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Farglory Land Dev Co (FLDS)

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Monday 02 July, 2012

Farglory Land Dev Co

Annual Financial Report

RNS Number : 5810G
Farglory Land Development Co., Ltd.
30 June 2012
 



 

 

 

 

FARGLORY LAND DEVELOPMENT CO., LTD. AND SUBSIDIARIES

 

 

CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS

DECEMBER 31, 2011 AND 2010

 

------------------------------------------------------------------------------------------------------------------------------------

For the convenience of readers and for information purpose only, the auditors' report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China.  In the event of any discrepancy between the English version and the original Chinese version or any differences in the interpretation of the two versions, the Chinese-language auditors' report and financial statements shall prevail.

 


 

REPORT OF INDEPENDENT ACCOUNTANTS

 

To: The Board of Directors and Stockholders

Farglory Land Development Co., Ltd.

 

We have audited the consolidated balance sheets of Farglory Land Development Co., Ltd. (the "Company") and its subsidiaries as of December 31, 2011 and 2010 and the related consolidated statements of income, of change in stockholders' equity and of cash flows for the years then ended , expressed in thousands of New Taiwan dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 2010 financial statements of Farglory Life Insurance Co., Ltd. ("Farglory Life Insurance"), a long-term investment accounted for under the equity method. Those financial statements were audited by other auditors whose reports thereon were furnished to us and our opinion expressed herein, insofar as it relates to the amounts included in the consolidated financial statements relating to Farglory Life Insurance, is based solely on the reports of other auditors. This long-term investment amounted to NT$0 thousand as of December 31, 2010 and the related investment loss amounted to NT$ 54,520 for the year then ended.

 

We conducted our audits in accordance with the "Regulations Governing the Examination of Financial Statements by Certified Public Accountants" and generally accepted auditing standards in the Republic of China. Those standards and rules require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.

 

 

 

 

 

 

 

March 29, 2012

 

PricewaterhouseCoopers, Taiwan

 

 

 

 

 

-------------------------------------------------------------------------------------------------------------------------------------------------

The accompanying consolidated financial statements are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices in the Republic of China governing the audit of such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying consolidated financial statements and report of independent accountants are not intended for use by those who are not informed about the accounting principles or auditing standards generally accepted in the Republic of China, and their applications in practice.

 

             FARGLORY LAND DEVELOPMENT CO., LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)   

    
          

                                        ASSETS

Current Assets


       Notes



2011             




2010          


  Cash and cash equivalents


4(1)


$

973,589



$

779,359


  Financial assets at fair value through profit or loss - current


4(2)



1,165,534




2,962,793


  Notes receivable, net





78,835




174,664


  Notes receivable, net - related parties


5(2)



-




272,500


  Accounts receivable, net





97,733




123,665


  Accounts receivable, net - related parties


5(2)



40,061




50,429


  Other financial assets - current


4(3), 5(2), 6 and

7



6,738,642




327,707


  Inventories


4(4), 5(2), 6 and

7



43,795,211




33,175,371


  Construction in progress


4(5)



1,610,895




506,367


  Less: Progress billings on uncompleted contracts


4(5)


(1,405,475)


(404,412)

  Prepayments





711,779




322,084


  Deferred selling expenses


5(2)



1,454,531




1,380,173


  Other current assets - other





58,574




35,905


    Total current assets





55,319,909




39,706,605


Funds and Investments











  Financial assets carried at cost - non-current


4(6)(7)



422,364




457,680


  Long-term equity investments accounted for under the equity method


4(7)



2,739,217




710,512


    Total funds and investments





3,161,581




1,168,192


Property, Plant, and Equipment, net


4(8) and 6









Cost











    Machinery and equipment





4,617




4,251


    Transportation equipment





1,280




-


    Office equipment





21,203




20,676


    Property held for lease - land





571,687




644,207


    Property held for lease - buildings





1,915,132




1,790,885


    Other equipment





1,410




1,523


  Cost and revaluation increments





2,515,329




2,461,542


  Less: Accumulated depreciation




(151,092)


(137,644)

  Total construction in progress and prepayment for equipment





996,711




-


    Total property, plant and equipment, net





3,360,948




2,323,898


Intangible Assets











  Goodwill





18,172




-


  Other intangible assets - other


4(9) and 6



204,427




226,511


    Total intangible assets





222,599




226,511


Other Assets











  Idle assets





778




785


  Refundable deposits


5(2)



8,009




8,288


  Long-term receivables, net


4(10)



-




-


  Other assets - other


4(11) and 6



80,222




194,602


    Total other assets





89,009




203,675


  TOTAL ASSETS




$

62,154,046



$

43,628,881


 

(Continued)

 FARGLORY LAND DEVELOPMENT CO., LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)   

LIABILITIES AND STOCKHOLDERS EQUITY

Current Liabilities


         Notes



2011            




2010             


  Short-term loans


4(12) and 6


$

17,134,100



$

5,296,000


  Commercial papers payable


4(13) and 6



149,666




19,993


  Financial liabilities at fair value through profit or loss - current


4(14)(17)



-




76,607


  Notes payable





142,666




264,058


  Accounts payable





3,307,808




2,364,497


  Accounts payable - related parties


5(2)



37,705




146,595


  Income tax payable


4(15)



346,589




1,095,098


  Accrued expenses





280,994




340,430


  Other payables - related parties


5(2)



64,747




643,669


  Other payables - other





91,410




258,795


  Advances from customers


4(16) and 7



7,220,588




5,586,870


  Long-term liabilities - current portion


4(17)(18) and 6



60,000




880,669


  Estimated warranty liabilities





210,871




214,653


  Deferred income tax liabilities - current


4(15)



337,788




48,473


  Other current liabilities - other





33,250




10,436


    Total current liabilities





29,418,182




17,246,843


Long-term Liabilities











  Bonds payable


4(17) and 6



-




-


  Long-term loans


4(18) and 6



295,000




555,000


    Total long-term liabilities





295,000




555,000


Other Liabilities











  Accrued pension liabilities


4(19)



23,492




22,463


  Guarantee deposits received


5(2)



87,234




80,782


  Deferred income tax liabilities - non-current


4(15)



12,358




-


    Total other liabilities





123,084




103,245


    Total liabilities





29,836,266




17,905,088


Stockholders' Equity











Capital


4(17)(20)









    Common stock





7,714,332




7,063,833


Capital Surplus


4(17)(21)









    Paid-in capital in excess of par value of common stock





5,176,016




1,230,160


    Capital reserve from conversion of convertible bonds





806,862




803,594


    Capital reserve from gain on disposal of assets





24,100




24,100


    Capital reserve from long-term investments


4(7)



44,275




38,256


    Capital reserve - other





21,840




21,840


Retained Earnings











    Legal reserve


4(22)



3,515,001




2,845,559


    Special reserve


4(23)



56,303




-


    Undistributed earnings


4(23)



14,271,767




13,743,434


Other adjustments to stockholders' equity











  Cumulative translation adjustments





103,499



(56,303)

  Total Parent Company Stockholders' Equity





31,733,995




25,714,473


  Minority interest





583,785




9,320


    Total stockholders' equity





32,317,780




25,723,793


Commitments and Contingent Liabilities


4(9), 5(2) and 7









Significant Subsequent Events


9









  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY




$

62,154,046



$

43,628,881


 

The accompanying notes are an integral part of these consolidated financial statements.
See report of independent accountants dated March 29, 2012.


FARGLORY LAND DEVELOPMENT CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT FOR EARNINGS PER SHARE)
 


                          Items
Operating Revenue


      Notes



2011                    





2010               


  Rental income


5(2)


$

258,860




$

237,866


  Construction revenue





19,960,182





19,822,721


Net Operating Revenue





20,219,042





20,060,587


Operating Costs












  Rental costs


4(9)


(103,460)



(94,067)

  Construction costs


4(4)(25) and 5

(2)


(11,837,102)



(11,427,025)

Net Operating Costs




(11,940,562)



(11,521,092)

Gross profit





8,278,480





8,539,495


Operating Expenses












  Sales and marketing expenses


5(2)


(1,043,119)



(1,025,493)

  General and administrative expenses


4(9)(25) and 5

(2)


(484,747)



(570,727)

Total Operating Expenses




(1,527,866)



(1,596,220)

Operating income





6,750,614





6,943,275


Non-operating Income and Gains












  Interest income





4,942





1,568


  Gain on disposal of investments


4(7) and 5(2)



-





504,244


  Foreign exchange gains





108,474





-


  Gain on valuation of financial assets


4(2)



13,501





9,468


  Gain on valuation of financial liabilities


4(14)



58,273





111,546


  Other non-operating income


4(8)



271,004





64,975


Non-operating Income and Gains





456,194





691,801


Non-operating Expenses












  Interest expense




(103,209)



(709)

  Investment loss accounted for under the equity method


4(7)


(52,004)



(132,409)

  Impairment loss on financial assets


4(6)


(112,000)




-


  Other non-operating losses




(63,087)



(23,655)

Non-operating Expenses and Losses




(330,300)



(156,773)

Income from continuing operations before income tax





6,876,508





7,478,303


Income tax expense


4(15)


(827,859)



(782,813)

Consolidated net income




$

6,048,649




$

6,695,490


Consolidated net income attributable to :












  Parent Company




$

5,894,690




$

6,694,416


  Minority interests





153,959





1,074






$

6,048,649




$

6,695,490





















 





Before Tax



After Tax




Before Tax



After Tax


Basic earnings per share


4(24)


















Net income




$

8.75



$

7.67




$

10.59



$

9.48


Diluted earnings per share


4(24)


















Net income




$

8.73



$

7.66




$

10.38



$

9.29


 

The accompanying notes are an integral part of these consolidated financial statements.
See report of independent accountants dated March 29, 2012.


FARGLORY LAND DEVELOPMENT CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)





 
 
 
 
 
 
Retained Earnings
 
 
 
 
 
 
 
 
Common Stock
 
Capital Reserves
 
Legal Reserve
 
Special Reserve
 
Undistributed Earnings
 
Cumulative Translation Adjustments
 
Minority Interests
 
Total

Balance at January 1, 2010

































Balance at January 1, 2010



$ 7,063,833




$ 2,172,283




$ 2,208,518




$         -




$ 11,924,359




$         -




$    14,651




$ 23,383,644


Appropriation of earnings (Note A)

































  Legal reserve



-




-




637,041




-



(637,041)



-




-




-


  Cash dividends



-




-




-




-



(4,238,300)



-




-



(4,238,300)

Adjustments for change in shareholding percentage in investee companies



-




4,007




-




-




-




-



(4,007)



-


Reduction in holding percentage in investee companies



-



(58,340)



-




-




-




-




-



(58,340)

Cumulative translation adjustments



-




-




-




-




-



(56,303)



-



(56,303)

Consolidated net income for 2010



-




-




-




-




6,694,416




-




1,074




6,695,490


Distribution of cash dividends by the consolidated subsidiary



-




-




-




-




-




-



(2,398)


(2,398)

Balance at December 31, 2010



$ 7,063,833




$ 2,117,950




$ 2,845,559




 $

 -




$ 13,743,434



$    (56,303)



$     9,320




$ 25,723,793


2011

































Balance at January 1, 2011



$ 7,063,833




$ 2,117,950




$ 2,845,559




$         -




$ 13,743,434



$    (56,303)



$     9,320




$ 25,723,793


Appropriation of earnings (Note B)

































  Legal reserve



-




-




669,442




-



(669,442)



-




-




-


  Special reserve



-




-




-




56,303



(56,303)



-




-




-


  Cash dividends



-




-




-




-



(4,628,300)



-




-



(4,628,300)

Issuance of common stock through cash infusion



650,000




3,945,856




-




-




-




-




-




4,595,856


Conversion of bonds payable to common stock



499




3,268




-




-




-




-




-




3,767


Adjustments for change in shareholding percentage in investee companies



-




6,019




-




-



(12,312)



-




24,188




17,895


Cumulative translation adjustments



-




-




-




-




-




159,802




-




159,802


Consolidated net income for 2011



-




-




-




-




5,894,690




-




153,959




6,048,649


Changes in minority interest



-




-




-




-




-




-




396,318




396,318


Balance at December 31, 2011



$ 7,714,332




$ 6,073,093




$ 3,515,001




$    56,303




$ 14,271,767




$   103,499




$   583,785




$ 32,317,780


 

Note A : Directors' and supervisors' remuneration amounting to NT$13,014 and employees' bonus amounting to NT$86,762 had been deducted from the Consolidated Statement of Income.
Note B : Directors' and supervisors' remuneration amounting to NT$13,262 and employees' bonus amounting to NT$94,726 had been deducted from the Consolidated Statement of Income.

