Financial Risk and Fair Value Disclosures

12 Months Ended

Dec. 31, 2019

Text block1 [abstract]

Financial Risk and Fair Value Disclosures

11. FINANCIAL RISK AND FAIR VALUE DISCLOSURES

(1) Categories of financial instruments

	As of December 31,
Financial Assets	2018		2019
	NT$		NT$
	(In Thousands)		(In Thousands)
Financial assets at fair value through profit or loss	$	12,084,297	$	14,021,473
Financial assets at fair value through other comprehensive income		11,585,477		14,723,232
Financial assets measured at amortized cost
Cash and cash equivalents (excludes cash on hand)		83,655,648		95,486,403
Receivables		24,583,451		26,459,392
Refundable deposits		2,757,399		2,600,733
Other financial assets		2,320,037		2,353,066
Total	$	136,986,309	$	155,644,299

	As of December 31,
Financial Liabilities	2018		2019
	NT$		NT$
	(In Thousands)		(In Thousands)
Financial liabilities measured at amortized cost
Short-term loans	$	13,103,808	$	12,015,206
Payables		23,559,548		27,433,065
Guarantee deposits (current portion included)		665,793		296,694
Bonds payable (current portion included)		41,378,182		38,781,416
Long-term loans (current portion included)		30,826,215		33,902,074
Lease liabilities (Note)		—		6,031,025
Other financial liabilities		20,523,099		20,093,441
Total	$	130,056,645	$	138,552,921

Note: The Company adopted IFRS 16 on January 1, 2019. The Company elected not to restate prior periods in accordance with the transition provision in IFRS 16.

(2) Financial risk management objectives and policies

The Company’s risk management objectives are to manage the market risk, credit risk and liquidity risk related to its operating activities. The Company identifies, measures and manages the aforementioned risks based on policy and risk preference.

The Company has established appropriate policies, procedures and internal controls for financial risk management. Before entering into significant financial activities, approval process by the Board of Directors and Audit Committee must be carried out based on related protocols and internal control procedures. The Company complies with its financial risk management policies at all times.

(3) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks comprise currency risk, interest rate risk and other price risk (such as equity price risk).

Foreign currency risk

The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the Company’s operating activities (when revenue or expense is denominated in a different currency from the Company’s functional currency) and the Company’s net investments in foreign subsidiaries.

The Company applies natural hedges on the foreign currency risk arising from purchases or sales, and utilizes spot or forward exchange contracts to manage foreign currency risk and the net effect of the risks related to monetary financial assets and liabilities is minor. The notional amounts of the foreign currency contracts are the same as the amount of the hedged items. In principle, the Company does not carry out any forward exchange contracts for uncertain commitments. The Company designates certain forward currency contracts as cash flow hedges to hedge its exposure to foreign currency exchange risk associated with certain highly probable forecast transactions. On the basis of assessment, the Company expects that the value of forward currency exchange contracts and the value of the hedged transactions will change systematically in opposite directions for given changes in foreign exchange rates. Hedge ineffectiveness in these hedging relationships mainly arises from the counterparties’ credit risk, impacting the fair value movements of the hedging instruments and hedged items. No other sources of ineffectiveness emerged from these hedging relationships. Furthermore, as net investments in foreign subsidiaries are for strategic purposes, they are not hedged by the Company.

Certain forward exchange contracts designated by the Company to hedge foreign currency exchange rate risks associated with the purchase of additional shares of USJC in JPY, amounting to JPY 23 billion, expired prior to December 31, 2018. The cash flow hedge reserve in other components of equity, amounting to NT$(3) million, was recognized as consideration for the ownership interest of 84.1% in USJC on October 1, 2019. Please refer to Note 6(26).

The foreign currency sensitivity analysis of the possible change in foreign exchange rates on the Company’s profit is performed on significant monetary items denominated in foreign currencies as of the end of the reporting period. When NTD strengthens/weakens against USD by 10%, the profit for the years ended December 31, 2017, 2018 and 2019 decreases/increases by NT$1,330 million, NT$1,367 million and NT$1,009 million, respectively. When RMB strengthens/weakens against USD by 10%, the profit for the years ended December 31, 2017, 2018 and 2019 increases/decreases by NT$4,011 million, NT$2,624 million and NT$2,200 million, respectively.

