currency swap contracts

         

Inflow

  $940   $937    $—      $—      $1,877  

Outflow

   938    937     —       —       1,875  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 
  $2   $—      $—      $—      $2  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Forward exchange contracts

         

Inflow

  $60   $—      $—      $—      $60  

Outflow

   60    —       —       —       60  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 
  $—     $—      $—      $—      $—    
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

         

Gross settled

         

Currency swap contracts

         

Inflow

  $726   $1,194    $—      $—      $1,920  

Outflow

   727    1,192     —       —       1,919  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 
  $(1 $2    $—      $—      $1  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

  Less Than
1 Month
   1-3 Months   3 Months to
1 Year
   1-5 Years   Total   Less Than
1 Month
   1-3 Months 3 Months to
1 Year
   1-5 Years   Total 
  NT$   NT$   NT$   NT$   NT$   NT$   NT$ NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Forward exchange contracts

          

Inflow

  $154    $—      $—      $—      $154  

Outflow

   154     —       —       —       154  
  

 

   

 

   

 

   

 

   

 

 
  $—      $—      $—      $—      $—    
  

 

   

 

   

 

   

 

   

 

 

December 31, 2013

          

December 31, 2014

         

Gross settled

                   

Forward exchange contracts

                   

Inflow

  $90    $—      $—      $—      $90    $220    $90   $  —      $  —      $310  

Outflow

   90     —       —       —       90     219     90    —       —       309  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 
  $—      $—      $—      $—      $—      $1    $  —     $—      $—      $1  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

December 31, 2015

         

Gross settled

         

Forward exchange contracts

         

Inflow

  $26    $474   $492    $—      $992  

Outflow

   26     476   489     —       991  
  

 

   

 

  

 

   

 

   

 

 
  $  —      $(2 $3    $—      $1  
  

 

   

 

  

 

   

 

   

 

 

 

 2)Financing facilities

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Unsecured bank loan facility

          

Amount used

  $475    $511    $254    $564    $110  

Amount unused

   8,525     8,639     8,475     35,315     41,278  
  

 

   

 

   

 

   

 

   

 

 
  $9,000    $9,150    $8,729    $35,879    $41,388  
  

 

   

 

   

 

   

 

   

 

 

Secured bank loan facility

          

Amount used

  $1,651    $2,050    $1,700    $1,900    $1,750  

Amount unused

   —       600     600     818     200  
  

 

   

 

   

 

   

 

   

 

 
  $1,651    $2,650    $2,300    $2,718    $1,950  
  

 

   

 

   

 

   

 

   

 

 

 

38.39.FAIR VALUEFAIR VALUE INFORMATION

The fair value measurement guidance requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value. The level in thestandard describes a fair value hierarchy within which the fair value measurement in its entirely falls shall be determined based on the lowest level inputthree levels of inputs that is significantmay be used to themeasure fair value measurement in its entirety.value. These levels are:

 

 Level 1:1Quotedfair value measurements: These measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;liabilities.

 

 Level 2:2Quotedfair value measurements: These measurements are those derived from inputs other than quoted prices in marketsincluded within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3fair value measurements: These measurements are those derived from valuation techniques that include inputs for the asset or liability that are not active, or inputs which arebased on observable either directly or indirectly, for substantially the full term of the asset or liability; ormarket data (unobservable inputs).

 

 Level 3:a.Prices or valuation techniques that require inputsFinancial instruments that are both significant to thenot measured at fair value measurement and are unobservable.but for which fair value is disclosed

AssetsExcept for what disclosed in the following table, the Company considers that the carrying amounts of finanal assets and liabilitiesliablities not measured at fair value on a recurring basis

The following table presents our assets and liabilities measured atapproximate their fair value on a recurring basis:

January 1, 2012

   Level 1   Level 2   Level 3   Total 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Financial assets at FVTPL

        

Derivative financial assets Currency swap contracts

  $—      $6    $—      $6  

Financial assets designated as at fair value through profit or loss

        

Convertible bonds

   —       40     —       40  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $—      $46    $     $46  
  

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-sale financial assets

        

Domestic securities

        

Equity investments

  $528    $—      $—      $528  

Corporate bonds

   —       77     —       77  

Foreign securities

        

Equity investments

   —       —       —       —    

Open-end mutual funds

   2,137     —       —       2,137  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $2,665    $77    $—      $2,742  
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities at FVTPL

        

Derivative financial assets

        

Forward exchange

  $—      $—      $—      $—    

Currency swap contracts

   —       4     —       4  

Index future contracts

   —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $—      $4    $—      $4  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Concluded)values or the fair values cannot be reliable estimated:

December 31, 20122014

 

   Level 1   Level 2   Level 3   Total 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Financial assets at FVTPL

        

Derivative financial assets

        

Forward exchange

  $—      $—      $—      $—    

Currency swap contracts

   —       3     —       3  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $—      $3    $—      $3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-sale financial assets

        

Domestic securities

        

Equity investments

  $3,278    $—      $—      $3,278  

Corporate bonds

   —       50     —       50  

Foreign securities

        

Equity investments

   10     —       —       10  

Open-end mutual funds

   2,190     —       —       2,190  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $5,478    $50    $—      $5,528  
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities at FVTPL

        

Derivative financial assets

        

Forward exchange

  $—      $—      $—      $—    

Currency swap contracts

   —       2     —       2  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $—      $2    $—      $2  
  

 

 

   

 

 

   

 

 

   

 

 

 
   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3 

Held-to-maturity financial assets

        

Corporate bonds

  $6,534    $  —      $6,564    $  —    

Bank debentures

   951     —       952     —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $7,485    $—      $7,516    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3 

Held-to-maturity financial assets

        

Corporate bonds

  $3,871    $  —      $3,891    $  —    

Bank debentures

   150     —       150     —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $4,021    $—      $4,041    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

The Level 2 fair values are estimated using discounted cash flow models. The models use market-based observable inputs including duration, yield rate and credit rating.

b.Financial instruments measured at fair value

December 31, 2014

   Level 1   Level 2   Level 3   Total 

Financial assets at FVTPL

        

Derivative financial assets

  $—      $1    $  —      $1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-sale financial assets

        

Domestic and foreign listed securities

        

Equity investments

  $3,914    $  —      $—      $3,914  
  

 

 

   

 

 

   

 

 

   

 

 

 

Hedging derivative financial liabilities

  $—      $—      $—      $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities at FVTPL

        

Derivative financial liabilities

  $—      $—      $—      $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 20132015

 

  Level 1   Level 2   Level 3   Total 
  NT$   NT$   NT$   NT$ 
  (In Millions)   Level 1   Level 2   Level 3   Total 

Financial assets at FVTPL

                

Derivative financial assets

          $—      $  —      $  —      $—    

Forward exchange

  $—      $—      $—      $—    
  

 

   

 

   

 

   

 

 

Hedging derivative financial assets

  $—      $1    $—      $1  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Available-for-sale financial assets

                

Domestic securities

        

Equity investments

  $3,046    $—      $—      $3,046  

Corporate bonds

   —       —       —       —    

Foreign securities

        

Domestic and foreign listed securities

        

Equity investments

   24     —       —       24    $3,243    $—      $—      $3,243  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $3,070    $—      $—      $3,070  
  

 

   

 

   

 

   

 

 

Financial liabilities at FVTPL

        

Derivative financial assets

        

Forward exchange

  $—      $—      $—      $—    
  

 

   

 

   

 

   

 

 

There were no transfers between LevelLevels 1 and 2 for the years ended December 31, 20122014 and 2013.

2015. There were no Level 3 investments measured at fair value on a recurring basis.

Index future contracts are actively traded or have quoted prices. For derivative financial assets forward exchange and currency swap contracts, fair values are estimated using 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.

Available-for-sale financial assets include open-end mutual funds, domestic and foreign listed stocks that are actively traded or have quoted prices.