The accompanying notes are an integral part of these consolidated financial statements.
See report of independent accountants dated March 29, 2012.




FARGLORY LAND DEVELOPMENT CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)



CASH FLOWS FROM OPERATING ACTIVITIES



2011





2010


  Consolidated net income


$

6,048,649




$

6,695,490


    Adjustments to reconcile net income to net cash (used in) provided by operating activities










      Realized profit on intercompany transactions



-




(16,352)

      Reversal of allowance for doubtful accounts


(480)



(1,183)

      Reversal of allowance for obsolescence and decline in market value of inventories



-




(11,826)

      Depreciation



37,893





34,310


      Amortization



29,058





29,304


      Gain on valuation of financial assets and liabilities


(71,774)



(121,014)

      Loss on long-term investments accounted for under the equity method



52,004





132,409


      Gain on disposal of investments



-




(504,244)

      Reversal of impairment of assets


(245,000)




-


      Amortization of discount on convertible bonds payable



24,022





59,161


      Loss from early-redemption of convertible bonds



40,637





16,904


      Impairment loss on financial aseets



112,000





-


      Changes in assets and liabilities










        Financial assets at fair value through profit or loss - current



1,823,014




(2,007,246)

        Notes receivable, net



95,829




(60,181)

        Notes receivable, net - related parties



272,500




(7,550)

        Accounts receivables - net



25,932




(15,549)

        Accounts receivables - related parties



10,368





143,281


        Other financial assets - current


(3,960,096)



(9,188)

        Inventories


(10,534,550)




8,927,401


        Excess of construction in progress over progress billings


(103,465)


(


(43,782)

        Prepayments

(


382,088

)


(


90,030

)

        Deferred selling expenses

(


74,358

)




368,356


        Other current assets - other

(


22,669

)




21,914


        Other assets - other

(


47,507

)




-


        Net change in deferred income taxes



280,475



(


417,704

)

        Notes payable

(


159,645

)




128,855


        Accounts payable



923,176



(


444,297

)

        Accounts payable - related parties

(


108,890

)




63,952


        Income tax payable

(


748,509

)




679,612


        Accrued expenses

(


61,789

)




23,705


        Other payables - related parties

(


578,922

)




272,517


        Other payables - other

(


167,921

)




123,602


        Advances from customers



1,633,718



(


4,150,189

)

        Estimated warranty liabilities

(


3,782

)


(


10,791

)

        Other current liabilities - other



22,814



(


2,845

)

        Accrued pension liabilities



1,029





778


        Other liablities - others



-



(


290

)

          Net cash (used in) provided by operating activities

(


5,838,327

)




9,807,290


 

(Continued)

FARGLORY LAND DEVELOPMENT CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS)


CASH FLOWS FROM INVESTING ACTIVITIES



2011





2010


  (Increase) decrease in other financial assets - current

$

(2,360,785)



$

6,778


  Acquisition of property, plant and equipment


(382,569)



(4,279)

  Increase in financial assets carried at cost - non-current


(76,684)



(450,000)

  Increase in long-term investments accounted for under the equity method


(2,026,850)



(641,100)

  Proceeds from sale of long-term investments



-





457,623


  Decrease in refundable deposits



649





793


  Decrease in long-term receivables



480





1,183


  Increase in other assets - other


(5,491)



(8,023)

          Net cash used in investing activities


(4,851,250)



(637,025)

CASH FLOWS FROM FINANCING ACTIVITIES










  Increase (decrease) in short-term loans



11,838,100



(


4,448,840

)

  Increase (decrease) in commercial papers payable



129,673



(


294,648

)

  Increase in long-term loans



-





400,000


  Repayment of long-term loans

(


365,000

)


(


120,000

)

  Increase in guarantee deposits received



6,452





15,656


  Payment of cash dividends

(


4,628,300

)


(


4,238,300

)

  Payment of cash dividends to minority interests



-



(


2,398

)

  Redemption of convertible bonds

(


794,895

)


(


416,407

)

  Proceeds from issuance of common stock



4,595,856





-


  Changes in minority interests



396,318





-


          Net cash provided by (used in) financing activities



11,178,204



(


9,104,937

)

Net effect of changes in consolidated entities

(


294,397

)




-


Increase in cash and cash equivalents



194,230





65,328


Cash and cash equivalents at beginning of year



779,359





714,031


Cash and cash equivalents at end of year


$

973,589




$

779,359


Supplemental disclosures of cash flow information:










Cash paid during the year for:










  Interest


$

262,531




$

156,211


  Interest capitalized


(171,855)



(152,752)

  Interest (excluding interest capitalized)


$

90,676




$

3,459


  Income tax


$

1,295,981




$

530,468


Acquisition of property, plant and equipment










Increase in property, plant and equipment


$

436,111




$

-


Add:Payable at beginning of year



5,176





-


Less:Payable at end of year


(58,718)




-


Cash paid


$

382,569




$

-


  Non-cash flows from investing and financing activities:










    Property held for lease transferred from inventories


$

-




$

41,726


    Inventories transferred from property held for lease


$

88,500




$

-


    Property held for lease transferred from other assets


$

160,403




$

156,868


    Conversion of convertible bonds (face value) into common stock


$

3,600




$

-


 

The accompanying notes are an integral part of these consolidated financial statements.
See report of independent accountants dated March 29, 2012.


FAGLORY LAND DEVELOPMENT CO., LTD. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 AND 2010

(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS,                                  EXCEPT AS OTHERWISE INDICATED)

 

HISTORY AND ORGANIZATION

Farglory Land Development Co., Ltd. (the "Company") was incorporated under the provisions of the Company Law of the Republic of China ("ROC") in August 1978. The Company was renamed from Metropolitan Construction Co., Ltd. to Farglory Land Development Co., Ltd. in December 2005 after obtaining the approval from the regulatory agency. The Company is primarily engaged in selling and leasing commercial buildings and public housing constructed by commissioned construction contractors.

The Company's shares have been traded on the GreTai Securities Market (formerly-Over-The -Counter Securities Exchange) since December 1999 and were transferred to be traded on the Taiwan Stock Exchange on August 6, 2007. As of December 31, 2011, the Company and its subsidiaries included in the consolidated financial statements had approximately 290 employees.

    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements of the Company and its subsidiaries (collectively referred herein as the "Group") are prepared in accordance with the "Rules Governing the Preparation of Financial Statements by Securities Issuers" and accounting principles generally accepted in the Republic of China. The Group's significant accounting policies are summarized below:

(1) Basis for preparation of consolidated financial statements

A.    All majority-owned subsidiaries and controlled entities are included in the consolidated financial statements. Effective January 1, 2008, the Company prepares consolidated financial statements on a quarterly basis. The income (loss) of the subsidiaries is included in the consolidated statement of income effective on the date the Company gains control over the subsidiaries. The income (loss) of the subsidiaries is excluded from the consolidated statement of income effective on the date the Company loses control over the subsidiaries.

Significant inter-company transactions, assets, and liabilities arising from inter-company transactions are eliminated.

B.     Subsidiaries included in the consolidated financial statements and their changes for the years ended December 31, 2011 and 2010:

 

Note : Farglory Dome issued common stock in February and June, 2011, and the Company and the subsidiary - Farglory Construction obtained partial of additional shares. As a result, the Company held directly and indirectly more than 50% of the voting shares of Farglory Dome. Therefore, the Company has included Farglory Dome as a consolidated entity starting from 2011.

 

C.    Subsidiaries not included in the consolidated financial statements: None.

D.    Adjustments for subsidiaries with different balance sheet dates and accounting policy: None.

E.     Special operating risks in foreign subsidiaries: None.

F.     Nature and extent of the restrictions on fund remittance from subsidiaries to the parent company: None.

G.     Contents of subsidiaries' securities issued by the parent company: None.

H.    Information on new issuance of convertible bonds and common stock by subsidiaries: In August, 2010, the shareholders of Farglory Construction resolved to issue common stocks in the amount of $610,000. The shareholders of Farglory Dome resolved to issue common stocks in the amount of $200,000 and $500,000 in November, 2010 and April, 2011, respectively.

 

(2) Classification of current and non-current items

A.    Assets that meet one of the following criteria are classified as current assets; otherwise, they are classified as non-current assets:

(a)    Assets arising from operating activities that are expected to be realized or consumed, or are intended to be sold within the normal operating cycle;

(b)    Assets held mainly for trading purposes;

(c)    Assets that are expected to be realized within twelve months from the balance sheet date;

(d)    Cash and cash equivalents, excluding restricted cash and cash equivalents and those that are to be exchanged or used to pay off liabilities more than twelve months after the balance sheet date.

B.     Liabilities that meet one of the following criteria are classified as current liabilities; otherwise, they are classified as non-current liabilities:

(a)    Liabilities arising from operating activities that are expected to be paid off within the normal operating cycle;

(b)    Liabilities arising mainly from trading activities;

(c)    Liabilities that are to be paid off within twelve months from the balance sheet date;

(d)    Liabilities for which the repayment date cannot be extended unconditionally to more than twelve months after the balance sheet date.

C.    Since the normal operating cycle from constructing to selling the properties is usually more than one year, the assets and liabilities relating to construction or long-term construction contracts are classified as current and non-current items based on the operating cycle. Other assets and liabilities are classified based on the period of one year.

 

(3) Foreign currency transactions

A.    Transactions denominated in foreign currencies are translated into functional currency at the spot exchange rates prevailing at the transaction dates.  Exchange gains or losses due to the difference between the exchange rate on the transaction date and the exchange rate on the date of actual receipt and payment are recognized in current year's profit or loss.

B.     Monetary assets and liabilities denominated in foreign currencies are translated at the spot exchange rates prevailing at the balance sheet date. Exchange gains or losses are recognized in profit or loss. However, exchange gains or losses on overseas inter-company accounts that are, in nature, deemed long-term is accounted for as a reduction in stockholders' equity.

C.    For non-monetary assets and liabilities measured at fair value with differences recognized in profit or loss, any exchange component arising from translation at the spot rate prevailing at the balance sheet date shall be recognized in profit or loss. Conversely, for non-monetary assets and liabilities measured at fair value with differences recognized directly in equity, any exchange component arising from translation at the spot rate prevailing at the balance sheet date shall be recognized directly in equity. However, non-monetary items that are measured on a historical cost basis are translated using the exchange rate at the date of the transaction.

D.    The financial statements of foreign subsidiaries are translated into New Taiwan dollars using the exchange rates at the balance sheet date except for equity accounts, which are translated at historical rates. Dividends are translated at the rates prevailing at the date of declaration. Profit and loss accounts are translated at weighted-average rates of the year. The resulting translation adjustments are recorded as "cumulative translation adjustments" under stockholders' equity, and recorded as a component of statement of income when sold or liquidated.

(4) Financial assets and financial liabilities at fair value through profit or loss

A.    Financial assets and financial liabilities at fair value through profit or loss are recognized and derecognized using trade date accounting and are recognized initially at fair value.

B.     These financial instruments are subsequently remeasured and stated at fair value, and the gain or loss is recognized in profit or loss. The fair values of listed stocks, OTC stocks, closed-end mutual funds, and depository receipts are determined by the closing prices at the balance sheet date. The fair value of open-end mutual funds is based on the net asset value at the balance sheet date.

