11. SIGNIFICANT EVENTS AFTER THE BALANCE SHEET DATE None.
12. OTHERS
(1) Capital management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of the debt to assets ratio. This ratio is calculated as total debt divided by total assets.
During 2017, the Group’s strategy was unchanged from 2016. As of March 31, 2017, December 31, 2016 and March 31, 2016, the Group’s debt to assets ratio was 30%, 33% and 32%, respectively.
(2) Financial instruments
A. The carrying amounts of the Group’s financial instruments not measured at fair value (including cash and cash equivalents, notes receivable, accounts receivable accounts receivable – related parties, other receivables, other current assets (Time deposits and other financial assets), other non - current assets (refundable deposits), accounts payable - related parties, accounts payable and other payables) are approximate to their fair values. The fair value information of financial instruments measured at fair value is provided in Note 12(3).
B. Financial risk management policies
(a) The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial position and financial performance.
(b) Risk management is carried out by a central treasury department (Group treasury) under policies approved by the management. Group treasury identifies, evaluates and hedges financial risks in close cooperation with the Group’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas and matters, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.
C. Significant financial risks and degrees of financial risks (a) Market risk
i. Foreign exchange risk
(i) The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the USD. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations.
(ii) Management has set up a policy to require group companies to manage their foreign exchange risk against their functional currency. The group companies are required to hedge their entire foreign exchange risk exposure with the Group treasury. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity’s functional currency. (iii) The Group’s businesses involve some non-functional currency operations (the
Company’s and certain subsidiaries’ functional currency: NTD; other certain subsidiaries’ functional currency: RMB and HKD). The information on assets and liabilities denominated in foreign currencies whose values would be materially affected by the exchange rate fluctuations is as follows:
March 31, 2017 Foreign currency
amount Book value
(In thousands) Exchange rate (NTD)
(Foreign currency: functional currency) Financial assets Monetary items USD : NTD $ 22,284 30.3300 $ 675,874 USD : RMB 6,366 6.8993 193,081
Investments Accounted for Using Equity Method
RMB : NTD 23,487 4.4070 103,506 HKD : NTD 10,278 3.9040 40,125 Financial liabilities Monetary items USD : NTD 10,010 30.3300 303,603 USD : RMB 7,287 6.8993 221,015
December 31, 2016 Foreign currency
amount Book value
(In thousands) Exchange rate (NTD)
(Foreign currency: functional currency) Financial assets Monetary items USD : NTD $ 23,668 32.2500 $ 763,293 USD : RMB 6,735 6.9370 217,204 Non-monetary items USD : NTD 1,109 32.2500 35,760
Investments Accounted for Using Equity Method
RMB : NTD 20,552 4.6170 94,889 HKD : NTD 10,488 4.1580 43,609 Financial liabilities Monetary items USD : NTD 10,594 32.2500 341,657 USD : RMB 7,518 6.9370 242,456 March 31, 2016 Foreign currency
amount Book value
(In thousands) Exchange rate (NTD)
(Foreign currency: functional currency) Financial assets Monetary items USD : NTD $ 27,765 32.1850 $ 893,617 USD : RMB 2,160 6.4612 69,520 Non-monetary items USD : NTD 1,115 32.1850 35,878
Investments Accounted for Using Equity Method
RMB : NTD 10,762 4.9720 53,508 HKD : NTD 10,482 4.1500 43,500 Financial liabilities Monetary items USD : NTD 3,823 32.1850 123,043 USD : RMB 7,438 6.4612 239,392
(iv) Total exchange gain (loss), including realised and unrealised arising from significant foreign exchange variation on the monetary items held by the Group for the three months ended March 31, 2017 and 2016 amounted to ($30,283) and ($14,598), respectively.
(v) Analysis of foreign currency market risk arising from significant foreign exchange variation:
Three months ended March 31, 2017 Sensitivity analysis
Degree of Effect on
Effect on other comprehensive variation profit or loss income (loss)
(Foreign currency: functional currency) Financial assets Monetary items USD : NTD 1% $ 6,759 $ - USD : RMB 1% 1,931 - Financial liabilities Monetary items USD : NTD 1% ( 3,036) - USD : RMB 1% ( 2,210) -
Three months ended March 31, 2016 Sensitivity analysis
Degree of Effect on
Effect on other comprehensive variation profit or loss income (loss)
(Foreign currency: functional currency) Financial assets Monetary items USD : NTD 1% $ 8,936 $ - USD : RMB 1% 695 - Financial liabilities Monetary items USD : NTD 1% ( 1,230) - USD : RMB 1% ( 2,394) -
ii. Price risk
the Group and classified on the consolidated balance sheet either as available-for-sale or at fair value through profit or loss. The Group is not exposed to commodity price risk. To manage its price risk arising from investments in equity securities, the Group diversifies its portfolio. Diversification of the portfolio is done in accordance with the limits set by the Group.
(ii) The Group’s investments in equity securities comprise domestic listed and unlisted stocks. The prices of equity securities would change due to the change of the future value of investee companies. If the prices of these equity securities had increased/decreased by 1% with all other variables held constant, post-tax profit for the three months ended March 31, 2017 and 2016 would have increased/decreased by $3,384 and $4,389, respectively, as a result of gains/losses on equity securities classified as at fair value through profit or loss. Other components of equity would have increased/decreased by $8,347 and $8,392, respectively, as a result of gains/losses on equity securities classified as available-for-sale.
iii. Interest rate risk
The Group analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios, the Group calculates the impact on profit and loss of a defined interest rate shift. The scenarios are run only for liabilities that represent the major interest-bearing positions at specified intervals to verify that the maximum loss potential is within the limit given by the management.