Convertible bonds and corporate bonds are valued using discounted cash flow model which incorporates the market-based observable inputs including duration, yield rate and credit rating.

Assets and liabilities measured at fair value on a nonrecurring basis

The Company measures certain assets at fair value on a nonrecurring basis when they are deemed to be impaired. Due to the significant unobservable inputs used, the Company classified these measurements as Level 3.

   For the Year Ended December 31, 2012 
   Level 1   Level 2   Level 3   Total
Losses
 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Available-for-sale financial assets

        

Domestic stocks

        

Equity investments

  $—      $—      $103    $176  
  

 

 

   

 

 

   

 

 

   

 

 

 

   For the Year Ended December 31, 2013 
   Level 1   Level 2   Level 3   Total
Losses
 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Available-for-sale financial assets

        

Domestic stocks

  $—      $—      $20    $66  
  

 

 

   

 

 

   

 

 

   

 

 

 

The AFS financial assets consisted of non-publicly stocks. The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on nonrecurring basis during the years ended December 31, 2012 and 2013:

   For the Year Ended December 31, 2012
   Fair
Value
   Valuation Methodology   Unobservable Inputs  Range
of Inputs
   NT$           
   (In Millions)           

Assets

        

AFS financial assets

  $103     Discounted cash flow    Return on investment  7%
  

 

 

       
      Industrial risk  1%-3%
      Enterprise risk  1%-3%
      Sustainable growth rate  2%

   For the Year Ended December 31, 2013
   Fair
Value
   Valuation Methodology   Unobservable Inputs  Range
of Inputs
   NT$           
   (In Millions)           

Assets

        

AFS financial assets

  $20     Discounted cash flow    Return on investment  7%
  

 

 

       
      Industrial risk  3%
      Enterprise risk  2%-2.5%
      Sustainable growth rate  2%

The department of investment and the department of finance are responsible for the impairment tests of financial instruments. They have set forth the Company’s valuation policies and procedures for the impairment test and are responsible for reporting to the general manager regarding the changes in fair value and reasonableness of the underlying assumptions utilized in the valuation whenever the impairment test is performed.

The Company evaluated its unlisted stocks for impairment by using valuation models based on discounted future cash flows because there were no quoted fair value for such investments. Pursuant to the established policies, the Company employed an internal valuation model in 2012 and 2013 to determine the fair value of unlisted AFS financial assets using the discounted cash flow approach based on management’s projections. Variables utilized in discounted cash flow approach require the use of unobservable inputs (Level 3), including return on investment, industrial risk, enterprise risk and sustainable growth rate. Changes in management estimates to the unobservable inputs in the valuation models would significantly change the fair value of the above investee. The return on investment is the assumption that most significantly affects the fair value determination. AFS financial assets held with a carrying amount of NT$279 million were written down to their fair value of NT$103 million, resulting in an impairment charge of NT$176 million, which was included in earnings for the year ended December 31, 2012. AFS financial assets held with a carrying amount of NT$86 million were written down to their fair value of NT$20 million, resulting in an impairment charge of NT$66 million, which was included in earnings for the year ended December 31, 2013.

Assets and liabilities not measured at fair value but for which fair value is disclosed

Except for the following table, the management considered that the carrying amounts of financial instruments approximate fair values or fair values of those instruments cannot be reliably measured.

   January 1, 2012 
   Carrying
Amount
   Estimated Fair Value 
     Level 1   Level 2   Level 3 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Financial assets

        

Held-to-maturity investments

        

Corporate bonds

  $13,790    $—      $14,045    $—    

Bank debentures

   906     —       904     —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $14,696    $—      $14,949    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

   December 31, 2012 
   Carrying
Amount
   Estimated Fair Value 
     Level 1   Level 2   Level 3 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Financial assets

        

Held-to-maturity investments

        

Corporate bonds

  $14,791    $—      $16,131    $—    

Bank debentures

   1,255     —       1,257     —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $16,046    $—      $17,388    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

   December 31, 2013 
   Carrying
Amount
   Estimated Fair Value 
     Level 1   Level 2   Level 3 
   NT$   NT$   NT$   NT$ 
   (In Millions) 

Financial assets

        

Held-to-maturity investments

        

Corporate bonds

  $10,513    $—      $10,552    $—    

Bank debentures

   1,253     —       1,256     —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $11,766    $—      $11,808    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

Methods and assumptions used in the estimation of fair values of financial instruments:assets and financial liabilities are determined as follows:

 

 a.1)The carrying amountsfair values of cashfinancial assets and cash equivalents, other current monetary assets, short-term loansfinancial liabilities with standard terms and current portion of long-term loans approximate fair value dueconditions and traded in active markets are determined with reference to the short period of time to maturity.quoted market prices.

 

 b.2)Held-to-maturity investments were corporate bonds valuedFor derivative financial assets and liabilities of forward exchange contracts, fair values are estimated using discounted cash flow model. The model withuses market-based observable inputs including duration, yield rateforeign exchange rates, and credit rating.forward and spot prices for currencies to project fair value.

 

39.40.RELATED PARTIES TRANSACTIONS

Balances and transactions between Chunghwa and its subsidiaries, which are related parties of Chunghwa, have been eliminated on consolidation and are not disclosed in this note.

The ROC Government, one of Chunghwa’s customers heldhas significant equity interest in Chunghwa. Chunghwa provides fixed-line services, wireless services, Internet and data and other services to the various departments and institutions of the ROC Government and other state-owned enterprises in the normal course

of business and at arm’s-length prices. The information on service revenues fromtransactions with the ROC government bodies hashave not been provided because the ROC government has significant influence over Chunghwa.transactions are not individually or collectively significant. However, the related revenues and operating costs have been appropriately recorded.

 

 a.The Company engages in business transactions with the following related parties:

 

Company

  

Relationship

Taiwan International Standard Electronics Co., Ltd. (“TISE”)

  

Associate

So-net Entertainment Taiwan Co., Ltd. (“So-net”)

Limited
  

Associate

Skysoft Co., Ltd. (“SKYSOFT”)

  

Associate

KingWaytekKingwayTek Technology Co., Ltd. (“KWT”)

  

Associate

Dian Zuan Integrating Marketing Co., Ltd. (“DZIM”)

  

Associate

Viettel-CHT Co., Ltd. (“Viettel”)

  

Associate

Taiwan International Ports Logistics Corporation

Associate
Huada Digital CorporationJoint venture
Chunghwa Benefit One Co., Ltd.Joint venture
International Integrated System, Inc. (“IISI”)

  

Associate

Senao Networks, Inc.

Associate
HopeTech Technologies LimitedAssociate
ST-2 Satellite Ventures Pte., Ltd. (“STS”)Associate
Xiamen Sertec Business Technology Co., Ltd.Associate
Click Force Co., Ltd.Associate
Other related parties
(Continued)

Company

  

AssociateRelationship

Huada Digital Corporation (“HDD”)

Joint venture

Senao Networks, Inc. (“SNI”)

Associate of SENAO

HopeTech Technologies Limited (“HopeTech”)

Associate of SIS

Other related parties

Chunghwa Telecom Foundation (“CTF”)

  

A nonprofit organization of which the funds donated by Chunghwa exceeds one third of its total funds

Senao Technical and Cultural Foundation (“STCF”)

  

A nonprofit organization of which the funds donated by SENAO exceeds one third of its total funds

Sochamp Technology Co., Ltd. (“Sochamp”)

  

Investor of significant influence over CHST

United Daily News Co., Ltd. (“UDN)

Investor of significant influence over SFD

E-Life Mall Co., LtdLtd.

  

One of the directors of E-Life Mall and a director of SENAO are members of an immediate family

Cheng Fong InvestmentUnited Daily News Co., Ltd.