C.    For a derivative that does not meet the criteria for hedge accounting, it is initially recognized at fair value on the date the derivative contract is entered into and is subsequently remeasured at its fair value. If a derivative is a non-option derivative, the fair value initially recognized is zero.

D.    For call options, put options, conversion price resetting options and non-equity conversion options embedded in bonds payable issued by the Company, please refer to Note 2 (18).

(5) Notes, accounts and other receivables

A.    Notes and accounts receivable are claims resulting from the sale of goods or services.  Receivables arising from transactions other than the sale of goods or services are classified as other receivables.  Notes, accounts and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment.

B.     The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.  If such evidence exists, a provision for impairment of financial asset is recognized.  The amount of impairment loss is determined based on the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.  When the fair value of the asset subsequently increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed to the extent of the loss previously recognized in profit or loss.  Such recovery of impairment loss shall not result to the asset's carrying amount greater than its amortized cost where no impairment loss was recognized.  Subsequent recoveries of amounts previously written off are recognized in profit or loss.

(6) Inventories

The inventories include "land held for construction", "construction in progress", and "buildings and land held for sale." Gains or losses arising from construction contracts are recognized using the percentage of completion method. Inventories are stated at cost and evaluated at the lower of cost or net realizable value at the end of period. The individual item approach is used in the comparison of cost and net realizable value. The calculation of net realizable value is based on the estimated selling price in the normal course of business, net of estimated costs of completion and estimated selling expenses. The interest costs related to construction in progress are capitalized in accordance with the generally accepted accounting principles.

(7) Long-term construction contracts

A.    For the construction contracts that the Company enters into, the percentage of completion method is used when the construction lasts for more than one year and the profit or loss can be reliably estimated. Under the percentage of completion method, the percentage of completion is measured at the proportion that the costs incurred for work performed to date compared to the total estimated construction cost. For other construction contracts, the completed-contract method is used. When it is probable that the estimated contract costs will exceed the total contract price, under both methods, the expected loss is recognized immediately.

B.     When the construction in progress exceeds the progress billings received under the same contract, the progress billings received is presented as a deduction from the construction in progress in arriving at the amount classified as current asset. When the progress billings received exceeds the construction in progress, the construction in progress is presented as a deduction from progress billings received under the same contract in arriving at the amount classified as current liability.

(8) Joint controlling interest

The subsidiary and other enterprises jointly undertake the construction of Taipei Cultural Gym Area - Big-sized Indoor Gym and set up a joint project office to establish and keep the accounting records and books with respect to the project transactions.  The Company recognizes assets, liabilities, revenues and costs related to the project in proportion to its joint undertaking percentage at the end of each month.

(9) Deferred selling expense

The selling expenses related to the pre-sale of land and buildings are deferred until the gains and losses from the sale are recognized.

(10) Financial assets carried at cost

A.  The financial assets are recognized or derecognized using the trade date accounting and are recognized initially at fair value plus transaction costs that are directly attributable to the acquisition of the financial assets.

B.  If there is any objective evidence that the financial assets are impaired, the impairment loss is recognized in profit or loss. Such impairment loss shall not be reversed.

(11) Long-term equity investments accounted for under the equity method

A.    Long-term equity investments in which the Company holds more than 20% of the investee company's voting shares or has the ability to exercise significant influence on the investee company are accounted for under the equity method. Effective January 1, 2006, the excess of the acquisition cost over the investee company's fair values of identifiable net assets is treated as goodwill. Goodwill is subject to impairment assessment annually. Retrospective adjustment for prior years is not required.

Long-term equity investments in which the Company holds more than 50% of the investee company's voting shares or has the ability to control the investee's operational decisions are accounted for under the equity method and included in the quarterly consolidated financial statements.

B.     Upon the disposal of a long-term investment, the difference between the carrying amount and sales price is recorded as gain or loss from disposal of long-term investments. The capital reserve arising from long-term equity investment is transferred to gain or loss according to the disposal proportion.

C.    Exchange differences arising from translation of the financial statements of overseas investee companies accounted for under the equity method are recorded as "cumulative translation adjustments" under stockholders' equity. Please refer to Note 2 (3).

(12) Property, plant, and equipment

A.    The property, plant, and equipment are stated at cost. Interest incurred on the loans used to bring the assets to the condition and location necessary for their intended uses are capitalized.

B.     Depreciation is provided under the straight-line method based on the assets' estimated economic useful lives. The estimated economic useful lives of property held for lease - building are 50~60 years while that of the other property, plant, and equipment are 3~8 years.

C.    Major improvements and renewals are capitalized and depreciated accordingly. Maintenance and repairs are expensed as incurred. The gains and losses from the sale or disposal of assets are recognized in profit or loss.

(13) Land-use right (shown as "other intangible assets")

The land-use right is the royalty paid to use the land for the construction of properties for leases or sale and is amortized over the effective period. During the construction period, the royalty is amortized to the construction cost. After the completion of the construction, the royalty is amortized to the rental cost based on the proportion of rented out properties. For the portion that has not yet been rented, the related royalty is amortized to operating expense. When a property is sold, the royalty is transferred to the operating cost based on the percentage of the property's construction cost over total construction cost.

(14) Idle assets

Property, plant, and equipment not used in operations are reclassified to "other assets" at the lower of the net realizable value or carrying amount. Depreciation provided on these assets is charged to non-operating expense.

(15) Deferred expenses (shown as "other assets - other")

The deferred expenses, including expenditures of computer software and leasehold decoration and maintenance are stated at cost, and are amortized over the shorter of the estimated useful lives or the lease periods using the straight-line method from 2 to 5 years.

(16) Impairment of non-financial assets

For an asset in which there is an indication of impairment, the Group estimates its recoverable amount and recognizes impairment loss if its recoverable amount is less than its carrying amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of the asset in an arm's length transaction after deducting any direct incremental disposal costs. The value in use is the present value of estimated future cash flows to be derived from continuing use of the asset and from its disposal at the end of its useful life. When the impairment no longer exists, the impairment loss recognized in prior years shall be reversed.

The recoverable amount of goodwill, intangible assets with indefinite useful lives, and intangible assets that have not yet been available for use are evaluated for impairment at least annually. Impairment loss is recognized whenever the recoverable amount of these assets is less than their respective carrying amount. Impairment loss of goodwill recognized in prior years is not reversed in the following years.

(17) Construction warranty (shown as "estimated warranty liabilities")

Construction warranty is accrued based on the potential warranty expenditure over the warranty period under construction contracts. When the actual warranty expenses occur, the warranty liability will be debited. If the warranty liability is not sufficient, the excess of the expenditures will be recognized as current expense.

(18) Convertible bonds

A.    For the bonds payable embedded in conversion option, put option, call option and price resetting option issued after January 1, 2006, the issuer of the financial instruments shall separate the issuance price on initial recognition into financial asset and financial liability according to the contractual terms. These instruments are accounted for as follows:

(a)    The premium or discount arising from the issuance of the convertible bonds is amortized over the period from the date of issuance to maturity date using the straight-line method and is recorded as interest expense.

(b)    The net values assigned to the derivative features (conversion option, put option, call option, and price resetting option) embedded in the convertible bonds are accounted for as "financial assets or financial liabilities at fair value through profit or loss". Such financial assets or liabilities are subsequently remeasured at fair value on the balance sheet dates, with the resulting differences recognized as "gain or loss on valuation of financial assets or financial liabilities". The fair value of the put option upon expiration is recognized in profit or loss for the period. The reduction of fair value due to the reset of conversion price is recognized in "gain or loss" in the current period.

(c)    When the conversion option is exercised, the liability components (including the bonds as well as the separately recognized embedded derivatives) shall be remeasured at fair value on the conversion date, and the resulting difference shall be recognized in profit or loss for the period. The carrying amount for the common stock issued upon conversion shall be based on the fair value of the above-mentioned liability components of the bonds.

(d)    Costs incurred on issuance of convertible bonds are proportionally charged to the liability components based on initially recognized costs.

B.     In the event that the bondholders may exercise put options within the following year, the underlying bonds payable shall be reclassified to current liabilities. The bonds payable whose put options are unexercised during the exercisable period shall be reversed to non-current liabilities.

(19) Pension plan

Under the defined benefit pension plan, net periodic pension costs are recognized in accordance with the actuarial calculations. Net periodic pension costs include service cost, interest cost, expected return on plan assets, amortization of unrecognized net transition obligation and gains or losses on plan assets. Unrecognized net transition obligation is amortized on a straight-line basis over the average remaining service years. Under the defined contribution pension plan, the contribution amounts are recognized as net periodic pension costs incurred under the accrual basis.

(20) Income tax

A.    The Group uses inter-period as well as intra-period tax allocation for income tax. Any over-provision or under-provision on prior years' income tax liabilities is recorded as current year's income tax expense. As a result of the change in the tax law, the deferred tax assets and deferred tax liabilities should be remeasured in the year the tax law is enacted. The impact of change in tax rate is recognized as income tax expense (benefit) for income from continuing operations in the current period.

B.     An additional 10% tax is levied on the unappropriated retained earnings and is recorded as income tax expense in the year the stockholders resolve the distribution of earnings.

(21) Share-based payment ─ employee compensation plan

For share-based payment with the grant date on or after January 1, 2008, the Company shall measure the services received during the vesting period by reference to the fair value of the equity instruments granted and account for those amounts as payroll expenses during that period. In accordance with ARDF 96-267 prescribed by the R.O.C. Accounting Research and Development Foundation, shares reserved for employees to purchase under Article 267 paragraph 1 of the Company Law, are measured at fair value on the grant date and the resulting amount recognized as payroll expenses.

(22) Bonuses to employees and remuneration to directors and supervisors

Effective January 1, 2008, pursuant to ARDF 96-052 of the R.O.C. Accounting Research and Development Foundation, dated March 16, 2007, "Accounting for Bonuses to Employees and Remuneration to Directors and Supervisors", the estimated bonuses to employees and remuneration to directors and supervisors are accounted for as expenses and liabilities, provided that such liabilities are required under legal or constructive obligation and those amounts can be estimated reasonably. However, if the accrued amounts for bonuses to employees and remuneration to directors and supervisors are different from the actual distributed amounts resolved at the stockholders' meeting subsequently, the differences shall be recognized as income or expenses in the following year.

(23) Revenue and cost recognition

A.    Profit/loss from property sales

The Company commissions contractors to construct properties for the pre-completion contracts the Company enters into with customers for the sale of developed properties. If the construction meets the requirements for the use of the percentage of completion method, the profit or loss is recognized based on the percentage of completion of the project. Other constructions are accounted for under the completed-contract method under which the cost and the profit or losses are recognized when the ownership is transferred and the property is delivered. However, the profit or loss is also recognized when the property is delivered (or the ownership is transferred) before the balance sheet date and the ownership is transferred (or the property is delivered) before the issuance date of the financial statements.

B.     Rental income

Rental income is recognized monthly. The related cost is recognized as incurred and when related income is recognized. Expenses are recognized as incurred under the accrual basis.

C.    Others

Except for the long-term construction contracts, revenues are recognized when the earning process is substantially completed and are realized or realizable. The related cost is recognized as incurred when related income is recognized. Expenses are recognized as incurred under the accrual basis.

(24) Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make measurement, assessment, and disclosure, including the use of assumptions and estimates, for amounts and contingencies reported in the financial statements. Actual results could differ from assumptions and estimates.

(25) Operating segments

The operating segment reporting is consistent with the format of the management reports prepared for the chief operating decision-maker who determines the resource allocation and assesses the performance of operating segments.

In accordance with R.O.C. SFAS No. 41 "Operating Segments", the Company discloses the operating segment information in the consolidated financial statements rather than in the separate financial statements.

 

EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES

(1)   Notes, accounts and other receivables

Effective January 1, 2011, the Group adopted the amendments to R.O.C. SFAS No. 34, "Financial Instruments: Recognition and Measurement". The Group recognizes the impairment (bad debt) loss when there is objective evidence that the recoverable amount of notes, accounts and other receivables is less than its carrying amount. There is no significant effect resulting from the change in accounting principle on consolidated net income and earnings per share for the year ended December 31, 2011.