Interest rate risk

The Company is exposed to interest rate risk arising from borrowing at floating interest rates. All of the Company’s bonds have fixed interest rates and are measured at amortized cost. As such, changes in interest rates would not affect the future cash flows. On the other hand, as the interest rates of the Company’s short-term and long-term bank loans are floating, changes in interest rates would affect the future cash flows but not the fair value. Please refer to Note 6(10), 6(11) and 6(12) for the range of interest rates of the Company’s bonds and bank loans.

At the reporting dates, a change of 10 basis points of interest rate in a reporting period could cause the profit for the years ended December 31, 2017, 2018 and 2019 to decrease/increase by NT$58 million, NT$44 million and NT$46 million, respectively.

Equity price risk

The Company’s listed and unlisted equity securities are susceptible to market price risk arising from uncertainties about future performance of equity markets. The Company’s equity investments are classified as financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income.

The sensitivity analysis for the equity instruments is based on the change in fair value as of the reporting date. A change of 5% in the price of the aforementioned financial assets at fair value through profit or loss of listed companies could increase/decrease the Company’s profit for the years ended December 31, 2017, 2018 and 2019 by NT$33 million, NT$171 million and NT$252 million, respectively. A change of 5% in the price of the aforementioned financial assets at fair value through other comprehensive income of listed companies could increase/decrease the Company’s other comprehensive income for the years ended December 31, 2018 and 2019 by NT$408 million and NT$671 million, respectively. A change of 5% in the price of the aforementioned available-for-sale financial instruments could increase/decrease the Company’s other comprehensive income for the year ended December 31, 2017 by NT$979 million.

(4) Credit risk management

The Company only trades with approved and creditworthy third parties. Where the Company trades with third parties which have less credit, it will request collateral from them. It is the Company’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, notes and accounts receivable balances are monitored on an ongoing basis to decrease the Company’s exposure to credit risk.

The Company mitigates the credit risks from financial institutions by limiting its counter parties to only reputable domestic or international financial institutions with good credit standing and spreading its holdings among various financial institutions. The Company’s exposure to credit risk arising from the default of counter-parties is limited to the carrying amount of these instruments.

As of December 31, 2018 and 2019, accounts receivable from the top ten customers represent 54% and 44% of the total accounts receivable of the Company, respectively. The credit concentration risk of other accounts receivable is insignificant.

(5) Liquidity risk management

The Company’s objectives are to maintain a balance between continuity of funding and flexibility through the use of cash and cash equivalents, bank loans, bonds and lease.

The table below summarizes the maturity profile of the Company’s financial liabilities based on the contractual undiscounted payments and contractual maturity:

	As of December 31, 2018
	Less than 1 year		2 to 3 years		4 to 5 years		> 5 years		Total
	NT$		NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Non-derivative financial liabilities
Short-term loans	$	13,171,811	$	—	$	—	$	—	$	13,171,811
Payables		23,088,071		199,788		—		—		23,287,859
Guarantee deposits		52,890		154,787		15,385		442,731		665,793
Bonds payable		3,000,855		23,187,913		8,484,393		8,563,021		43,236,182
Long-term loans		4,036,260		10,997,829		17,209,849		4,765,719		37,009,657
Other financial liabilities		112,744		—		17,477,984		4,369,730		21,960,458
Total	$	43,462,631	$	34,540,317	$	43,187,611	$	18,141,201	$	139,331,760

	As of December 31, 2019
	Less than 1 year		2 to 3 years		4 to 5 years		> 5 years		Total
	NT$		NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Non-derivative financial liabilities
Short-term loans	$	12,211,621	$	—	$	—	$	—	$	12,211,621
Payables		26,998,325		198,862		—		—		27,197,187
Guarantee deposits		100,584		97,108		—		99,002		296,694
Bonds payable		20,659,607		10,590,265		8,689,971		—		39,939,843
Long-term loans		6,104,795		19,631,931		13,097,986		12,000		38,846,712
Lease liabilities		740,939		1,413,978		1,180,955		3,792,192		7,128,064
Other financial liabilities		—		12,668,287		8,445,826		—		21,114,113
Total	$	66,815,871	$	44,600,431	$	31,414,738	$	3,903,194	$	146,734,234

(6) Foreign currency risk management

UMC entered into forward exchange contracts for hedging the exchange rate risk arising from the net monetary assets or liabilities denominated in foreign currency. The details of forward exchange contracts entered into by UMC are summarized as follows:

As of December 31, 2018

Type	Notional Amount	Contract Period
Forward exchange contracts	Sell USD 28 million	December 10, 2018~ January 7, 2019

As of December 31, 2019

None.