  

The chairmanInvestor of the board of directors of Cheng Fong is the general manager of SENAOsignificant influence over SFD

(Concluded)

 

 b.Balances and transactions between Chunghwa and its subsidiaries, which are related parties of Chunghwa, have been eliminated on consolidation and are not disclosed in this note. Term of the foregoing transactions with related parties were not significantly different from transactions with non-related parties. When no similar transactions with non-related parties can be referenced, terms were determined in accordance with mutual agreements. Details of transactions between the Company and other related parties are disclosed below:

 

 1)Operating transactions

 

  Revenues   Revenues 
  Year Ended December 31   Year Ended December 31 
          2012                   2013                   2013                   2014                   2015         
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Associates

  $416    $367    $367    $329    $333  
  

 

   

 

 

Joint ventures

  $4    $4     4     7     9  
  

 

   

 

 

Others

  $4    $69     69     97     81  
  

 

   

 

   

 

   

 

   

 

 
  $440    $433    $423  
  

 

   

 

   

 

 

  Operating Costs and Expenses   Operating Costs and Expenses 
  Year Ended December 31   Year Ended December 31 
          2012                   2013                   2013                   2014                   2015         
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Associates

  $1,471    $1,486    $1,486    $1,663    $1,451  
  

 

   

 

 

Joint ventures

  $—      $1     1     34     17  
  

 

   

 

 

Others

  $65    $74     74     69     62  
  

 

   

 

   

 

   

 

   

 

 
  $1,561    $1,766    $1,530  
  

 

   

 

   

 

 

 

 2)Non-operating transactions

 

  Non-operating Income and Expenses 
  Year Ended December 31   Year Ended December 31 
          2012                   2013                   2013                   2014                   2015         
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Associates

  $32    $33    $33    $34    $36  
  

 

   

 

 

Others

  $—      $—       —       —       —    
  

 

   

 

   

 

   

 

   

 

 
  $33    $34    $36  
  

 

   

 

   

 

 

 3)Receivables

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
           2014                   2015         
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Associates

  $34    $44    $60    $62    $29  

Joint ventures

   —       —       —       —       1  

Others

   —       —       9     19     12  
  

 

   

 

   

 

   

 

   

 

 
  $34    $44    $69    $81    $42  
  

 

   

 

   

 

   

 

   

 

 

 

 4)Payables

 

  December 31 
  January 1, 2012   December 31,
2012
   December 31,
2013
           2014                   2015         
  NT$   NT$   NT$   NT$   NT$ 
      (In Millions)       (In Millions) 

Associates

  $784    $833    $549    $402    $602  

Joint ventures

   —       5  

Others

   4     4     8     6     4  
  

 

   

 

   

 

   

 

   

 

 
  $788    $837    $557    $408    $611  
  

 

   

 

   

 

   

 

   

 

 

 

 5)Customers’ deposits

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
       (In Millions)     

Associates

  $2    $3    $1  
  

 

 

   

 

 

   

 

 

 
   December 31 
           2014                   2015         
   NT$   NT$ 
   (In Millions) 

Associates

  $9    $11  

Others

   —       —    
  

 

 

   

 

 

 
  $9    $11  
  

 

 

   

 

 

 

 6)Acquisition of property, plant and equipment

 

   Year Ended December 31 
           2012                   2013         
   NT$   NT$ 
   (In Millions) 

Associates

  $747    $1,270  
  

 

 

   

 

 

 

The above amount is mainly attributable to telecommunications equipment bought from TISE.

   Year Ended December 31 
           2013                   2014                   2015         
   NT$   NT$   NT$ 
   (In Millions) 

Associates

  $1,270    $521    $314  

Joint ventures

   —       —       11  
  

 

 

   

 

 

   

 

 

 
  $1,270    $521    $325  
  

 

 

   

 

 

   

 

 

 

 

 7)Prepayments

Chunghwa entered into a contract with STSST-2 Satellite Ventures Pte., Ltd. on March 12, 2010 to lease capacity on the ST-2 satellite. This lease is for 15 years which should start from the official operation of ST-2 satellite and the total contract value is approximately $6,000 million (SG$261 million), including a prepayment of $3,068 million, and the rest of amount should be paid annually when ST-2 satellite starts its official operation. ST-2 satellite was launched in May 2011, and began its official operation in August 2011. The total rental expense for the year ended

December 31, 20132015 was $410$404 million, which consisted of an offsetting credit of the prepayment of $211$204 million and an additional accrual of $199$200 million. The prepayment was $2,567 millionprepaid rents (classified as prepaid rents-current $204 million, and prepaid rents-noncurrent $2,363 million)prepayments) as of December 31, 2013.2014 and 2015, were as follows:

   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Prepaid rents—current

  $204    $204  

Prepaid rents—noncurrent

   2,163     1,959  
  

 

 

   

 

 

 
  $2,367    $2,163  
  

 

 

   

 

 

 

 

 c.Compensation of key management personnel

The remuneration of directors and members of key management personnel for the years ended December 31, 20122013, 2014 and 2013 was2015 were as follows:

 

  Year Ended December 31   Year Ended December 31 
          2012                   2013                   2013                   2014                   2015         
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Short-term benefits

  $277    $257  

Short-term employee benefits

  $257    $222    $212  

Share-based payment

   6     10     3  

Post-employment benefits

   9     10     10     8     9  

Share-based payment

   —       6  
  

 

   

 

   

 

   

 

   

 

 
  $286    $273    $273    $240    $224  
  

 

   

 

   

 

   

 

   

 

 

The remuneration of directors and key executives is mainly determined by the compensation committee having regard to the performance of individual and market trends.

 

40.41.PLEDGED ASSETS

The following assets are pledged as collaterals for long-term bank loans and contract deposits.custom duties of the imported materials.

 

   January 1, 2012   December 31,
2012
   December 31,
2013
 
   NT$   NT$   NT$ 
   (In Millions) 

Property, plant and equipment, net

  $2,736    $2,694    $2,668  

Land held under development and land held for development (included in inventories)

   —       1,999     1,999  

Restricted assets (included in other noncurrent assets—others)

   9     10     10  
  

 

 

   

 

 

   

 

 

 
  $2,745    $4,703    $4,677  
  

 

 

   

 

 

   

 

 

 
   December 31 
   2014   2015 
   NT$   NT$ 
   (In Millions) 

Property, plant and equipment, net

  $3,079    $3,101  

Land held under development (included in inventories)

   1,999     1,999  

Restricted assets (included in other assets—others)

   1     2  
  

 

 

   

 

 

 
  $5,079    $5,102  
  

 

 

   

 

 

 

41.42.SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNIZED COMMITMENTS

At the balance sheet date, theThe Company’s remaining commitments under non-cancelable contracts with various parties, excluding those disclosed in other notes, were as follows:

 

 a.Acquisitions of land and buildings of $3,650$647 million as of December 31, 2013.2015.

 

 b.Acquisitions of telecommunications equipment of $31,267$13,952 million as of December 31, 2013.2015.

 

 c.Unused letters of credit were of $202amounting to $50 million as of December 31, 2013.2015.

 d.Contract to print billing, envelopes and marketing gifts were of $29 million as of December 31, 2013.

e.A commitment to contribute $2,000 million to a Piping Fund administered by the Taipei City Government, of which $1,000 million was contributed by Chunghwa on August 15, 1996 (classified as other monetary assets—noncurrent). If the fund is not sufficient, Chunghwa will contribute the remaining $1,000 million upon notification from the Taipei City Government.

 

42.43.SEGMENT INFORMATION

The Company has the following reportable segments that provide different products or services. The reportable segments are managed separately because each segment represents a strategic business unit that serves different markets. Segment information is provided to CEO who allocateallocates resources and assessassesses segment performance. The Company’s measure of segment performance is mainly based on revenues and income before tax. The Company’s reportable segments are as follows:

 

 a.Domestic fixed communications business—the provision of local telephone services, domestic long distance telephone services, broadband access, and related services;

 

 b.Mobile communications business—the provision of mobile services, sales of mobile handsets and data cards, and related services;

 

 c.Internet business—the provision of HiNet services and related services;

 

 d.International fixed communications business—the provision of international long distance telephone services and related services;

 

 e.Others—the provision of non-Telecom services and the corporate related items not allocated to reportable segments.