(b) Credit risk
i. Credit risk refers to the risk of financial loss to the Group arising from default by the clients or counterparties of financial instruments on the contract obligations. According to the Group’s credit policy, each local entity in the Group is responsible for managing and analysing the credit risk for each of their new clients before standard payment and delivery terms and conditions are offered. Internal risk control assesses the credit quality of the customers, taking into account their financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the management. The utilisation of credit limits is regularly monitored. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables.
ii. For the three months ended March 31, 2017 and 2016, no credit limits were exceeded during the reporting periods, and management does not expect any significant losses from non-performance by these counterparties.
provided in Note 6(4).
iv. The ageing analysis of financial assets that are neither past due nor impaired and that are past due but not impaired is provided in Note 6(4).
v. The individual analysis of financial assets that had been impaired is provided in the statement for each type of financial assets in Note 6.
(c) Liquidity risk
i. Cash flow forecasting is performed in the operating entities of the Group and aggregated by Group treasury. Group treasury monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities at all times. Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance, compliance with internal balance sheet ratio targets.
ii. Surplus cash held by the operating entities over and above balance required for working capital management are transferred to the Group treasury. Group treasury invests surplus cash in interest bearing current accounts, time deposits and marketable securities.
iii. The Group’s non-derivative financial liabilities are analyzed based on the remaining period at the balance sheet date to the contractual maturity date and they are all financial liabilities due for repayment within one year.
iv. The Group does not expect the timing of occurrence of the cash flows estimated through the maturity date analysis will be significantly earlier, nor expect the actual cash flow amount will be significantly different.
(3) Fair value information
A. Details of the fair value of the Group’s financial assets and financial liabilities not measured at fair value are provided in Note 12(2) A.
B. The different levels that the inputs to valuation techniques are used to measure fair value of financial and non-financial instruments have been defined as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. A market is regarded as active where a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The fair value of the Group’s investment in listed stocks and beneficiary certificates is included in Level 1.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
in unlisted stocks is included in Level 3.
C. The related information of financial and non-financial instruments measured at fair value by level on the basis of the nature, characteristics and risks of the assets and liabilities is as follows:
March 31, 2017 Level 1 Level 2 Level 3 Total
Assets
Recurring fair value measurements Financial assets at fair value through
profit or loss - stocks and funds $ 338,409 $ - $ $ 338,409- Available - for - sale financial assets
- stocks 826,693 8,000- 834,693 $ 1,165,102 $ $ 8,000 $ 1,173,102-
December 31, 2016 Level 1 Level 2 Level 3 Total
Assets
Recurring fair value measurements Financial assets at fair value through
profit or loss - stocks and funds $ 360,925 $ - $ - $ 360,925 Available - for - sale financial assets
- stocks 767,153 - 8,000 775,153 1,128,078
$ $ - $ 8,000 $ 1,136,078
March 31, 2016 Level 1 Level 2 Level 3 Total
Assets
Recurring fair value measurements Financial assets at fair value through
profit or loss - stocks and funds $ 438,941 $ - $ - $ 438,941 Available - for - sale financial assets
- stocks 831,183 - 8,000 839,183 1,270,124
$ $ - $ 8,000 $ 1,278,124
D. The methods and assumptions the Group used to measure fair value are as follows:
(a) The instruments the Group used market quoted prices as their fair values (that is, Level 1) are listed below by characteristics:
i. The fair value of listed shares is the closing price at the balance sheet date. ii. The fair value of open-end fund is the net asset value at the balance sheet date.
(b) Except for financial instruments with active markets, the fair value of other financial instruments is measured by using valuation techniques or by reference to counterparty quotes. The fair value of financial instruments measured by using valuation techniques can be referred to current fair value of instruments with similar terms and characteristics in substance or other valuation methods, including calculated by applying model using market information available at the consolidated balance sheet date. The output of valuation model is an estimated value and the valuation technique may not be able to capture all relevant
factors of the Group’s financial and non-financial instruments.
(c) The Group takes into account adjustments for credit risks to measure the fair value of financial and non-financial instruments to reflect credit risk of the counterparty and the Group’s credit quality.
E. For the three months ended March 31, 2017 and 2016, there was no transfer between Level 1 and Level 2.
F. The following chart is the movement of Level 3 for the three months ended March 31, 2017 and 2016:
2017 2016
Non-derivative Non-derivative equity instrument equity instrument
At January 1 $ 8,000 $ 8,000
Gains and losses recognised in other comprehensive
income - -
At March 31 $ 8,000 $ 8,000
G. For the three months ended March 31, 2017 and 2016, there was no transfer into or out from Level 3.
H. Financial function is in charge of valuation procedures for fair value measurements being categorised within Level 3, which is to verify independent fair value of financial instruments. Such assessment is to ensure the valuation results are reasonable by applying independent information to make results close to current market conditions, confirming the source of information is independent, reliable and in line with other sources and represented as the exercisable price.
I. The following is the qualitative information of significant unobservable inputs and sensitivity analysis of changes in significant unobservable inputs to valuation model used in Level 3 fair value measurement: (a) March 31, 2017 Fair value Valuation technique Significant unobservable input Range (weighted average) Relationship of inputs to fair value Equity instrument:
Unlisted shares $ 8,000 Net asset value N/A - N/A
(b) March 31, 2016 Fair value Valuation technique Significant unobservable input Range (weighted average) Relationship of inputs to fair value Equity instrument:
J. The Group has carefully assessed the valuation models and assumptions used to measure fair value; therefore, the fair value measurement is reasonable. However, use of different valuation models or assumptions may result in different measurement. As of March 31, 2017, December 31, 2016 and March 31, 2016, there is no significant effect on financial assets and liabilities categorised within Level 3 if the net assets had increased/decreased by 1%.
13. SUPPLEMENTARY DISCLOSURES