(2) Operating segments

Effective January 1, 2011, the Group adopted the newly issued R.O.C. SFAS No. 41, "Operating Segments." which supersedes R.O.C. SFAS No. 20 "Segment Reporting". The Group restated the segment information of the prior period in accordance with the regulations. There is no significant effect resulting from the change in accounting principle on consolidated net income and earnings per share for the years ended December 31, 2011 and 2010.

 

SUMMARY OF SIGNIFICANT ACCOUNTS

(1) Cash and cash equivalents

 

(2) Financial assets at fair value through profit or loss - current

 

 

The Group recognized net gains in the amount of NT$13,501 and NT$9,468 for the years ended December 31, 2011 and 2010, respectively.

(3) Other financial assets - current

 

A.   Refundable deposits mainly consisted of refundable deposits due to the joint development arrangements. For details of the arrangements, please refer to Notes 5(2) M and 7(5).

B.     Sinking account mainly consisted of funds raised from the issuance of GDRs and the trust of advances from customers. For the information about the trust fund, please refer to Note 7(3).

(4) Inventories

 


 


 

 

The cost of inventories recognized as expense and included in constructional costs for the years ended December 31, 2011 and 2010 were as follows: 


 

The Company reversed previously written-down inventory during the year ended December 31, 2010. The Company sold the buildings and land held for sale that were written down in the previous years.

 

A.    As of December 31, 2011 and 2010, construction contracts that met the requirements to use the percentage of completion method are listed as follows:

 

 

B.     For the years ended December 31, 2011 and 2010, the interest capitalized as cost of inventory amounted to NT$171,855 and NT$152,752, respectively. Annual interest rates used for capitalization for the years ended December 31, 2011 and 2010 were 1.80%~2.53% and 2.03%~2.83%, respectively.

C.    For details of pledged assets, please refer to Note 6.

D.    For the details of trust deeds for construction in progress, please refer to Note 7(3).


 

(5) Construction in progress and progress billings on uncompleted contracts

A.    The details of construction in progress and progress billings on uncompleted contracts are as follows:

 


 

 


B.     The details of significant uncompleted contracts are as follows: 

 

 

Note : Farglory Life Insurance Co., Ltd. made a real estate contract with Chang Xuan Land Development Co., Ltd. and reached an agreement that Chang Xuan Co., Ltd. take charge of the building construction, and which the construction project was taken over by Farglory Construction Co., Ltd.. The contract price was NT$2,857,143, of which NT$1,275,171 has been paid.

 

 

(6) Financial assets carried at cost - non-current

 

 

A.    In September, 2010, the Company sold partial shares of Farglory Life Insurance Co., Ltd. and reclassified the remaining investment to financial assets carried at cost - non-current. Please refer to Note 4 (7) D.

B.     The Company evaluated that the value of investment in Yuan Jing Solar, carried at cost, had been impaired and therefore provided impairment loss of $112,000 (shown as "impairment loss") for 2011.

 

(7) Long-term equity investments accounted for under the equity method

A.    Details of long-term equity investments accounted for under the equity method are set forth below:

 

B.     Investment gain or loss accounted for under the equity method for the years ended December 31, 2011 and 2010 which are based solely on the reports of the independent accountants of these investee companies are set forth below:

 


 

C.    The Company invested in Farglory Dome when it was established in September 2006. The Company made a commitment to the Taipei City Government that its shareholdings in Farglory Dome would not be less than 20%. In October 2006, Farglory Dome signed the "Taipei Cultural Gym Area - Big-sized Indoor Gym Development Plan" with the Taipei City Government. Under this agreement, Farglory Dome shall obtain construction permit within 12 months after the agreement date. Furthermore, Farglory Dome shall complete the construction and obtain the usage permit within three years after obtaining the construction permit. For the details of agreement and the state of the affairs, please refer to Note 7(6).

D.    In September 2010, the Company sold 54,000 (in thousands) common shares of Farglory Life Insurance Co., Ltd., one of the long-term equity investments accounted for under the equity method, for NT$457,623 (which excluded the security transaction tax amounting to NT$1,377), and recognized disposal gain of NT$504,244 (which included the proportionally deducted part of the capital reserve). Since the Company no longer had the ability to exercise a significant influence on Farglory Life Insurance Co., Ltd. after the sale, the remaining investment in Farglory Life Insurance Co., Ltd. was reclassified to financial assets carried at cost - non-current in the amount of NT$7,680.

E.     The Company's application to invest in real estate development in China was approved by Investment Commission of the Ministry of Economic Affairs. The total investment amount was US$292,283 thousand (about NT$8,834,254 thousand). The related information is set forth below.

As of December 31, 2011, the Company remitted to Straits Construction the amount of US$90,000 thousand.


 

NoteThe names of the investee companies shown above were provisional. For the formal name, please refer to Note 11(3).

 

(8) Property, plant and equipment

 

 

 

A.    The property held for lease - buildings mainly consisted of the Metropolitan Headquarters building, which was constructed under the land use right based on the contract signed with the Chi-Seng Water Management Research & Development Foundation of Taipei City in 2000. The construction was completed in 2003. The construction costs accounted for as property held for lease consisted of the leased portions of the building as of December 31, 2011 and 2010, respectively.

B.     The H47A Farglory University Harvard project (originally classified as "inventories") planned to lease out the commercial space and parking lot. This project was completed in 2008 and the related costs of construction amounting to NT$408,946 was transferred from construction in progress to property held for lease. As of December 31, 2011, its book value was NT$392,947. The Company entered into a 15-year leasing contract with Taiwan Carrefour Co., Ltd. on July 10, 2009.

C.    On June 8, 2010, the Taipei City Government terminated the contract with the subsidiary - Farglory Dome for not being able to obtain the construction permit within 12 months after the contract date in accordance with the contract terms and for not improving within the deadline. Accordingly, the subsidiary - Farglory Dome recognized the impairment loss amounting to NT$245,000 for the construction project based on the conservatism principle during the six-month period ended June 30, 2010. However, the subsidiary - Farglory Dome passed the field investigation on December 9, 2010, obtained the

construction permit on June 30, 2011, and began construction on November 11, 2011. Therefore, the management assessed that the impairment no longer existed and reversed the total impairment loss of NT$245,000, which was classified as "other non-operating income." For the details of the agreement, "Taipei Cultural Gym Area - Big-sized Indoor Gym Development Plan", please refer to Note 7(6).

D.    Some of the Company's fixed assets was pledged as security for short-term or long-term loans and commercial papers payable. For details of pledged assets, please refer to Note 6.

 

(9) Intangible assets

 

A.    The details of accumulated amortization were as follows:

 

B.     In 2000, the Company entered into a 40-year lease with the Chi-Seng Water Management Research & Development Foundation of Taipei City for the land-use right of the lot located on Xihu Section 4 No. 102 in Neihu. In addition, the Company has to make an annual rental payment based on 8% of the land value declared by the government each year. The rent payments were recognized as lease cost and administration expense based on the proportion of rental space.

C.    For details of pledged assets, please refer to Note 6.

 

(10) Long-term receivables

 

The above receivables were mainly accounts receivable overdue or under litigation.

 

(11)  Other assets

 

A.    The Metropolitan Headquarters building was constructed under the land-use right based on the contract signed with the Chi-Seng Water Management Research & Development Foundation of Taipei City in 2000. The construction was completed in 2003. The construction costs accounted for as other assets consisted of the unleased portions of the building as of December 31, 2011 and 2010, respectively.

B.     For details of Metropolitan Headquarters building as a pledge, please refer to Note 6.

 

(12)  Short-term loans

 

 

For details of pledged assets, please refer to Notes 5(2)O and 6.

 

(13)  Commercial papers payable

 

 

For details of pledged assets, please refer to Note 6.

 

(14)  Financial liabilities at fair value through profit or loss

 

 

The Company recognized net gain in the amount of NT$58,273 and NT$111,546 for the years ended December 31, 2011 and 2010, respectively.

 

(15)     Income Tax

 


 

A.    Income tax expense for 2011 and 2010 included the 10% additional income tax expense on the undistributed earnings of 2010 and 2009 in the amounts of NT$134,226 and NT$151,171, respectively.

 

B.     As of December 31, 2011 and 2010, deferred income tax assets and liabilities were as follows:

 

 

C.    As of December 31, 2011 and 2010, the details of the deferred income tax assets and liabilities are listed as follows:


 

 

 

 

 

D.    As of December 31, 2011, the details of the unused loss carryforwards of the subsidiary - Farglory Dome were as follows:

 

 

E.    For the years ended December 31, 2011 and 2010, the income from land sales, which is exempt from income tax, amounted to NT$1,483,978 and NT$8,182,020, respectively.

F.     As of December 31, 2011, the Company's income tax returns for the year, except for 2008, through 2009 have been assessed and approved by the Tax Authority; the subsidiary - Farglory Construction and Farglory Dome's income tax returns for the years through 2009 and 2010, respectively, have been assessed and approved by the Tax Authority.

 

(16)  Advances from customers    

 

(17)  Bonds payable

 

A.    The Company issued domestic secured convertible bonds - III and domestic unsecured convertible bonds-IV on June 30, 2008. The major terms of the issuance are as follows:

(a)    Total issued amount: NT$500,000 of secured convertible bonds and NT$1,000,000 of unsecured convertible bonds.

(b)    Coupon rate: 0%

(c)    Redemption term: The bondholders have the right to request the Company to redeem the bonds or to convert the bonds into common shares. The Company also has the right to redeem the bonds. The bonds will be redeemed for cash on the maturity date.

(d)    Issuance terms: Three years for secured convertible bonds, from December 31, 2008 to June 30, 2011, and five years for unsecured convertible bonds, from December 31, 2008 to June 30, 2013.

(e)    Conversion periods: The bonds are convertible anytime from one month after the issuance date to ten days before the maturity date.

(f)     Conversion price: The initial conversion price per share was set at NT$114. The conversion price will be adjusted or reset according to the issuance contract when the number of the Company's ordinary shares is changed or if, for a period of 20 consecutive trading days, the average closing price of the Company's shares is equal to or less than 90% of the initial conversion price. Effective July 18, 2011, the reset conversion price is NT$72.12.

(g)    Redemption at the option of issuer:

a.   During the period from the day six months after the issuance of the bonds to 40 days before the maturity date of the bonds, the Company may redeem all of the outstanding bonds at face value by cash at any time within 30 trading days following the period of 30 consecutive trading days during which the closing price of the Company's shares is equal to or above 50% of the latest conversion price.

b.   During the period from the day six months after the issuance of the bonds to 40 days before the maturity date of the bonds, the Company may redeem all of the outstanding bonds at face value by cash at any time after the amount of the outstanding bonds becomes less than 10% of the initial issuance amount.

(h)    Redemption at the option of bondholders:

a.   Under the terms of the secured convertible bonds-III, the bondholders have the right to require the Company to redeem the bonds by cash at the price of face value plus interest on redemption of 3.03% of the face value upon the passing of three years after the issuance of bonds.

b.   Under the terms of the unsecured convertible bonds-IV, the bondholders have the right to require the Company to redeem the bonds by cash at the price of face value plus interest on redemption of 3.02% and 4.57% of the face value upon the passing of two years and three years after the issuance of bonds, respectively.

(i)     Bonds redeemed and cancelled by the Company: As of December 31, 2011, the Company had early redeemed by cash and cancelled the unsecured convertible bonds-IV in the amount of NT$324,200. The Company had early-redemption gain in the amount of NT$43,769 and recognized the amount of NT$26,432 as extraordinary income after deducting income tax in the amount of NT$17,337 for the year ended December 31, 2008.

(j)    Bonds redeemed and cancelled by the Company per the bondholders' request: As of December 31, 2011, as requested by the bondholders, the Company had redeemed and cancelled the unsecured convertible bonds-IV in the amount of NT$672,200 and NT$500,000, respectively. The Company recognized redemption loss in the amount of NT$40,637 and NT$16,904 as other non-operating expenses for the years ended December 31, 2011 and 2010, respectively.