The reportableSome operating segments have been aggregated into a single operating segment taking into account the following factors: (a) the nature of the telecommunication products and services; (b) the nature of production processes of the telecommunication products and services are managed separately because each segment represents a strategic business unit that serves different markets. The Company’s measuresimilar; (c) the type or class of segment performance is mainly based on revenuescustomer for the telecommunication products and income before tax.services; (d) the methods used to provide the services to the customers are the same; and (e) similar economic characteristics such as long-term gross profit margins.

There was no material differences between the accounting policies of the operating segments and the accounting policies described in Note 3.

 

 a.Segment information

Analysis by reportable segment of revenue and operating results of continuing operations are as follows:

 

  Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others Total   Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others Total 
  NT$   NT$   NT$   NT$   NT$ NT$   NT$   NT$   NT$   NT$   NT$ NT$ 
  (In Millions)   (In Millions) 

Year ended December 31, 2012

           

Revenue

           

Year ended December 31, 2013

           

Revenues

           

From external customers

  $76,133    $100,794    $24,766    $15,319    $4,408   $221,420    $73,502    $110,590    $25,447    $15,750    $2,692   $227,981  

Intersegment revenues

   16,991     6,581     2,877     2,231     1,035   29,715     18,447     5,702     4,354     2,107     1,232   31,842  
  

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

 

Segment revenues

  $93,124    $107,375    $27,643    $17,550    $5,443     $91,949    $116,292    $29,801    $17,857    $3,924   259,823  
  

 

   

 

   

 

   

 

   

 

    

 

   

 

   

 

   

 

   

 

  

Intersegment elimination

            (29,715           (31,842
           

 

            

 

 

Consolidated revenues

           $221,420             $227,981  
           

 

            

 

 

Segment income before income tax

  $15,675    $25,827    $8,579    $1,316    $(1,444 $49,953    $17,339    $23,676    $9,432    $892    $(2,243 $49,096  
  

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

 
         (Continued)  

  Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others Total   Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others Total 
  NT$   NT$   NT$   NT$   NT$ NT$   NT$   NT$   NT$   NT$   NT$ NT$ 
  (In Millions)   (In Millions) 

Year ended December 31, 2013

           

Revenue

           

Year ended December 31, 2014

           

Revenues

           

From external customers

  $73,502    $110,590    $25,447    $15,750    $2,692   $227,981    $72,062    $110,665    $25,997    $15,314    $2,571   $226,609  

Intersegment revenues

   18,447     5,702     4,354     2,107     1,232   31,842     19,728     5,324     4,705     2,256     2,422   34,435  
           

 

   

 

   

 

   

 

   

 

   

 

  

 

 

Segment revenues

  $91,949    $116,292    $29,801    $17,857    $3,924     $91,790    $115,989    $30,702    $17,570    $4,993   261,044  
  

 

   

 

   

 

   

 

   

 

    

 

   

 

   

 

   

 

   

 

  

Intersegment elimination

            (31,842           (34,435
           

 

            

 

 

Consolidated revenues

           $227,981             $226,609  
           

 

            

 

 

Segment income before income tax

  $17,339    $23,676    $9,432    $892    $(2,243 $49,096    $19,535    $19,322    $9,547    $191    $(2,043 $46,552  
  

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

 

Year ended December 31, 2015

           

Revenues

           

From external customers

  $72,535    $114,877    $25,777    $15,460    $3,146   $231,795  

Intersegment revenues

   21,401     3,475     4,701     2,120     3,214   34,911  
  

 

   

 

   

 

   

 

   

 

  

 

 

Segment revenues

  $93,936    $118,352    $30,478    $17,580    $6,360   266,706  
  

 

   

 

   

 

   

 

   

 

  

Intersegment elimination

           (34,911
           

 

 

Consolidated revenues

           $231,795  
           

 

 

Segment income before income tax

  $23,231    $19,394    $9,918    $1,120    $(1,710 $51,953  
  

 

   

 

   

 

   

 

   

 

  

 

 
         (Concluded)  

 

 b.Other segment information

Other information reviewed by the chief operating decision maker or regularly provided to the chief operating decision maker was as following:follows:

For the year ended December 31, 2012

   Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others   Total 
   NT$   NT$   NT$   NT$   NT$   NT$ 
   (In Millions) 

Share of the profit of associates and joint venture accounted for using equity method

  $—      $—      $—      $—      $520    $520  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest revenue

  $6    $12    $2    $4    $718    $742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

  $—      $—      $2    $—      $20    $22  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

  $69,327    $71,092    $10,280    $13,352    $7,389    $171,440  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

  $19,230    $8,478    $2,685    $1,434    $333    $32,160  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditure

  $19,551    $7,232    $3,441    $2,379    $677    $33,280  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2013

 

   Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others   Total 
   NT$   NT$   NT$   NT$   NT$   NT$ 
   (In Millions) 

Share of the profit of associates and joint venture accounted for using equity method

  $—      $—      $—      $—      $666    $666  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest revenue

  $12    $9    $6    $2    $534    $563  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

  $1    $9    $1    $—      $25    $36  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

  $68,740    $79,074    $11,577    $14,333    $6,645    $180,369  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

  $19,005    $8,147    $3,122    $1,549    $369    $32,192  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditure

  $20,362    $9,245    $4,621    $1,559    $595    $36,382  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others   Total 
   NT$   NT$   NT$   NT$   NT$   NT$ 
   (In Millions) 

Share of the profit of associates and joint ventures accounted for using equity method

  $—      $—      $—      $—      $666    $666  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

  $12    $9    $6    $2    $534    $563  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expenses

  $1    $9    $1    $—      $25    $36  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

  $68,740    $79,074    $11,577    $14,333    $6,645    $180,369  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

  $19,005    $8,147    $3,122    $1,549    $369    $32,192  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         (Continued)  

   Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others   Total 
   NT$   NT$   NT$   NT$   NT$   NT$ 
   (In Millions) 

Capital expenditure

  $20,362    $9,245    $4,621    $1,559    $595    $36,382  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment loss on property, plant and equipment

  $—      $254    $—      $—      $—      $254  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reversal of impairment loss on investment properties

  $246    $—      $—      $—      $—      $246  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         (Concluded)  

For the year ended December 31, 2014

   Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others   Total 
   NT$   NT$   NT$   NT$   NT$   NT$ 
   (In Millions) 

Share of the profit of associates and joint ventures accounted for using equity method

  $—      $—      $—      $—      $802    $802  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

  $24    $12    $10    $2    $240    $288  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expenses

  $—      $13    $1    $—      $32    $46  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

  $66,465    $81,400    $11,975    $14,500    $8,103    $182,443  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

  $18,540    $9,909    $3,422    $1,819    $424    $34,114  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditure

  $16,165    $9,619    $4,425    $1,458    $892    $32,559  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment loss on property, plant and equipment

  $—      $—      $0.1    $—      $—      $0.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2015

   Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others   Total 
   NT$   NT$   NT$   NT$   NT$   NT$ 
   (In Millions) 

Share of the profit of associates and joint ventures accounted for using equity method

  $—      $—      $—      $—      $897    $897  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

  $19    $19    $11    $2    $255    $306  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expenses

  $—      $10    $—      $—      $23    $33  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         (Continued)  

   Domestic
Fixed
Communi-

cations
Business
   Mobile
Communi-

cations
Business
   Internet
Business
   International
Fixed
Communi-

cations
Business
   Others   Total 
   NT$   NT$   NT$   NT$   NT$   NT$ 
   (In Millions) 

Operating costs and expenses

  $64,960    $81,213    $12,062    $14,411    $8,683    $181,329  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

  $17,487    $10,444    $3,611    $1,536    $370    $33,448  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditure

  $10,196    $8,596    $4,795    $968    $529    $25,084  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment loss on property, plant and equipment

  $22    $116    $—      $—      $—      $138  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reversal of impairment loss on investment properties

  $142    $—      $—      $—      $—      $142  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         (Concluded)  

 

 c.Main products and service revenues from external customer information

The following is an analysis of the Company’s revenue from its major products and services.