(7) Fair value measurement

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. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Company.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

• Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities;

• Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable;

• Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

a. Assets and liabilities measured and recorded at fair value on a recurring basis:

	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
	NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Financial assets:
Financial assets at fair value through profit or loss, current	$	493,481	$	34,969	$	—	$	528,450
Financial assets at fair value through profit or loss, noncurrent		3,612,243		44,597		7,899,007		11,555,847
Financial assets at fair value through other comprehensive income, noncurrent		8,166,277		—		3,419,200		11,585,477

	As of December 31, 2019
	Level 1		Level 2		Level 3		Total
	NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Financial assets:
Financial assets at fair value through profit or loss, current	$	668,476	$	—	$	54,318	$	722,794
Financial assets at fair value through profit or loss, noncurrent		4,737,027		340,255		8,221,397		13,298,679
Financial assets at fair value through other comprehensive income, noncurrent		13,417,308		—		1,305,924		14,723,232

Fair values of financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income that are categorized into Level 1 are based on the quoted market prices in active markets. If there is no active market, the Company estimates the fair value by using the valuation techniques (income approach and market approach) in consideration of cash flow forecast, recent fund raising activities, valuation of similar companies, individual company’s development, market conditions and other economic indicators. If there are restrictions on the sale or transfer of a financial asset, which are a characteristic of the asset, the fair value of the asset will be determined based on similar but unrestricted financial assets’ quoted market price with appropriate discounts for the restrictions. To measure fair values, if the lowest level input that is significant to the fair value measurement is directly or indirectly observable, then the financial assets are classified as Level 2 of the fair value hierarchy, otherwise as Level 3.

During the years ended December 31, 2018 and 2019, there were no significant transfers between Level 1 and Level 2 fair value measurements.

Reconciliations for fair value measurement in Level 3 fair value hierarchy were as follows:

	Financial assets at fair value through profit or loss														Financial assets at fair value through other comprehensive income
	Common stock			Preferred stock			Funds		Option			Total			Common stock			Preferred stock			Total
	NT$			NT$			NT$		NT$			NT$			NT$			NT$			NT$
	(In Thousands)			(In Thousands)			(In Thousands)		(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)
As of January 1, 2018	$	3,832,537		$	2,994,294		$	1,183,940	$	31,605		$	8,042,376		$	3,350,694		$	233,326		$	3,584,020
Recognized in profit (loss)		(3,356	)		(394,931	)		69,827		(31,605	)		(360,065	)		—			—			—
Recognized in other comprehensive loss		—			—			—		—			—			(115,520	)		(49,300	)		(164,820	)
Acquisition		140,338			630,626			577,347		—			1,348,311			—			—			—
Disposal		(468,337	)		(310,025	)		—		—			(778,362	)		—			—			—
Return of capital		(22,954	)		—			—		—			(22,954	)		—			—			—
Transfer to Level 3		22,050			—			—		—			22,050			—			—			—
Transfer out of Level 3		(442,138	)		—			—		—			(442,138	)		—			—			—
Exchange effect		19,551			51,564			18,674		—			89,789			—			—			—
As of December 31, 2018	$	3,077,691		$	2,971,528		$	1,849,788	$	—		$	7,899,007		$	3,235,174		$	184,026		$	3,419,200