(k)    On September 2011, bonds in the amount of NT$3,600 had been converted into 50 thousands common stocks based on the conversion price per share at the date of conversion. The excess of the bond cost over par value of the shares amounting to NT$3,268 was credited to capital reserve. 

B.     The non-equity conversion options, put options, call options and conversion price resetting options embedded in convertible bonds- III and IV were separated from these bonds and recognized as "financial assets or liabilities at fair value through profit or loss" in accordance with R.O.C. SFAS No. 34 upon issuance of these bonds because the economic characteristics and risks of these embedded derivatives are not closely related to those of the host debt contract.

C.    As of September, 2011, the domestic secured convertible bonds- III and domestic unsecured convertible bonds- IV, which the Company issued, were all converted or redeemed.

D.    As of December 31, 2010, for details of pledged assets, please refer to Note 6.

E.     The Company's Board of Directors resolved to issue domestic secured convertible bonds- V and domestic unsecured convertible bonds- VI on July 20, 2011. The application was sent to the Financial Supervisory Commission, Executive Yuan R.O.C, and was approved on September 13, 2011. In addition, the Company issued the domestic secured convertible bonds-V amounting to NT$800,000, and domestic unsecured convertible bonds-VI amounting to NT$1,200,000, on March 8 and 9, 2012, respectively, with the conversion price of NT$65 per share.

 

(18)  Long-term loans

 

 

A.    The loans are repayable by installments from 2012 to 2015.

B.     For details of pledged assets, please refer to Note 6.

 

(19)  Retirement plan

A.    The Company and its subsidiary participate in a defined benefit pension plan in accordance with the Labor Standards Law, covering all regular employees for services provided prior to July 1, 2005, and employees who choose to remain in the defined benefit pension plan subsequent to the enforcement of the Labor Pension Act on July 1, 2005. Under the defined benefit pension plan, employees are entitled to two base points for every year of service for the first 15 years and one base point for each additional year thereafter, up to a maximum of 45 base points. The pension payment to employees is computed based on years of service and average salaries or wages of the last six months prior to approved retirement. The Company and its subsidiary contribute an amount equal to 2% of salaries and wages paid each month to a pension fund. The pension fund is administered by a pension fund monitoring committee (the "Committee") and deposited under the Committee's name in the Bank of Taiwan.

 

(a)    The following sets forth the pension information based on the actuarial report:

 

 

 

(b)    The funded status of the pension plan is listed as follows:

 

 

(c)    The components of net periodic pension costs are as follows:

 

B.     Pursuant to the new "Labor Pension Act" enacted on July 1, 2005, the Company and its subsidiary have each set up a defined contribution pension plan. For domestic employees who choose to participate in the defined contribution pension plan, the Company contributes 6% of the employees' salaries and wages each month to the employees' individual pension accounts at the Bureau of Labor Insurance. The net pension costs recognized under the defined contribution plan amounted to NT$10,722 and NT$10,787, for the years ended December 31, 2011 and 2010, respectively.

 

(20)  Capital stock

A.    As of December 31, 2011, the Company's authorized capital was NT$10,000,000, and total contributed capital was NT$7,714,332 (including exercising the convertible bonds into common stock amounting to NT$499 in 2011) consisting of 771,433 thousand shares with a par value of NT$10 per share.

B.     On January 19, 2011, the Company issued an additional 65 million common shares, for the issuance of 32.5 million units of global depository receipts (GDRs). The issuance of GDRs was approved by the Central Bank (November 2, 2010 No.0990051697) and the Securities and Futures Bureau, Financial Supervisory Commission, Executive Yuan (December 1, 2010 No.0990064701). The GDRs amounting to US$158,945 thousand were issued overseas and traded on the London Stock Exchange. The main terms and conditions of the GDRs are as follows:

(a)    Voting rights

Holders of GDRs have no rights to directly exercise voting rights or attend the Company's stockholders' meeting. However, should a uniform decision be reached by holders of at least 51% of the GDRs outstanding, with regards to issues proposed at the meeting of shareholders, the depository bank or agency should vote in the same direction. If the condition is not met, the voting right is delegated to the representatives. 

(b)    Sale and withdrawal of GDRs

Under current R.O.C. law, depository agency may not forward the shares represented by the GDRs to the holders until the initial issuance of GDRs. A holder of GDRs may convert GDRs to shares of common stocks or sell the corresponding shares of common stock through the depository bank after the issuance date.

(c)    Dividends

GDR holders are entitled to receive dividends the same way as the holders of common stock subject to the terms of the Deposit Agreement and applicable laws of the R.O.C.

(21)  Capital reserve

A.    Pursuant to the R.O.C. Company Law, capital reserve arising from paid-in capital in excess of par value on issuance of common stocks and donations can be used to cover accumulated deficit or to issue new stocks or cash to shareholders in proportion to their share ownership, provided that the Company has no accumulated deficit. However, capital reserve should not be used to cover accumulated deficit unless the legal reserve is insufficient.

Further, the R.O.C. Securities and Exchange Law requires that the amount of capital reserve to be capitalized mentioned above should not exceed 10% of the paid-in capital each year. Capital reserve should not be used to cover accumulated deficit unless the legal reserve is insufficient.

B.     For the details of capital reserve from conversion of convertible bonds, please refer to Note 4 (17).

 

(22)  Legal reserve

Pursuant to the Company Law, 10% of the current year's earnings, after payment of all taxes and after offsetting accumulated deficits, shall be appropriated as legal reserve, until the accumulated amount of legal reserve is equal to the issued share capital. Except for covering accumulated deficit or issuing new stocks or cash to shareholders in proportion to their share ownership, the legal reserve shall not be used for any other purpose. The use of legal reserve for the issuance of stocks or cash to shareholders in proportion to their share ownership is permitted, provided that the balance of the reserve exceeds 25% of the Company's paid-in capital.

As of December 31, 2011, the amount of legal reserve has been accumulated from the appropriation of prior years' earnings as of 2010.

 

(23)  Special reserve / Undistributed earnings

A.    In accordance with the Company Law, 10% of the current year's earnings, after payment of all taxes and after offsetting accumulated deficits, shall be set aside as legal reserve. Afterwards, an amount shall be appropriated as special reserve in accordance with applicable legal or regulatory requirements. Appropriation of the remainder plus prior years' undistributed earnings shall be proposed by the Board of Directors to be resolved during the meeting of the stockholders. The Company will take into consideration its future business plans and capital expenditures in determining the amounts of earnings to be retained and to be distributed. Distribution should be in the following order:

(a)    0% to 2% as remuneration to directors and supervisors,

(b)    2% as bonuses to employees, including employees of affiliate companies per the criteria set by the Board of Directors or other authorized party; and

(c)    96% to 98% as dividends to shareholders, either as share dividends or cash dividends. However, cash dividends shall account for at least 50% of the total dividends distributed, and the proportion shall be determined by taking into account the Company's investment plan and financial structure.

 

B.     On distribution of retained earnings, in addition to the appropriation to legal reserve, the Company shall also set aside a special reserve from retained earnings for any reductions of the stockholders' equity as of the end of the current year under Article 41, paragraph 1 of the R.O.C. Securities and Exchanges Law.

 

C.    Resolutions were adopted at the stockholders' meeting in May 2011 and June 2010, respectively, for the appropriation of 2010 and 2009 earnings as follows:

 

Note 1: At the stockholders' meeting in 2011, a resolution was adopted to appropriate employees' cash bonus and directors' and supervisors' remuneration in the amounts of NT$94,726 and NT$13,262, respectively, for 2010.

Note 2: At the stockholders' meeting in 2010, a resolution was adopted to appropriate employees' cash bonus and directors' and supervisors' remuneration in the amounts of NT$86,762 and NT$13,014, respectively, for 2009.

Information on whether the Board of Directors resolves and the stockholders approve the distribution of the Company's earnings will be posted in the "Market Observation Post System" on the website of the Taiwan Stock Exchange.

D.    (a) The estimated amounts of cash bonuses to employees and remuneration to directors and

supervisors were as follows:

 

The estimated employees' cash bonus and directors and supervisors' remuneration were determined based on a certain percentage of net income and taking into account the legal reserve and other factors prescribed by the Company's Articles of Incorporation (2% and 0.3% of after-tax earnings of 2011 and 2010 for the years ended December 31, 2011 and 2010, respectively). The estimated amounts were recognized as operating expenses for the years ended December 31, 2011 and 2010. If the estimated amounts differ from the amounts approved by the stockholders, the difference is recognized as income or expenses in 2012 and 2011.

The difference, resulting in expenses of NT$8,499, between the amounts recognized in 2010 (cash bonuses to employees of NT$86,512 and remunerations to directors and supervisors of NT$12,977) and the amount resolved by the stockholders was adjusted in the statement of income of 2011.

(b) The appropriation of 2011 earnings had been proposed by the Board of Directors on March 29, 2012. Details are summarized below:

 

Note : At the Board of Directors' and stockholders' meeting on March 29, 2012, a resolution was proposed to appropriate employees' cash bonus and directors' and supervisors' remuneration in the amounts of NT$75,786 and NT$10,610, respectively, for 2011.

Information on whether the Board of Directors resolves the distribution of the Company's earnings will be posted in the "Market Observation Post System" on the website of the Taiwan Stock Exchange.

E.     As of December 31, 2011, the Company's imputation tax credit account balance amounted to NT$1,314,391 as calculated based on the ending balance at the date of dividend distribution and the estimated credible tax ratio of 11.54% for the year 2011. The distribution of 2010 earnings has been carried out, and the actual credible tax ratio was 13.51% in 2010 and the expected credit tax ratio was 11.54% in 2011. The Company's undistributed earnings derived before and after the adoption of the imputation tax system amounted to NT$18,527 and NT$14,253,240, respectively.

 

(24)  Earnings per share

 

 

Effective January 1, 2008, the diluted EPS computation is performed under the assumption that bonuses to employees will be distributed in the form of shares, and if dilutive, those estimated shares would be included in the weighted-average number of common shares outstanding during the year. When calculating basic EPS, the number of shares issued for bonuses to employees is included in the weighted-average number of common shares outstanding during the year of the stockholders' meeting which resolves and confirms the share bonuses to employees from prior years' earnings. Since the issuance of share bonuses to employees are no longer distribution of stock dividends, the calculation of basic EPS and diluted EPS for all periods presented shall not be adjusted retroactively.

 

(25)  Personnel expenses, depreciation and amortization

Personnel expenses, depreciation and amortization incurred by function for the years ended December 31, 2011 and 2010 were as follows:

 

 

 

 

 

RELATED PARTY TRANSACTIONS

(1)    Names of related parties and their relationship with the Company

 

 

Note 1 : In September, 2010, since the Company partially disposed its investment in Farglory Life Insurance and lost its ability to exercise significant influence on Farglory Life Insurance, the investment is no longer accounted for under the equity method.  

Note 2 : Farglory Dome issued common stock in February and June, 2011, and the Company and the subsidiary - Farglory Construction obtained additional shares. As a result, the Company held directly and indirectly more than 50% of the voting shares of Farglory Dome. Therefore, the Company has included Farglory Dome as a consolidated entity statrting this year.

 

 

 

 

 

 



 

(2)    Significant transactions and balances with related parties

A.    Sales

 

(a)  For construction contracts commissioned from related parties, the contract prices were negotiated according to estimated construction cost plus reasonable management fee and profit. Payments were based on terms stated in the contracts.

(b)  As of December 31, 2011, the Company has no uncompleted contract commissioned with related parties. As for the O3 Farglory Financial Center contract undertaken by the subsidiary - Farglory Construction, please refer to Note 4 (5) for details.  

As of December 31, 2010, the details of contract price and progress billings on uncompleted contracts with related parties are as follows:

 

 

B.     Purchases and commission of construction contract

(a)  Purchases

 

 

(b) Commission of construction contracts

As of December 31, 2011 and 2010, contract prices and billed amounts were as follows:

 

For the construction contracts commissioned with related parties, the project price was negotiated according to the estimated construction cost plus reasonable management fee and profit. Payments were based on terms stated in the contracts.