 

  Year Ended December 31   Year Ended December 31 
  2012   2013   2013   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Mobile services revenue

  $72,540    $76,709    $76,709    $77,469    $80,867  

Local telephone and domestic long distance telephone services revenue

   44,629     41,278     41,278     38,905     36,690  

Sales of product

   27,649     33,103     33,103     34,795     36,509  

Broadband access and domestic leased line services revenue

   24,606     24,183     24,183     23,681     23,711  

Internet services revenue

   16,938     17,191     17,191     17,241     17,455  

International network and leased telephone services revenue

   12,749     12,675     12,675     11,951     11,319  

Others

   22,309     22,842     22,842     22,567     25,244  
  

 

   

 

   

 

   

 

   

 

 
  $221,420    $227,981    $227,981    $226,609    $231,795  
  

 

   

 

   

 

   

 

   

 

 

 

 d.Geographic information

The users of the Company’s services are mainly from Taiwan, R.O.C. The revenues it derived outside Taiwan are mainly revenues from international long distance telephone and leased line services. The geographic information for revenues iswas as follows:

 

  Year Ended December 31   Year Ended December 31 
  2012   2013   2013   2014   2015 
  NT$   NT$   NT$   NT$   NT$ 
  (In Millions)   (In Millions) 

Taiwan, R.O.C.

  $213,837    $217,986    $217,986    $216,173    $220,917  

Overseas

   7,583     9,995     9,995     10,436     10,878  
  

 

   

 

   

 

   

 

   

 

 
  $221,420    $227,981    $227,981    $226,609    $231,795  
  

 

   

 

   

 

   

 

   

 

 

The Company has long-lived assets in U.S., Singapore, Hong Kong, China, Vietnam, and Japan and except for $1,415$4,087 million and $3,310$4,041 million as of December 31, 20122014 and 2013,2015, respectively, in the aforementioned areas, the other long-lived assets are located in Taiwan, R.O.C.

 

 e.Major customers

For the years ended December 31, 20122013, 2014 and 2013,2015, the Company did not have any single customer whose net revenue exceeded 10% of the total net revenue.

43.DISCLOSURE FOR FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

a.Basis of the preparation of financial information under International Financial Reporting Standards

The consolidated financial statements for the year ended December 31, 2013 are reported under IFRSs as issued by IASB. As the basis of the preparation, the Company not only follows the significant accounting policies stated in Note 3 but also applies IFRS 1 “First-time adoption of International Financial Reporting Standards”.

b.Based on IFRS 1 “First-time adoption of International Financial Reporting Standards”, when the Company first adopts IFRSs, the Company should apply the IFRSs to establish its accounting policies, to prepare its financial statements and make required adjustments retroactively to the transition date (January 1, 2012). IFRS 1 provides several optional exemptions. The main exemptions adopted by the Company were discussed as follows:

1) Business combination

The Company elected not to apply IFRS 3 retrospectively to business combinations which occurred before January 1, 2012.

2) Share-based payment transactions

The Company elected not to apply IFRS 2 retrospectively to the share-based payment transactions which were granted and vested before January 1, 2012.

3) Deemed costs

The Company elected to measure parcels of land it owned at the date of transition to IFRSs at its revalued amount determined under accounting principles generally accepted in the Republic of China (“ROC GAAP”) as its deemed cost. The other property, plant and equipment, investment properties and intangible assets were measured under a cost model under IFRSs.

4) Employee benefits

The Company elected to recognize all unrecognized cumulative actuarial gains and losses as retained earnings as of January 1, 2012.

The impacts of the aforementioned optional exemptions were included in the following part d. of “explanation for the adjustments of IFRSs transition”.

c.Impact after transition to IFRSs

The impact on the consolidated balance sheet and the consolidated statements of comprehensive income after transition to IFRSs are as follows:

1)Reconciliation of consolidated balance sheet as of January 1, 2012

   Adjustments   

ROC GAAP

  Differences in
Recognitions and
Measurements
  Differences in
Presentations
  IFRSs  

Items

 Amount    Amount  

Items

 

Notes

  NT$  NT$  NT$  NT$     
     (In Millions)        

Current assets

 $106,539   $(350 $(805 $105,384   

Current assets

 4), 9), 15)

Investments accounted for using equity method

  2,563   

 

(43

 


 

—     


 

2,520   

Investments accounted for using equity method

 

10), 14)

Financial assets carried at cost

  2,760   


 

—      (2,760  —      15)

Available-for-sale financial assets

  58   


 

—      2,760    2,818   

Available-for-sale financial assets

 15)

Held-to-maturity financial assets

  13,495   


 

—      —      13,495   

Held-to-maturity financial assets

 

Other monetary assets

  1,000    —      (1,000  —      15)

Property, plant and equipment

  302,612   


 

—      (7,580  295,032   

Property, plant and equipment

 1), 2), 15)
    9,060    9,060   

Investment properties

 1), 2)

Intangible assets

  6,330    (65  13    6,278   

Intangible assets

 15)

Other assets

  7,563    569    329    8,461   

Other noncurrent assets

 1), 2), 4), 5), 6), 15)
 

 

 

  

 

 

  

 

 

  

 

 

   

Total

 $442,920   $111   $17   $443,048   

Total

 
 

 

 

  

 

 

  

 

 

  

 

 

   

Current liabilities

 $59,281   $5,073   $(569 $63,785   

Current liabilities

 7), 8), 9), 14)

Noncurrent liabilities

  10,502    2,738    681    13,921   

Noncurrent liabilities

 4), 6), 7), 8)

Reserve for land value incremental tax

  95    —      (95  —      4)
 

 

 

  

 

 

  

 

 

  

 

 

   

Total liabilities

  69,878    7,811    17    77,706   

Total liabilities

 
 

 

 

  

 

 

  

 

 

  

 

 

   

Common stock

  77,574    —      —      77,574   

Common stock

 

Additional paid-in capital

  169,536    (664  —      168,872   

Additional paid-in capital

 6),8), 12), 13)

Retained earnings

  115,866    (1,180  —      114,686   

Retained earnings

 3), 5), 6), 7), 8), 9), 10), 11), 12), 13), 14)

Other adjustments

  5,755    (5,726  —      29   

Other adjustments

 3), 6), 10)
 

 

 

  

 

 

  

 

 

  

 

 

   

Total equity attributable to stockholders of the parent

  368,731   

 

(7,570

 



 

—     



 

361,161   

Total equity attributable to shareholders of the parent

 

Minority interests in subsidiaries

  4,311    (130  —      4,181   

Noncontrolling interests

 5), 6), 10), 11), 14)
 

 

 

  

 

 

  

 

 

  

 

 

   

Total stockholders’ equity

  373,042    (7,700  —      365,342   

Total equity

 
 

 

 

  

 

 

  

 

 

  

 

 

   

Total

 $442,920   $111   $17   $443,048   

Total

 
 

 

 

  

 

 

  

 

 

  

 

 

   

2)Reconciliation of consolidated balance sheet as of December 31, 2012

   Adjustments   

ROC GAAP

  Differences in
Recognitions and
Measurements
  Differences in
Presentations
  IFRSs  

Items

 Amount    Amount  

Items

 

Notes

  NT$  NT$  NT$  NT$     
     (In Millions)        

Current assets

 $100,995   $—     $(1,048 $99,947   

Current assets

 4), 9), 15)

Investments accounted for using equity method

  2,250   

 

(59

 


 

—     


 

2,191   

Investments accounted for using equity method

 10), 12), 14)

