Chunghwa’s hedge strategy is to enter forward exchange contracts - buy to avoid its foreign currency exposure to certain foreign currency denominated equipment 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. When forecast purchases actually take place, basis adjustments are made to the initial carrying amounts of hedged items.

For the hedges of highly probable forecast sales and purchases, as the critical terms (i.e. the notional amount, life and underlying) of the forward foreign exchange contracts and their corresponding hedged items are the same, the Company performs a qualitative assessment of effectiveness and it is expected that the value of the forward contracts and the value of the corresponding hedged items will systematically change in opposite direction in response to movements in the underlying exchange rates.

The main source of hedge ineffectiveness in these hedging relationships is the effect of credit risks of the Company and the counterparty on the fair value of the forward exchange contracts. Such credit risks do not impact the fair value of the hedged item attributable to changes in foreign exchange rates. No other sources of ineffectiveness emerged from these hedging relationships.

For the years ended December 31, 2016 and 2017, losses arising from changes in fair value of the hedged items recognized in other comprehensive income were $1 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, 2016 and 2017, Chunghwa expected part of the equipment purchase transactions would not occur and reclassified the related gains of $1 million and $2 million, respectively, from equity to profit or loss which arising from the forward exchange contracts of the aforementioned transactions for the years ended December 31, 2016 and 2017.

The outstanding forward exchange contracts at the balance sheet dates were as follows:

Loss (gain) arising from the hedging derivative financial instruments that have been reclassified from equity to initial cost of the property, plant and equipment were as follows:

The following tables summarized the information relating to the hedges for foreign currency risk.

Notional Amount

Forward

Line Item in

Carrying Amount

Change in Fair Values of Hedging Instruments Used for Calculating

Hedging Instruments

Currency

(In millions)

Maturity

Rate

Balance Sheet

Asset

Liability

Hedge Ineffectiveness

NT$

(In Millions)

Cash flow hedge

Forecast purchases - forward

exchange contracts

EUR/NT$

EUR 5/

NT$ 172

2019.03

34.98

Hedging financial assets (liabilities)

—

Accumulated Gain or Loss on Hedging Instruments in Other Equity

Hedged Items

Change in Value of Hedged Item Used for Calculating Hedge Ineffectiveness

Continuing Hedges

Hedge Accounting No Longer Applied

NT$

(In Millions)

Cash flow hedge

Forecast equipment purchases

)

—

Comprehensive Income

Reclassification from Equity to Profit or Loss and the Adjusted Line Item

Hedging Gain or Loss

Amount of Hedge Ineffectiveness

Line Item in which Hedge

Amount Reclassified to P/L and

Due to Hedged Future Cash Flows No

Hedge

Recognized

Recognized in

Ineffectiveness

the Adjusted

Longer Expected

Transaction

in OCI

Profit or Loss

is Included

Line Item

to Occur

NT$

(In Millions)

Cash flow hedge

Forecast equipment purchases

—

)

—

Construction in progress and equipment to be accepted

Other gains and losses