	Financial assets at fair value through profit or loss															Financial assets at fair value through other comprehensive income
	Common stock			Preferred stock			Funds			Convertible bonds			Total			Common stock			Preferred stock			Total
	NT$			NT$			NT$			NT$			NT$			NT$			NT$			NT$
	(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)
As of January 1, 2019	$	3,077,691		$	2,971,528		$	1,849,788		$	—		$	7,899,007		$	3,235,174		$	184,026		$	3,419,200
Recognized in profit (loss)		(272,299	)		273,047			(14,024	)		6,145			(7,131	)		—			—			—
Recognized in other comprehensive income (loss)		—			—			—			—			—			199,244			(8,532	)		190,712
Acquisition		159,476			396,890			204,082			51,956			812,404			—			—			—
Disposal		(1,475	)		(328,371	)		—			—			(329,846	)		(2,303,988	)		—			(2,303,988	)
Return of capital		(14,954	)		—			—			—			(14,954	)		—			—			—
Transfer to Level 3		—			—			—			49,706			49,706			—			—			—
Transfer out of Level 3		(53,300	)		—			—			—			(53,300	)		—			—			—
Exchange effect		(14,451	)		(33,800	)		(28,821	)		(3,099	)		(80,171	)		—			—			—
As of December 31, 2019	$	2,880,688		$	3,279,294		$	2,011,025		$	104,708		$	8,275,715		$	1,130,430		$	175,494		$	1,305,924

The Company’s policy to recognize the transfer into and out of fair value hierarchy levels is based on the event or changes in circumstances that caused the transfer.

The total losses of NT$286 million, NT$203 million and NT$113 million for the years ended December 31, 2017, 2018 and 2019, were included in profit or loss that is attributable to the change in unrealized gains or losses relating to those financial assets without quoted market prices held at the end of the reporting period.

Significant unobservable inputs of fair value measurement in Level 3 fair value hierarchy were as follow:

As of December 31, 2018
Category of equity securities	Valuation technique	Significant unobservable inputs	Quantitative information	Interrelationship between inputs and fair value	Sensitivity analysis of interrelationship between inputs and fair value
Unlisted stock	Market Approach	Discount for lack of marketability	15%~50%	The greater degree of lack of marketability, the lower the estimated fair value is determined.	A change of 5% in the discount for lack of marketability of the aforementioned fair values of unlisted stocks could decrease/increase the Company’s profit (loss) and other comprehensive income (loss) for the year ended December 31, 2018 by NT$309 million and by NT$241 million, respectively.

As of December 31, 2019
Category of equity securities	Valuation technique	Significant unobservable inputs	Quantitative information	Interrelationship between inputs and fair value	Sensitivity analysis of interrelationship between inputs and fair value
Unlisted stock	Market Approach	Discount for lack of marketability	0%~50%	The greater degree of lack of marketability, the lower the estimated fair value is determined.	A change of 5% in the discount for lack of marketability of the aforementioned fair values of unlisted stocks could decrease/increase the Company’s profit (loss) for the year ended December 31, 2019 by NT$267 million and NT$191 million, respectively, and decrease/increase the Company’s other comprehensive income (loss) for the year ended December 31, 2019 by NT$87 million.

b. Assets and liabilities not recorded at fair value but for which fair value is disclosed:

The fair value of bonds payable is estimated by the market price or using a valuation model. The model uses market-based observable inputs including share price, volatility, credit spread and risk-free interest rates. The fair value of long-term loans is determined using discounted cash flow model, based on the Company’s current incremental borrowing rates of similar loans.

The fair values of the Company’s short-term financial instruments including cash and cash equivalents, receivables, refundable deposits, other financial assets-current, short-term loans, payables and guarantee deposits approximate their carrying amount due to their maturities within one year.

As of December 31, 2018

			Fair value measurements during reporting period using
Items	Fair value		Level 1		Level 2		Level 3		Carrying amount
	NT$		NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Bonds payables (current portion included)	$	41,714,368	$	23,929,019	$	17,785,349	$	—	$	41,378,182
Long-term loans (current portion included)		30,826,215		—		30,826,215		—		30,826,215

As of December 31, 2019

			Fair value measurements during reporting period using
Items	Fair value		Level 1		Level 2		Level 3		Carrying amount
	NT$		NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Bonds payables (current portion included)	$	39,571,920	$	21,347,047	$	18,224,873	$	—	$	38,781,416
Long-term loans (current portion included)		33,902,074		—		33,902,074		—		33,902,074