Financial assets carried at cost

  2,550    —      (2,550  —      15)

Available-for-sale financial assets

  3,196    —      2,550    5,746   

Available-for-sale financial assets

 15)

Held-to-maturity financial assets

  11,796    —      —      11,796   

Held-to-maturity financial assets

 

Other monetary assets

  1,000    —      (1,000  —      15)

Property, plant and equipment

  303,650    —      (6,308  297,342   

Property, plant and equipment

 1), 2), 15)
  —      —      7,789    7,789   

Investment properties

 1), 2)

Intangible assets

  5,813    (65  34    5,782   

Intangible assets

 15)

Other assets

  8,197    722    537    9,456   

Other noncurrent assets

 1), 2), 4), 5), 6), 15)
 

 

 

  

 

 

  

 

 

  

 

 

   

Total

 $439,447   $598   $4   $440,049   

Total

 
 

 

 

  

 

 

  

 

 

  

 

 

   

Current liabilities

 $56,784   $3,883   $(942 $59,725   

Current liabilities

 7), 8), 9), 14)

Noncurrent liabilities

  12,658    3,135    1,041    16,834   

Noncurrent liabilities

 4), 5), 6), 7), 8)

Reserve for land value incremental tax

  95    —      (95  —      4)
 

 

 

  

 

 

  

 

 

  

 

 

   

Total liabilities

  69,537    7,018    4    76,559   

Total liabilities

 
 

 

 

  

 

 

  

 

 

  

 

 

   

Common stock

  77,574    —      —      77,574   

Common stock

 

Additional paid-in capital

  169,544    (667  —      168,877   

Additional paid-in capital

 6), 8), 11), 12), 13)

Retained earnings

  113,408    (866  —      112,542   

Retained earnings

 3), 5), 6), 7), 8), 9), 10), 11), 12), 13), 14)

Other adjustments

  4,916    (4,755  —      161   

Other adjustments

 3), 5), 6), 10)
 

 

 

  

 

 

  

 

 

  

 

 

   

Total equity attributable to stockholders of the parent

  365,442    (6,288  —      359,154   

Total equity attributable to shareholders of the parent

 

Minority interests in subsidiaries

  4,468    (132  —      4,336   

Noncontrolling interests

 5), 6), 10), 11), 14)
 

 

 

  

 

 

  

 

 

  

 

 

   

Total stockholders’ equity

  369,910    (6,420  —      363,490   

Total equity

 
 

 

 

  

 

 

  

 

 

  

 

 

   

Total

 $439,447   $598   $4   $440,049   

Total

 
 

 

 

  

 

 

  

 

 

  

 

 

   

3)Reconciliation of consolidated statement of comprehensive income for year ended December 31, 2012

   Adjustments   

ROC GAAP

  Differences in
Recognitions and
Measurements
  Differences in
Presentations
  IFRSs  

Items

 Amount    Amount  

Items

 

Notes

  NT$  NT$  NT$  NT$     
     (In Millions)        

Net revenues

 $220,131   $1,289   $—     $221,420   

Revenues

 7), 8), 9)

Operating costs

  (141,177  (336  —      (141,513 

Operating costs

 6), 7), 9), 16)
 

 

 

  

 

 

  

 

 

  

 

 

   

Gross profits

  78,954    953    —      79,907   

Gross profit

 

Operating expenses

  (30,041  78    36    (29,927 

Operating expenses

 6), 7), 9), 11), 16)

Other income and expense

  —      —      (1,569  (1,569 

Other income and expense

 16)
 

 

 

  

 

 

  

 

 

  

 

 

   

Income from operations

  48,913    1,031    (1,533  48,411   

Income from operations

 

Non-operating income and losses

  (17  (10  1,569    1,542   

Non-operating income and expenses

 3), 10), 12), 14)
 

 

 

  

 

 

  

 

 

  

 

 

   

Income before income tax

  48,896    1,021    36    49,953   

Income before income tax

 

Income tax expense

  (7,858  558    (36  (7,336 

Income tax expenses

 5), 14), 16)
 

 

 

  

 

 

  

 

 

  

 

 

   

Consolidated net income

 $41,038   $1,579   $—      42,617   

Net income

 
 

 

 

  

 

 

  

 

 

  

 

 

   
     

Items that will not be reclassified to profit or loss:

 
      
     (1,539 

Remeasurements of defined benefit pension plans

 6)
      
     (18 

Share of remeasurements of defined benefit pension plans of associates

 10)
      
     265   

Income tax relating to items that will not reclassified

 5)
    

 

 

   
     (1,292  
    

 

 

   
     

Items that may be reclassified subsequently to profit or loss:

 
      
     (58 

Exchange differences arising from the translation of the foreign operations

 
      
     (8 

Share of exchange differences arising from the translation of the foreign operations of associates

 
     192   

Unrealized gain on available-for-sale financial assets

 
    

 

 

   
     126    
    

 

 

   
     (1,166 

Total other comprehensive income

 
    

 

 

   
    $41,451   

Total comprehensive income

 
    

 

 

   

d. Explanation for the adjustments of IFRSs transition:

1) Classification of investment properties

Under ROC GAAP, properties for lease were classified as property, plant and equipment and other assets; after transition to IFRSs, owned-property for either rental revenue or capital appreciation should be classified as investment properties.

On January 1, 2012, the assets that met the definition of investment properties under IAS 40 “Investment Property” were reclassified from property, plant and equipment of $8,597 million, and other assets—idle assets of $463 million, to investment properties. The total amount of reclassification was $9,060 million. On December 31, 2012, the assets that met the definition of investment properties were reclassified from property, plant and equipment of $7,330 million, and other assets—idle assets of $459 million to investment properties. The total amount of reclassification was $7,789 million.

2) Classification of leased assets and idle assets

Under ROC GAAP, leased and idle assets were classified as other assets; after the transition to IFRSs, leased and idle assets were reclassified to property, plant and equipment or investment properties based on the nature of these assets.

The Company reclassified leased assets to property, plant and equipment and the amounts were $400 million and $390 million as of January 1, 2012 and December 31, 2012, respectively. Except for the abovementioned Item 1) which discussed the reclassification from idle assets to investment properties, the Company reclassified the remaining idle assets to property, plant and equipment amounting to $437 million and $415 million, as of January 1, 2012 and December 31, 2012, respectively.

3) Deemed cost of property, plant and equipment

The Company elected to apply the optional exemption in IFRS 1. The management measured land (classified as property, plant and equipment and investment properties under IFRSs) at its revalued amount, which was determined under ROC GAAP as deemed cost. On January 1, 2012, the Company reclassified the unrealized revaluation increment (classified as stockholders’ equity) to retained earnings in the amount of $5,764 million. This reclassification did not affect total equity. Due to the disposal of some revalued assets and recognition of impairment loss of the revalued assets, the unrealized revaluation increment reclassified to retained earnings was decreased by $0.35 million and $2 million, respectively and revaluation increment as of December 31, 2012 was $5,760 million. As a result of the above adjustment, gain on disposal of property, plant and equipment decreased by $0.35 million, and impairment loss increased by $2 million for the year ended December 31, 2012.

4) Classification of deferred income tax asset and liability, and valuation allowance

Under ROC GAAP, a deferred income tax asset and liability should be classified as current and noncurrent in accordance with the classification of its related asset or liability. When a deferred income tax asset and liability does not relate to an asset or liability, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled. However, under IFRSs, a deferred income tax asset and liability should be classified as noncurrent, and could not be offset. Deferred income tax assets and liabilities are offset on the balance sheet when the entity has the legally enforceable right to offset current tax assets against current tax liabilities and they are levied by the same taxation authority on the same entity.

Under ROC GAAP, if it is more likely than not that deferred income tax assets will not be realized, the valuation allowances are provided to the extent. However, under IFRSs, deferred income tax assets are only recognized when it is more likely than not to be realized, and the valuation allowance is not used under IFRSs.