 

C.    Notes receivable

 

D.    Accounts receivable

 

 

The following is a summary of project retention receivables as well as receivables with expected collection term over one year and their expected collection periods:

 

 

E.     Accounts payable

 

 

F.     Other receivables (classified as "other financial assets - current" )

 

Other receivables mainly consisted of commission receivables and amounts paid on behalf of related parties.  

 

 



 

G.     Other payables

 

Other payables mainly consisted of sales commission payables, payments received on behalf of related parties on land sales from revenue-sharing joint development arrangements, and payables of membership cards as gift for customers.

 

H.    Rental agreements

(a)    Rental revenues

 

The refundable deposits received as at December 31, 2011 and 2010 amounted to NT$3,484 and NT$5,476, respectively.

 

(b)    Rental costs and refundable deposits

 

I.      Borrowings from related parties

 

 

The above borrowings from related parties were non-interest bearing and were not secured by collateral.

J.      Sales commission and advertising expenditures (classified as "deferred selling expenses" and "selling expenses")

 

 

K.    The following sets forth the salaries and remuneration information of key management, such as directors, supervisors, general manager and vice general manager, etc.

 

 

(a)    Management service fees consisted of fare and other allowances.

(b)    Appropriation of earnings refers to cash bonuses to employees and remunerations to directors and supervisors which were recognized in the income statement of current period.

 

L.    Property transactions

(a)    In August, 2010, the Company purchased "transferable of Building Bulk" located in Da-An section Chin-Hwa strip of Taipei City from the Chairman of the Board, Chao Teng Hsiung, and the contract price was NT$48,891. 

(b)    In September 2010, the Company sold 54,000 (in thousands) common shares of Farglory Life Insurance to Shin Yu Investment in the amount of NT$457,623 (which excluded the security transaction tax amounting to NT$1,377), and recognized disposal gain in the amount of NT$504,244 (which included the proportionally deducted part of the capital reserve). 

 

M.    Commitments

As of December 31, 2011 and 2010, the Company had the following joint development contracts signed with related parties:

 

 

N.    Endorsements and Guarantees

(a)    The details of guarantees and endorsements provided by related parties to the subsidiary - Farglory Dome for the syndicated loans of financial institutions were as follows:

 

(b)    The shares of Farglory Dome held by the related parties above which provided guarantees and endorsements to Farglory Dome would be totally pledged to the consortium of the syndicated loans.  As of March 29, 2012, the pledge registration had not been completed.

(c)    Chao Teng Hsiung and Chao Wen Chia serve as the guarantors of the syndicated loans to Farglory Dome.

 

O.    Others

Chairman, Chao Teng Hsiung, provided land located in Hao-Tian Sec., Xizhi District, New Taipei City as a collateral for the Company's certain syndicated loans from financial institutions.



 

PLEDGED ASSETS

As of December 31, 2011 and 2010, the carrying amounts of pledged assets were as follows:

 

 

COMMITMENTS AND CONTINGENT LIABILITIES

As of December 31, 2011, other than those mentioned in Notes 4 (9) and 5(2), other commitments and contingent liabilities were as follows:

 

(1)    As of December 31, 2011, the Company has entered into pre-completion contracts for the sale of developed property amounting to NT$28,267,095 of which NT$7,220,588 has been received.

 

(2)    As of December 31, 2011, the Company has entered into contracts for the purchase of land but wherein it has not received the legal title amounting to NT$195,968, of which NT$156,775 has been paid.

 

(3)    The Company signed trust agreements with financial institutions for its inventory and construction in progress. As of December 31, 2011, the trust agreements the Company has entered into were as follows: E02A U-Town, H62A Farglory Fortuna, H68A Farglory Oscar, H73A Farglory Palazzo Milano, H80A Symphonie Der Farglory, H86A Farglory Central Park, H90A Farglory Left Bank Smart Urban-Rose Garden and H107A Eiffel Farglory.

 

(4)    Oscar Land Development Co., Ltd. signed a contract with the Company in the amount of $401,546 to consign the planning and design of the construction to the Company.  The Company issued a promissory note of $40,155 as a guarantee to Oscar Land Development Co., Ltd..

 

(5)    As of December 31, 2011, the Company had the following joint construction contracts signed with third parties:

 


 


 

 

(6)    As of December 31, 2011, major commitments and contingent events of the subsidiary - Farglory Dome are set forth below:

A.  In October 2006, the subsidiary - Farglory Dome signed the "Taipei Cultural Gym Area - Big-sized Indoor Gym Development Plan" and "Land Use Right Setting" with the Taipei City Government. The subsidiary -Farglory Dome took charge of building, operating and transferring the multi-functional Big-sized Indoor Gym and its affiliated facilities. The duration, totaled 50 years, starting at the date the contract was signed. The subsidiary - Farglory Dome should transfer all the operating assets to the Taipei City Government after the contract expired. The contract terms and the related information were as follows:

(a)  Building

a.      Under this agreement, the subsidiary - Farglory Dome shall obtain construction permit within 12 months after the agreement date. Furthermore, the subsidiary -  Farglory Dome shall complete the construction and obtain the usage permit within three years after obtaining the construction permit. However, because the Taipei City Government did not submit the land until March 31, 2009, the subsidiary - Farglory Dome was not able to complete the construction, pass required environmental and field investigation, and obtain related permits as scheduled. The subsidiary - Farglory Dome referred the delayed submission of the land to arbitration with the Arbitration Association of R.O.C. in October 2009, and requested that the rental to be paid to the Taipei City Government be postponed. However, the subsidiary - Farglory Dome obtained the construction permit on June 30, 2011, so it revoked the arbitration on August 5, 2011. Furthermore, the subsidiary - Farglory Dome had signed a loan contract on November 9, 2011 and sent a letter to Taipei City Government.  Therefore, the two defects above had been removed.

b.      For details of the financing agreement, please refer to Note7 (6) C.

(b)  Operating

a.      After obtaining the usage permit, the subsidiary - Farglory Dome shall draw up the charge standard and begin to operate within three months.

b.      If the subsidiary - Farglory Dome's operating performance is evaluated to be excellent, the subsidiary - Farglory Dome may apply for priority contract three years before the duration ended.

(c)  Finance terms

a.      Before obtaining the construction permit, the originators' shareholdings in the subsidiary - Farglory Dome would not be less than 50%. If shareholding proportion declines due to capital increase, the Company's shareholding in the subsidiary - Farglory Dome would not be less than 20%, and the other originators' shareholdings would not be less than 5%; both of the above would not be less than the original investment amount.

b.      The subsidiary - Farglory Dome should keep its own capital more than 20% within the permitted duration.

(d)  Guarantee

As of December 31, 2011, the subsidiary - Farglory Dome provided performance guarantee to the Taipei City Government, and the guarantee amount was NT$300,000.

(e)  Land-use right

a.      The duration of land-use right starts from the set up date to the development plan expiry date. The subsidiary - Farglory Dome will set up the land-use right after the land is transferred.

b.      For the duration of the contract, the subsidiary - Farglory Dome has to make an annual rental payment based on 1% of the land value declared by the government each year to the Taipei City Government. And the rental payment should at least be equal to the actual land value tax that the Taipei City Government pays.

(f)  Correction

a.      On September 10, 2009, the Control Yuan of R.O.C. questioned the significant flaws of the Public Construction Commission, Executive Yuan and the Taipei City Government in this project. Accordingly, the Taipei City Government revoked the original resolution for the contract. the subsidiary - Farglory Dome applied for remedy procedures to the Public Construction Commission, Executive Yuan. The Public Construction Commission, Executive Yuan ruled that the Taipei City Government shall not revoke the original resolution for the contract. On June 8, 2010, the Taipei City Government asked the subsidiary - Farglory Dome to obtain the construction permit before December 31, 2010. On August 6, 2010, the subsidiary - Farglory Dome received a notice from the Taipei City Government indicating that the Taipei City Government had agreed to extend the deadline for the subsidiary - Farglory Dome to make proper improvement before December 31, 2010. On March 3, 2011, the Taipei City Government extended the deadline again to July 3, 2011. the subsidiary - Farglory Dome passed the field investigation on December 9, 2010, passed the environmental investigation on May 26, 2011, and obtained the construction permit on June 30, 2011. So the subsidiary- Farglory Dome revoked the arbitration on August 5, 2011; furthermore, it had started the miscellaneous works of the construction on November 11, 2011.

 

B.     For the "Taipei Cultural Gym Area - Big-sized Indoor Gym Development Plan", the subsidiary - Farglory Dome has entered into significant contracts amounting to NT$15,872,919, which has not been paid as of December 31, 2011.

C.    On November 9, 2011, the subsidiary - Farglory Dome signed a syndicated loan contract with 11 banks, with Mega International Commercial Bank as the lead bank, for the construction of Taipei Cultural Gym Area - Big-sized Indoor Gym. The major terms of the contract are as follows:

(a)    A-type loan line is NT$15,100 million.  The loan period is 15 years from the first draw-down date, including a 4-year grace period.

(b)    B-type loan line is NT$300 million.  The loan period is 5 years.  The loan can be renewed according to the construction contract and the syndicated loan contract.  However, the last-time loan period may be less than 5 years and the longest loan period should not be later than the final repayment date of the A-type loan.

(c)    The major commitments of  the subsidiary - Farglory Dome are as follows

a.     After the construction of the superficies, buildings and ancillary facilities by the subsidiary - Farglory Dome under the project is completed and their ownership is registered, all the assets above and any equipment, machinery and ancillary equipment acquired under the project should be pledged as collaterals for the syndicated loan.

b.     The following financial ratios and standards should be maintained during the loan period:

230%

190%

120%

advances from stockholders)/tangible net equity

2016 to 2017

2018 to 2027

1.1

1.2

2016

2017

2018 to 2027

70%

80%

100%

The above financial ratios are reviewed based on the semi-annual and annual financial statements of the subsidiary - Farglory Dome audited by independent accountants, as approved by the managing bank.  Interest coverage is reviewed annually, liability ratio and current ratio are reviewed semi-annually.

As of March 29, 2012, the syndicated loans have not been drawn down.

 

 

(7)    A.  As of December 31, 2011, major commitments and contingent events of the subsidiary -

Farglory Construction were set forth below:

Farglory Construction Co., Ltd., Taiwan OBAYASHI Construction Co., Ltd. and Japan OBAYASHI Construction Co., Ltd. Taiwan branch intend to jointly participate in the construction of Taipei Cultural Gym Area - Big-sized Indoor Gym of the subsidiary - Farglory Dome Co., Ltd. and signed a joint ventures agreement together in September, 2011. According to the agreement, the project costs and revenues should be allocated to both sides in proportion to their undertaking percentage, and they bear joint liabilities to the owner of the project.  The total contract price is $15,500,000 (exclusive of tax). The undertaking percentage of the subsidiary - Farglory Construction Co., Ltd per the agreement is 45%. The contract price amounted to NT$15,500,000(VAT excluded) and the proportion of the subsidiary - Farglory Construction was 45%.