Based on the Guidelines Governing the Preparation of Financial Reports by Securities Issuers in ROC, the reserve for land value incremental tax caused by revaluation of land is classified as long-term liabilities. Under IFRSs, if the Company elects to apply the IFRS 1 exemption and measure the revalued land using the carrying amount determined under ROC GAAP as its deemed cost, the related reserve for land value incremental tax should be classified as deferred income tax liabilities.

The Company reclassified its deferred income tax assets—current to noncurrent assets and the amounts were $115 million and $143 million as of January 1, 2012 and December 31, 2012, respectively. Further, deferred income tax liabilities, which were netted with deferred income tax assets under ROC GAAP, were reversed. As a result of such reversal, deferred income tax liabilities—noncurrent and deferred income tax assets—noncurrent increased by $16 million and $4 million, respectively, and reserve for land value incremental tax of $95 million was also reclassified as deferred income tax liabilities—noncurrent under IFRSs.

5) Income tax

Based on IAS 12 “Income Taxes”, the income tax adjustments as a result of the transition to IFRSs are as follows: deferred income tax assets increased by $584 million and $721 million (including the tax effects of actuarial gains and losses from defined benefit plans of $265 million) as of January 1, 2012 and December 31, 2012, respectively; retained earnings increased by $576 million and $710 million as of January 1, 2012 and December 31, 2012, respectively; noncontrolling interests increased by $8 million and $11 million as of January 1, 2012 and December 31, 2012, respectively. Deferred income tax liabilities decreased by $0.02 million as of December 31, 2012. For the year ended December 31, 2012, due to the adjustment of deferred income tax assets and deferred income tax liabilities (decreased by $128 million in deferred tax assets and decreased by $0.02 million in deferred income tax liabilities), income tax expense increased by $128 million and the income tax relating to other comprehensive income increased by $265 million.

6) Employee benefits

Under ROC GAAP, net transition obligation that resulted from the first time adoption of SFAS No. 18, “Pension” should be amortized on a straight-line basis over the average remaining service life of active plan participants and recognized as net periodic pension cost. After the transition to IFRSs, the transitional rules in IAS 19, “Employee Benefits” (“IAS 19”) was not applicable, thus the related amounts of net transition obligation should be recognized at once and adjusted in retain earnings.

Under ROC GAAP, actuarial gains (losses) are recognized based on the corridor approach and the amounts are amortized over the average remaining service life of active plan participants. Under IFRSs, the Company recognized actuarial gains (losses) arising from defined benefit plans as other comprehensive income immediately and subsequent reclassification to earnings is not permitted.

Furthermore, under ROC GAAP, the prior service costs should be recognized as an expense on a straight-line basis over the average remaining service life of active plan participants until the benefits become vested. Under IFRSs, IAS 19 required entities to recognize past service costs in profit or loss immediately.

As a result of the aforementioned adjustments, other liabilities increased by $1,504 million and $2,038 million as of January 1, 2012 and December 31, 2012, respectively; other noncurrent assets decreased by $15 million and increased by $1 million as of January 1, 2012 and December 31, 2012, respectively; retained earnings decreased by $1,472 million and $2,954 million as of January 1, 2012 and December 31, 2012, respectively; unrecognized net losses of pension decreased by $0.22 million, and $956 million as of January 1, 2012 and December 31, 2012, respectively; noncontrolling interests decreased by 47 million and $39 million as of January 1, 2012 and December 31, 2012, respectively. For the year ended December 31, 2012, pension cost decreased by $39 million which increased $0.17 million in operating costs and decreased $39 million in operating expenses and actuarial losses arising from defined benefit plans (classified as other comprehensive income) decreased by $1,539 million.

In addition, prior to Chunghwa’s privatization in 2005, the pension contributions were made according to the relevant regulations. Upon privatization, the pension obligations of retained employees that were civil employees and employees retired prior to privatization entitled to receive future monthly pension payments based on the “Labor Pension Act”, “Act of Privatization of Government-Owned Enterprises”, and “Enforcement Rules of Statute of Privatization of Government-Owned Enterprises” were borne by the government. The settlement impact upon privatization of $20,648 million derived according to the actuarial report under IAS 19 shall be retroactively adjusted from retained earnings to additional paid-in capital—privatization at the date of transition to IFRSs.

7) Award credits (often known as “points”)

Under ROC GAAP, the Company used their best estimates to accrue the liability of the points when the points are granted and adjust the liability subsequently based on the actual redemption of the points. After the transition to IFRSs, Chunghwa applied IFRIC 13, “Customer Royalty Program” retroactively. The award credit should be measured at its fair value and defer the recognition of revenue. When the customers redeem the points, the deferred revenue is recognized as well as the corresponding cost of the points.

Accrued award credits liabilities (classified as other current liabilities) were decreased by $70 million, and $121 million as of January 1, 2012 and December 31, 2012, respectively; net deferred award credits revenue (classified as noncurrent liabilities—deferred revenue) were increased by $24 million, and $72 million as of January 1, 2012 and December 31, 2012, respectively; retained earnings were increased by $46 million and $49 million as of January 1, 2012 and December 31, 2012, respectively. The revenue was decreased by $48 million, the marketing expenses were decreased by $80 million and the operating cost was increased by $29 million for the year ended December 31, 2012.

8) Recognition of revenue from providing fixed line connection service

Prior to incorporation and privatization, Chunghwa was subject to the financial reporting requirements under the laws and regulations applicable to state-owned enterprises in Taiwan which differed from ROC GAAP as applicable to commercial companies. As such, Chunghwa recorded revenue from providing fixed line connection service upon the receipt of connection fees. Upon incorporation, net assets greater than capital stock was credited as additional paid-in-capital. Part of additional paid-in-capital was from unearned revenues relating to connection fees as of that date. Upon privatization, unearned revenue generated from one-time connection fees was deferred at the time of service performed and recognized as revenue over time as the service is continuously performed in accordance with ROC GAAP.

Under IFRSs, following the revenue recognition guidance, the above service revenue was deferred at the time of service performed and recognized as revenue over time as the service is continuously performed.

Chunghwa retrospectively adjusted the deferred income of $1,926 million and $1,286 million as of January 1, 2012 and December 31, 2012, respectively, by decreasing retained earnings and increasing the deferred revenue from providing fixed line connection service ($640 million and $185 million were classified as other current liabilities; $1,286 million and $1,101 million were classified as noncurrent liabilities—deferred revenue as of January 1, December 31 and December 31, 2012, respectively). Unappropriated earnings increased and the additional paid-in-capital decreased by $18,487 million as of December 31, 2012. For the year ended December 31, 2012, revenue from providing fixed line connection service increased by $640 million.

9) Recognition of construction contract revenue

The construction contracts did not meet the criteria in IFRIC 15 “Agreements as the buyers are not able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress for the Construction of Real Estate”; therefore IAS 11 “Construction Contracts” does not apply. The Company could only recognize the revenues when the projects are completed and sold based on IAS 18, “Revenue”. Due to the reasons mentioned above, the Company reversed the revenue that was recognized based on percentage completion method, and recognize the related revenue, cost and expense when the project is completed in 2012.

Inventories decreased by $392 million and nil as of January 1, 2012 and December 31, 2012, respectively; prepaid expenses (classified as other current assets) increased by $42 million and nil as of January 1, 2012 and December 31, 2012, respectively; accrued expenses (classified as other current liabilities—accrued expense) decreased by $2 million and nil of January 1, 2012 and December 31, 2012, respectively; retained earnings decreased by $348 million and nil as of January 1, 2012 and December 31, 2012, respectively. The construction revenue increased by $697 million, the construction cost increased by $306 million and the marketing expenses increased by $43 million for the year ended December 31, 2012.