B.     The following is a summary of major litigations of the subsidiary - Farglory Construction Co., as of December 31, 2011:  

a. For the "Metro Park" construction undertaken by the subsidiary - Farglory Construction Co., a lawsuit was filed in 1998 by Liang Guei Ruei and 78 other individuals against the subsidiary, Taipei Rapid Transit Corporation as well as other companies involved in the construction, a total of eight parties, for damages caused to the neighborhood housing and foundation. The joint liability lawsuit claims for compensation amounting to NT$31,611. Taiwan Banqiao District Court dismissed the case. Some of the plaintiffs filed an appeal with the Taiwan High Court which was also dismissed. The second appeal was made with the Supreme Court of R.O.C. In July 2005, the Supreme Court overruled the decision made by the Taiwan High Court. The case was passed back to the Taiwan High Court. In November 2009, the Taiwan High Court ruled that Taipei Rapid Transit Corporation should pay plaintiffs NT$10,731. However, for the subsidiary's part, the dismissed decision previously ruled by Taiwan High Count remained effective; the plaintiffs of the case can make an appeal again.

b.      The "Farglory Tian-Mu" construction undertaken by the subsidiary - Farglory Construction and Founding Construction and Development Co., Ltd. damaged the neighborhood housing during the construction period. The total damage assessed amounted to NT$22,788. The subsidiary - Farglory Construction shall be liable for 51% of total damage, which amounts to NT$11,622 and Founding Construction and Development Co., Ltd. shall be liable for 49% of total damage, which amounts to NT$11,166. In order to avoid delay in obtaining usage permit, the subsidiary - Farglory Construction quickly settled with the victims. The subsidiary - Farglory Construction paid the victims on behalf of Founding Construction and Development Co., Ltd. in the amount of NT$10,611 (excluding NT$555 for the resident "Fong-Pin"), which was the amount Founding Construction and Development Co., Ltd. shall be liable. The victims agreed to transfer the creditors' rights (Founding Construction and Development Co., Ltd.'s liabilities) to the subsidiary - Farglory Construction. In March 2009, the subsidiary - Farglory Construction filed a lawsuit against Founding Construction and Development Co., Ltd., claiming for damages in the amount of NT$10,074. In May, 2010, the Taiwan Shihlin District Court ruled that Founding Construction and Development Co., Ltd. shall pay the subsidiary - Farglory Construction NT$10,074 plus interest. However, Founding Construction and Development Co., Ltd. filed an appeal with the Supreme Court of R.O.C, and the case is currently in trial. In addition, the subsidiary - Farglory Construction filed another lawsuit against Founding Construction and Development Co., Ltd. for the creditor's right relating to the payment to the victim, Mr. Hsieh, in the amount of NT$538, and the case is currently in trial in the Taiwan Taipei District Court.

 

8. SIGNIFICANT CATASTROPHE

None.

 

9. SIGNIFICANT SUBSEQUENT EVENTS

Other than those mentioned in Notes 4(17)E and 4(23)D, there was no significant subsequent events.

 

10.OTHERS

(1)    As of December 31, 2011 and 2010, the amounts of assets and liabilities relating to construction contracts of the Company and its subsidiary classified in current accounts based on the operating cycle were as follows:

 


(2)    Fair value of financial instruments

 


The methods and assumptions used to estimate the fair values of the above financial instruments are summarized below:

A. For short-term financial instruments, due to their short maturities, the carrying amounts approximate their fair values. This applies to cash and cash equivalents, notes and accounts receivable, other financial assets - current (including restricted assets and refundable deposits received on construction projects), short-term loans, commercial papers payable, notes and accounts payable.

B. Fair values for financial assets at fair value through profit or loss were based on the quoted price in an open market.

C. Fair values for long-term loans (including the portion of long-term liabilities due within one year) were estimated based on the discounted expected future cash flows. Discount rate was determined based on the Company's borrowing rate.

D. Fair values for convertible bonds were estimated based on the present value of expected future cash flows. Discount rates were determined based on the initial effective interest rate of the convertible bonds with similar issue conditions as that of the Company.

E. Fair values for refundable deposits and guarantee deposits received were estimated based on the present value of expected future cash flows. Discount rates were determined based on the one-year certificate deposit interest rate offered by the Postal Remittances and Savings Bank. However, they were not estimated when the amount was not significant.

F. The fair values of interest rate swaps were determined based on amounts estimated to be received or paid assuming that the contracts were settled as of the reporting date. The fair values of derivative instruments embedded in convertible bonds were estimated using a valuation method. The estimations and assumptions used in the valuation method by the Company are consistent with those used by the market participants when determining the price of financial instruments.

(3)  Information on significant financial instrument gains/losses and equity items

For the years ended December 31, 2011 and 2010, the Group's total interest expense for financial liabilities that were not at fair value through profit or loss amounted to NT$275,064 and NT$150,027, respectively.

(4)   Information on interest rate risk positions

As of December 31, 2011 and 2010, the Group's financial assets subjected to fair value risk due to the change in interest rate amounted to NT$8,009 and NT$8,288, respectively. The financial liabilities subjected to fair value risk due to the change in interest rate amounted to NT$87,234 and NT$796,451, respectively. The financial liabilities subjected to cash flow risk due to the change in interest rate were amounted to NT$17,638,766 and NT$6,035,993, respectively.



 

(5)   Financial risk management

The major financial risk that the Group was mainly exposed to was the risk associated with investing in financial instruments. The Group had established a stringent risk management policy, by which all financial investment activities were evaluated for potential market risk, credit risk, liquidity risk and cash flow risk and investments decisions were made based on policies to minimize risk exposure.

(6)   Information on significant financial risk

A.   Equity financial instruments

(a)  Market risk

The Group's business is engaged in foreign currency transactions that are affected by fluctuations in the exchange rate. The significant financial assets and liabilities denominated in foreign currency were as follows

 

(b)    Credit risk

For financial assets at fair value through profit or loss, the Group had carried out the transactions through the Taiwan Stock Exchange and GreTai Securities Market. These transactions are carried out only with counterparties with good credit standing and breaches of agreements is not expected. Thus, the likelihood that credit risk would arise is remote.

Loan guarantees provided by the Group are in compliance with the Group's "Procedures for Provision of Endorsements and Guarantees" and are only provided to affiliated companies of which the Group owns directly or indirectly more than 50% ownership. In the event that these related parties fail to comply with loan agreements with banks, the maximum loss to the Group is the total amount of loan guarantees as listed above.

(c)    Liquidity risk

The financial assets at fair value through profit or loss held by theGroup were traded in active markets and it is expected that these financial assets would be readily sold at amounts approximate to their fair values.

(d)    Cash flow risk due to the fluctuation of interest rate

The equity financial instruments held by the Group were not interest-bearing instruments, and thus, the Group was not subject to cash flow risk arising from the fluctuation of the interest rate.

B.    Notes and accounts receivable

(a)     Market risk

As the notes and accounts receivable held by the Group was due within one year or one operating cycle, it was assessed that the Group was not exposed to significant market risk.

(b)     Credit risk

The accounts receivable with third parties held by the Group was covered by collateral. As for the receivables with related parties, the counterparties are evaluated to be of good credit standing. Therefore, it was assessed that the Group was not exposed to significant credit risk from receivables.

(c)     Liquidity risk

It was assessed that Group was not exposed to significant liquidity risk as the Group's notes and accounts receivable were all due within one year or one operating cycle.

(d)     Cash flow risk due to the fluctuation of interest rate

It was assessed that the Group was not exposed to significant cash flow risk due to change in interest rate as the notes and accounts receivable of Group's receivables were all due within one year or one operating cycle.

C.    Loans

(a)      Market risk

Loans of the Group were with floating interest rate, and thus the Group did not expect to be exposed to significant market risk.

(b)     Credit risk

It was assessed that the Group was not exposed to significant credit risk.

(c)      Liquidity risk

As the working capital of the Group was considered sufficient to support its funding needs, the Group did not expect to be exposed to significant liquidity risk.

(d)     Cash flow risk due to the fluctuation of the interest rate

Loans of the Group were with floating interest rate, and thus the effective interest rate on the loan fluctuated according to changes in market interest rate, causing the expected future cash flow to fluctuate.

 

D.    Notes and accounts payable

(a)  Market risk

It was assessed that the Group was not exposed to significant market risk as the Group's notes and accounts payable were due within one year or one operating cycle.

(b)  Credit risk

It was assessed that the Group was not exposed to significant credit risk.

(c)  Liquidity risk

It was assessed that the Group was not exposed to significant liquidity risk as the Group's notes and accounts payable were due within one year or one operating cycle, and the working capital of the Group was considered sufficient in meeting its funding needs.

(d)  Cash flow risk due to the fluctuation in interest rate

It was assessed that the Group was not exposed to significant cash flow risk arising from the change in the interest rate as the Group's notes and accounts payable were due within one year or one operating cycle.

E.    Bonds payable

(a)   Market risk

The fair values of the options embedded in the zero-coupon convertible bonds issued by the Company, including conversion option, call option and put option were affected by fluctuations in market equity prices. As the Company can exercise the call option to lower its exposure to market risk, it did not expect to be exposed to significant market risk.  

(b)  Credit risk

As the debt instruments issued by the Company were secured by Taiwan Cooperative Bank, there is no credit risk associated with the instruments.

(c)   Liquidity risk

It was assessed that the Company was not exposed to significant liquidity risk as the Company's working capital was sufficient to meet its funding needs.

(d)  Cash flow risk due to the fluctuation of the interest rate

As the bonds issued by the Company were zero-coupon bonds, there was no significant cash flow risk due to the change in the interest rate.

 

(7) Other significant events or matters relating to the presentation of the consolidated financial statements: None.

 


11.    ADDITIONAL DISCLOSURE REQUIRED BY SECURITIES AND FUTURES BUREAU

A. Information on significant transactions

Pursuant to the disclosure requirements under the Securities and Exchange Regulations, significant transactions for the year ended December 31, 2011 were as follows:

(1) Loans to others attributed to financing activities as of December 31, 2011: None.

(2) Endorsements and guarantees provided by the Company to others as of December 31, 2011:

 

Note A: The number filled for endorsements and guarantees provided by the Company to others are as follows:

(a) The issuers is numbered "0".

(b) The investee companies are numbered starting from "1".

Note B: There are six kinds of relationships between the endorser / guarantor and the party being endorsed / guaranteed:

(a) Trading partner, marked "1".

(b) Majority owned subsidiary, marked "2".

(c) The Company and the subsidiary own over 50% ownership of the investee company, marked "3".

(d) A subsidiary jointly owned by the Company and the Company's directly-owned subsidiary, marked "4".

(e) Guaranteed by the Company according to the construction contract, marked "5".

(f) An investee company which is endorsed / guaranteed by the shareholders in accordance with their shareholding proportion since the jointly investment, marked "6".

Note C: Calculation for limit on endorsements / guarantees provided for a single party is as follows:

(a) For the subsidiary which the Company holds more than 90% of the shares, the limit shall be less than the 20% of the Company's net worth.

(b) Limit on other endorsements / guarantees shall be less than 20% of the Company's net worth.

(c) For the subsidiary which the Group holds more than 90% of the shares directly or indirectly, the limit shall be less than the 30% of the Group's net worth.

(d) Limit on other endorsements / guarantees is less than 20% of the Group's net worth.

Note D: Calculation for ceiling on total amount on endorsements / guarantees provided is as follows:

(a) The Company shall keep the total amount lower than 40% of its net worth.

(b) The Company and the subsidiary shall keep the total amount lower than 50% of its net worth.

Note E: The Company provides guarantee and endorsement to Straits Construction Investment (Holding) Ltd. The actual amount drawn down was NT$2,504,723.

Note F: The excess over the guarantee and endorsement limit provided by Farglory Construction Co., Ltd. to Farglory Dome Co., Ltd., amounting to $367,100 , is guaranteed by Farglory Land Development Co., Ltd.

(3) Details of marketable securities held as of December 31, 2011:

 

 

 

 

(4) Accumulated additions and disposals of individual marketable security exceeding the amount of NT$100,000 or 20% of the Company's contributed capital: ( thousand shares/units) For the year ended December 31, 2011.

 


 

 

 

(5) Acquisition of real estate exceeding the amount of NT$100,000 or 20% of the Company's contributed capital for the year ended December 31, 2011:

 

 

 

(6) Disposals of real estates exceeding the amount of NT$100,000 or 20% of the Company's contributed capital for the year ended December 31, 2011:

 



 

(7) Related party transactions with purchases or sales exceeding the amount of NT$100,000 or 20% of the Company's contributed capital for the year ended December 31, 2011:

 

(8) Receivables from related parties exceeding the amount of NT$100,000 or 20% of the Company's contributed capital as of December 31, 2011:

 

(9)    Information on derivative instruments transactions: N/A

 

B. Related information of investee companies as of December 31, 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

C. Information on investment in Mainland China

  (1) Related information of investment in Mainland China:

 

 

  (2) The ceiling on investment in Mainland China:

 

Note A: Invest in Mainland China through Straits Construction Investment Management and Consultancy (Shanghai) Co., Ltd. .

Note B: The column "Investment income (loss) recognized by the Company for the period": the financial statements were audited by international accounting firms which collaborate with accounting firms in the R.O.C. .

Note C: For details of the approval information, please refer to Note 4(7)E.

Note D: The ceiling on investment was calculated based on 60% of the net stockholders' equity on December 31, 2011.

Note E: $7,664,800 (USD $260,000 in thousands) of the investment in Straits Investment Ltd., Nanjing was raised by the company in the third territory.

 (2) Major transactions with investee companies in Mainland China: None.

D. Information on transactions between Parent Company and Subsidiaries or between the subsidiaries

 

Note A: The numbers filled for inter-company transactions are as follows:

(a)  The parent company is numbered "0".

(b)  The subsidiaries are numbered starting from "1".

Note B: Relationship with the transaction company:

(a)  Parent company to subsidiary is numbered "1"

(b)  Subsidiary to parent company is numbered "2"

(c)  Subsidiary to subsidiary is numbered "3"

Note C: For the calculation on the percentage of consolidated total operating revenues or of consolidated total assets, for balance sheet accounts, the calculation was based on the ratio of ending balance of such accounts over the consolidated total assets; as for income statement accounts, the calculation was based on the ratio of the accumulated amount during the period over the consolidated total operating revenues.

Note D: For the construction contracts commissioned through the related party, the contract prices were negotiated and progress payments were made in accordance with terms under the contracts.

12.    Operating Segment Information

(1)General Information

Management has determined the operating segments based on the reports reviewed by the chief operating decision-maker that are used to make strategic decisions.

The chief operating decision-maker manages the Company from the perspective of "products" which emphasizes on the marketing of development and construction projects. Thus, the Company considers development segment and construction segment as the reportable segments.  

 

(2)Measurement of Segment Information

The Company adopts the same methods in measurement not only in preparing net income (loss) before tax of each department for the chief operating decision-maker but revenues and expenses shown in the income statements. The chief operating decision-maker assesses the performance of each department according to the net income (loss) before tax. 

 

(3)The segment information provided to the chief operating decision-maker for the reportable segments for the years ended December 31, 2011 and 2010 is as follows:

 



 

Reconciliation for segment profit (loss), assets and liabilities;

Information for the segments and the subsidiaries' reportable segments and income from continuing operations before income tax is as follows:

 

Reportable segments' assets are reconciled to total assets as follows:

 

 

Revenue information by category:

Breakdown of the revenue from all sources is as follows:

 

 

 

 



 

(1) Revenue information by geographic area:

The revenue information by region for the years ended December 31, 2011 and 2010 is as follows:

 

 

(2) Information on major customers:

For the years ended December 31, 2011 and 2010, the operating revenue from each customer did not exceed 10% of total operating revenue in the income statement; thus, not applicable.

 

 


13.Disclosures relating to the adoption of IFRSs

Pursuant to the regulations of the Financial Supervisory Commission, Executive Yuan, R.O.C., effective January 1, 2013, a public company whose stock is listed on the Taiwan Stock Exchange Corporation or traded in the GreTai Securities Market should prepare financial statements in accordance with the International Financial Reporting Standards, International Accounting Standards, and Interpretations/bulletins (collectively referred herein as the IFRSs) developed by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee as recognized by the Financial Supervisory Commission, Executive Yuan, R.O.C.

The Company discloses the following information in advance prior to the adoption of IFRSs under the requirements of Jin-Guan-Zheng-Shen-Zi Order No. 0990004943 of the Financial Supervisory Commission, dated February 2, 2010:

A. Major contents and status of execution of the Company's plan for IFRSs adoption:

The Company has formed an IFRSs group headed by the Company's vice president of Financial Department, which is responsible for setting up a plan relative to the Company's transition to IFRSs. The major contents and status of execution of this plan are outlined below:

 

B.  Material differences that may arise between current accounting policies used in the preparation of financial statements and IFRSs and "Rules Governing the Preparation of Financial Statements by Securities Issuers" that will be used in the preparation of financial statements in the future: The Company uses the IFRSs already recognized currently by the Financial Supervisory Commission and the "Rules Governing the Preparation of Financial Statements by Securities Issuers" that will be applied in 2013 as the basis for evaluation of material differences in accounting policies as mentioned above. However, the Company's current evaluation results may be different from the actual differences that may arise when new issuances of or amendments to IFRSs and relevant interpretations that are subsequently recognized by the Financial Supervisory Commission or amendments to the "Rules Governing the Preparation of Financial Statements by Securities Issuers" come in the future.

Material differences identified by the Company that may arise between current accounting policies used in the preparation of financial statements and IFRSs and "Rules Governing the Preparation of Financial Statements by Securities Issuers" that will be used in the preparation of financial statements in the future are set forth below:

(a)    Financial assets: equity instruments

In accordance with the amended "Rules Governing the Preparation of Financial Statements by Securities Issuers", dated July 7, 2011, unlisted stocks and emerging stocks held by the Company should be measured at cost and recognized in "Financial assets carried at cost". However, in accordance with IAS 39, "Financial Instruments: Recognition and Measurement", investments in equity instruments without an active market but with reliable fair value measurement (i.e. the variability of the estimation interval of reasonable fair values of such equity instruments is insignificant, or the probability for these estimates can be made reliably) should be measured at fair value.

(b)   Business combinations

a.     Although no rules concerning the recognition of costs related to the acquisition in a business combination are specified in current accounting standards in R.O.C., in practice, certain acquisition-related costs are usually viewed as part of the acquisition cost of the acquiring corporation. However, in accordance with IFRS 3, "Business Combinations", all acquisition-related costs must be expensed by the acquiring corporation when such costs are incurred and services are received.

b.     In accordance with current accounting standards in R.O.C., the minority interest on the consolidated financial statements should be measured based on the book value of the acquired corporation. In accordance with IFRS 3, "Business Combinations", the non-controlling interest in the acquired corporation should be measured at fair value (or at the non-controlling interest's proportionate share of the acquired corporation's identifiable net assets).

(c)   Investments in associates/long-term equity investments accounted for under equity method

In accordance with current accounting standards in R.O.C., for long-term equity investment under equity method, if an investor company loses its significant influence over an investee company because of a decrease in ownership or other reasons and therefore ceases using the equity method, the cost of investment will be the book value at the time of change. If there is a balance on additional paid-in capital or other equity adjustment items from the long-term equity investment, then an investor company shall calculate its share when the investment is sold, so that the pro-rata gains or losses from the disposal of the long-term investment can be accounted for. In accordance with IAS 28, "Investments in Associates", when an investment ceases to be an associate, the fair value of the remaining investment at the date when it ceases to be an associate should be regarded as its fair value on initial recognition of the financial asset. If there is a balance on additional paid-in capital or other equity adjustment items from the long-term equity investment, it shall be written off totally by the investor company when the investment is sold, so that the gains or losses from the disposal of the long-term investment can be accounted for.

(d)     Investment property

a.     In accordance with current accounting standards in R.O.C., the Company's property that is leased to others is presented in 'Property, plant and equipment' and 'Other assets' account. In accordance with IAS 40, "Investment Property", property that meets the definition of investment property is classified and accounted for as 'Investment property'.

b.     In accordance with IAS 40, "Investment Property", the land superficies which is leased to others should be reclassified to 'long-term prepayment' for the land is held for investment.

(e) Dismantling, removing and restoring obligations/decommissioning liabilities

For those property, plant and equipment acquired by the Company before the issuance of EITF 97-340, with a binding agreement bearing dismantling, removing and restoring obligations in the future, the expenses of dismantling, removing the asset and restoring the site that may occur in the future are not estimated nor included as part of their costs, but are recognized as a liability. However, in accordance with IAS 16, "Property, Plant and Equipment", costs of property, plant and equipment include the original estimated costs of dismantling, removing the asset and restoring the site.

(f)    Long-term construction contracts

If the Company is required to provide construction services together with construction materials in order to perform its contractual obligation to deliver real estate to the buyers, the revenue from the 'off plan' houses sale transactions is recognized on a percentage-of-completion basis, simultaneously when it meets the recognition criteria specified in EITF 78-099. An agreement for the construction of real estate is a construction contract within the scope of IAS 11, "Construction Contracts", and IAS 11 applies only when the buyer is 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. The buyers of the Company's 'off plan' houses sale contracts have only limited ability to affect the design of the real estate or have ability to specify minor changes to the basic design of the real estate only. Therefore, in accordance with IFRIC 15, "Agreements for the Construction of Real Estate", the Company's 'off plan' houses sale contracts belong to the agreements of sale of goods, which are within the scope of IAS 18, "Revenue" and, accordingly, revenue from those 'off plan' houses sale contracts is accounted for as sale of goods under IAS 18.

(g)   Pensions

a.     The discount rate used to calculate pensions shall be determined with reference to the factors specified in R.O.C. SFAS 18, paragraph 23. However, IAS 19, "Employee Benefits", requires an entity to determine the rate used to discount employee benefits with reference to market yields on high quality corporate bonds that match the currency at the end day of the reporting period and duration of its pension plan; when there is no deep market in corporate bonds, an entity is required to use market yields on government bonds (at the end day of the reporting period) instead.

b.     In accordance with the Company's accounting policy, the unrecognized transitional net benefit obligation should be amortized on a straight-line basis over the average remaining service period of employees still in service and expected to receive benefits. However, since it is the first time adoption of International Financial Reporting Standards, the transitional rule of IAS 19 "Employee Benefits " is not applicable. Therefore, the Group did not recognize the transitional liabilities.

c.     In accordance with current accounting standards in R.O.C., actuarial pension gain or loss of the Company is recognized in net pension cost of current period using the 'corridor' method. However, IAS 19, "Employee Benefits", requires that actuarial pension gain or loss should be recognized immediately in other comprehensive income.

(h)   Employee benefits

The current accounting standards in R.O.C. do not specify the rules on the cost recognition for accumulated unused compensated absences. The Company recognizes such costs as expenses upon actual payment. However, IAS 19, "Employee Benefits", requires that the costs of accumulated unused compensated absences should be accrued as expenses at the end of the reporting period.

(i)    Share-based payment

Compensation cost of cash capital increase reserved for employee preemption incurred before December 31, 2007 was not recognized as an expense by the Group. However, according to IFRS 2, "Share-based Payment", the cost of the share-based payment arrangements stated above should be expensed at the fair value of the equity instruments over the vesting period.

(j)    Income taxes

a.     In accordance with current accounting standards in R.O.C., a deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or noncurrent. However, a deferred tax asset or liability that is not related to an asset or liability for financial reporting, should be classified as current or noncurrent according to the expected time period to realize or settle a deferred tax asset or liability. However, under IAS 1, "Presentation of Financial Statements", an entity should not classify a deferred tax asset or liability as current.

b.     In accordance with current accounting standards in R.O.C., when evidence shows that part or whole of the deferred tax asset with 50% probability or above will not be realized, an entity should reduce the amount of deferred tax asset by adjusting the valuation allowance account. In accordance with IAS 12, "Income Taxes", a deferred tax asset should be recognized if, and only if, it is considered highly probable that it will be realized.

(k)   Capitalization of interest

Regarding the interest (borrowing costs) included in the cost of inventory, the regulations on borrowing costs that should be capitalized in the current accounting standards in R.O.C. are different from the regulations in IAS 23, "Borrowing Costs".  IAS 23 specifies that for the part of project borrowings, borrowing costs that should be capitalized are the actual borrowing costs incurred less any income earned on the temporary investment of such

borrowings.

 

Some of the above differences may not have a material effect on the Company in transition to IFRSs due to the exemption rules in IFRS 1, "First-time Adoption of International Financial Reporting Standards", adopted by the Company.

 

 

 

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