10) Equity method investments

Associates and joint venture are accounted for using the equity method. Upon the Company’s transition to IFRSs, the main adjustment of equity method investments includes employee benefit and share-based payments, etc. As a result, long-term investments were decreased by $7 million and $10 million as of January 1, 2012 and December 31, 2012, respectively; retained earnings decreased by $40 million and $52 million as of January 1, 2012 and December 31, 2012, respectively; unrecognized net loss of pension decreased by $38 million and $49 million as of January 1, 2012 and December 31, 2012, respectively; noncontrolling interests decreased by $5 million and $7 million as of January 1, 2012 and December 31, 2012, respectively. Share of the profit of associates and joint venture accounted for using equity method increased by $4 million and share of other comprehensive income of associates and joint venture accounted for using equity method decreased $18 million for the year ended December 31, 2012.

11) Share-based payment transactions

A portion of the employee stock options granted by subsidiary CHPT was not vested on the transition date. Therefore, the subsidiary accounted for these stock options under IFRS 2, “Share-based Payment” from their respected grant dates. Under IFRSs, paid-in capital—employee stock option recognized by subsidiary does not belong to the equity attributable to parent company, instead it should be accounted as noncontrolling interests. As of January 1, 2012, retained earnings

instead decreased by $2 million and noncontrolling interests increased by $2 million. As of December 31, 2012, noncontrolling interests increased by $2 million and paid-in capital—equity in additional paid-in capital reported by equity-method investees decreased by $2 million. For the year ended December 31, 2012, the compensation cost under general and administrative expense decreased by $2 million.

12)(a)Subscription of associates/subsidiaries new shares and (b) adjustments of paid-in capital reported related to equity-method investees

When an investee issues new shares and existing shareholders do not subscribe to the new shares at their respective proportion in share holdings, this would result in changes in the investor’s shareholdings of the equity method investee. According to the Statements of Financial Accounting Standards (“SFAS”) No. 5 “Long-term Investments under Equity Method” under ROC GAAP, as since there are changes in the net book value of the equity method investee attributable to the investor, the investor shall reflect such changes by adjusting additional paid-in capital and long-term investments. However, under IFRSs, if the changes do not cause the investor to lose significant influence over associates, the change shall be treated as a deemed disposal with the related gain or loss recognized in earnings. If the changes do not cause the investor to lose control over subsidiaries, the change shall be treated as equity transactions. The Company reclassified such paid-in capital of $27 million as of January 1, 2012 to retained earnings. As of January 1, 2012 and December 31, 2012, the Company reclassified such paid-in capital of $27 million and $28 million to retained earnings and long-term investment decreased by $0.27 million. Gain on disposal of financial instruments increased by $1 million for the year ended December 31, 2012.

13) Prepaid cards

Prior to incorporation and privatization, Chunghwa was subject to the laws and regulations applicable to state-owned enterprises in Taiwan which differed from ROC GAAP as applicable to commercial companies. As such, revenue from sale of prepaid phone cards was recognized at the time of sale by Chunghwa. Upon incorporation, net assets greater than the capital stock was credited as additional paid-in-capital and part of the additional paid-in-capital was from the unearned revenues generated from prepaid cards as of that day. Upon privatization, unearned revenue generated from prepaid cards was deferred at the time of sale and recognized as revenue as consumed in accordance with ROC GAAP.

Under IFRSs, revenue from prepaid cards is deferred at the time of sale and recognized as revenue as consumed.

The amount of reclassification from additional paid-in capital to unappropriated earnings was $2,798 million as of January 1, 2012 and December 31, 2012.

14) 10% tax on unappropriated earnings

In the Republic of China (“ROC”), a 10% tax is imposed on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries). Under ROC GAAP, the Company records the 10% tax on unappropriated earnings in the year the stockholders approve the appropriation of earnings which is the immediate following year.

Under IFRSs, the 10% tax on unappropriated earnings is accrued during the period the earnings arise and adjusted to the extent that appropriations are approved by the stockholders in the following year.

The aforementioned 10% tax on unappropriated earnings is also applicable to the underlying investees whom the Company invested and accounted for using equity method. And, as a result,

investments accounted for using equity method decreased by $36 million and $49 million as of January 1, 2012 and December 31, 2012, respectively; current tax liabilities increased by $4,505 million and $3,819 million as of January 1, 2012 and December 31, 2012, respectively; retained earnings decreased by $4,442 million and $3,758 million as of January 1, 2012 and December 31, 2012, respectively; noncontrolling interests decreased by $99 million and $110 million as of January 1, 2012 and December 31, 2012, respectively. Income tax expenses decreased by $686 million and share of the profit of associates and joint ventures accounted for using the equity method decreased by $13 million for the year ended December 31, 2012.

15) Presentation of consolidated balance sheets

a) Piping fund

As part of the government’s effort to upgrade the existing telecommunications infrastructure project, Chunghwa and other public utility companies were required by the ROC government to contribute a total of $1,000 million to a Piping Fund administered by the Taipei City Government. Based on the terms of Construction Funding Agreement, if the Piping Fund project is considered to be no longer necessary by the ROC government, Chunghwa will receive back its proportionate share of the net equity of the Piping Fund upon its dissolution. In order to conform to the presentation of the financial statements under IFRSs, the fund was reclassified as other noncurrent assets.

b) Time deposits with maturities of more than three months

Under ROC GAAP, cash and cash equivalents includes time deposits that are cancellable but without any loss of principal. Under IFRSs, cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of three months or less from the date of acquisition.

Time deposits and negotiable certificate of deposits with maturities of more than three months held by the Company were $40,982 million and $22,264 million as of January 1, 2012 and December 31, 2012, respectively. In order to conform to the presentation of the financial statements under IFRSs, such amounts were reclassified from cash to other monetary assets—current.

c) Deferred expense

The deferred expense, which was classified as other assets under ROC GAAP, was reclassified based on its nature under IFRSs. Deferred expenses relating to decoration construction projects and advertisement signboard, etc. were reclassified as prepaid expenses of nil and $1 million as of January 1, 2012 and December 31, 2012, respectively. Deferred expenses relating to decoration construction projects and advertisement signboard, etc. were reclassified as property, plant and equipment of $158 million and $216 million as of January 1, 2012 and December 31, 2012, respectively. Deferred expenses relating to computer software were reclassified as intangible assets of $13 million and $34 million as of January 1, 2012 and December 31, 2012, respectively.

d) Assets to be abandoned

The property, plant and equipment classified as held for disposal (included in other assets—others) under ROC GAAP, was reclassified based on its nature under IFRSs. Assets to be abandoned were reclassified as property, plant and equipment of $22 million and $1 million as of January 1, 2012 and December 31, 2012, respectively.

e) Reclassification of financial assets carried at cost

Based on the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, stocks held by the Company which were not listed in Taiwan Stock Exchange or were not trading in the GreTai Securities Market and the Company did not have significant influence over these investees were classified as financial assets carried at cost. After transition to IFRSs, financial assets carried at cost were designated as available-for-sale financial assets. Financial assets carried at cost were reclassified as available-for-sale financial assets of $2,760 million and $2,550 million as of January 1, 2012 and December 31, 2012, respectively.

16) Presentation of consolidated statements of comprehensive income

After the transition to IFRSs, the consolidated statement of comprehensive income includes net income and other comprehensive income. Further, certain accounts were reclassified to conform to the presentation of the financial statements under IFRSs.

17) Summary of material adjustments of cash flow statements

Under ROC GAAP, collection and payment of interest and collection of dividends were classified as operating activity; payment of dividends was classified as financing activity. Further, for cash flow statement prepared using the indirect method, cash payment of interest expense is required for supplemental disclosure. Based on IAS 7 “Cash Flow Statement”, collection and payment of interest and dividends were disclosed separately with consistency for each period and classified as operating activity, investing activity or financing activity. The Company classified the payment of interest as operating activity, collection of interest and dividends as investing activity, and payment of dividends as financing activity in its consolidated statements of cash flows.

 

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