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Financial Risk and Fair Value Disclosures

12 Months Ended

Dec. 31, 2023

Disclosure of detailed information about financial instruments [abstract]

Financial Risk and Fair Value Disclosures

11.	FINANCIAL RISK AND FAIR VALUE DISCLOSURES

(1)

Categories of financial instruments


	As of December 31,
Financial Assets	2022		2023
	NT$		NT$
	(In Thousands)		(In Thousands)
Financial assets at fair value through profit or loss	$	18,490,569	$	17,138,461
Financial assets at fair value through other comprehensive income		15,189,600		17,683,960
Financial assets measured at amortized cost
Cash and cash equivalents (cash on hand excluded)		173,812,754		132,547,415
Receivables		38,783,086		32,292,914
Refundable deposits		2,749,691		2,708,823
Other financial assets		869,308		6,353,768

Total	$	249,895,008	$	208,725,341


	As of December 31,
Financial Liabilities	2022		2023
	NT$		NT$
	(In Thousands)		(In Thousands)
Financial liabilities at fair value through profit or loss	$	438,397	$	1,019,362
Financial liabilities measured at amortized cost
Short-term loans		—		13,530,000
Payables		58,893,871		52,393,399
Guarantee deposits (current portion included)		30,757,001		41,599,386
Bonds payable (current portion included)		28,184,687		38,359,352
Long-term loans (current portion included)		19,279,342		22,883,344
Lease liabilities		5,737,095		5,393,187
Other financial liabilities		21,449,487		—

Total	$	164,739,880	$	175,178,030

(2)

Financial risk management objectives and policies

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

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

(3)

Market risk

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

Foreign currency risk

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

The Company applies natural hedges on the foreign currency risk arising from purchases or sales, and utilizes spot or forward exchange contracts to manage foreign currency risk and the net effect of the risks related to monetary financial assets and liabilities is minor. The notional amounts of the foreign currency contracts are the same as the amount of the hedged items. In principle, the Company does not carry out any forward exchange contracts for uncertain commitments. Furthermore, as net investments in foreign subsidiaries are for strategic purposes, they are not hedged by the Company.

The foreign currency sensitivity analysis of the possible change in foreign exchange rates on the Company’s profit is performed on significant monetary items denominated in foreign currencies as of the end of the reporting period. When NTD strengthens/weakens against USD by 10%, the profit for the years ended December 31, 2021, 2022 and 2023 decreases/increases by NT$1,104 million, NT$1,305 million and NT$620 million, respectively. When RMB strengthens/weakens against USD by 10%, the profit for the years ended December 31, 2021, 2022 and 2023 increases/decreases by NT$375 million and decreases/increases by NT$572 million, NT$582 million, respectively. When JPY strengthens/weakens against USD by 10%, the profit for the years ended December 31, 2021, 2022 and 2023 decreases/increases by NT$434 million, NT$538 million and NT$290 million, respectively.

Interest rate risk

The Company is exposed to interest rate risk arising from borrowing at floating interest rates. All of the Company’s bonds have fixed interest rates and are measured at amortized cost. As such, changes in interest rates would not affect the future cash flows. On the other hand, as the interest rates of the Company’s short-term and long-term bank loans are floating, changes in interest rates would affect the future cash flows but not the fair value. Please refer to Note 6(11), (13) and (14) for the range of interest rates of the Company’s bonds and bank loans.

At the reporting dates, a change of 10 basis points of interest rate in a reporting period could cause the profit for the years ended December 31, 2021, 2022 and 2023 to decrease/increase by NT$39 million, NT$19 million and NT$36 million, respectively.

Equity price risk

The Company’s listed and unlisted equity securities, investments in convertible bonds and exchange right of the exchangeable bonds issued are susceptible to market price risk arising from uncertainties about future performance of equity markets. The Company’s equity investments are classified as financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income, the investments in convertible bonds which contain the right of conversion to equity instruments are classified as financial assets at fair value through profit or loss, and the exchange right of the exchangeable bonds issued is classified as financial liabilities at fair value through profit or loss as it does not satisfy the definition of an equity component. Please refer to Note 6(2), (3) and (12) for the relevant information.

The sensitivity analysis for the equity instruments is based on the change in fair value as of the reporting date. A change of 5% in the price of the aforementioned financial assets at fair value through profit or loss of listed companies could increase/decrease the Company’s profit for the years ended December 31, 2021, 2022 and 2023 by NT$393 million, NT$285 million and NT$270 million, respectively. A change of 5% in the price of the aforementioned financial assets at fair value through other comprehensive income of listed companies could increase/decrease the Company’s other comprehensive income (loss) for the years ended December 31, 2021, 2022 and 2023 by NT$867 million, NT$579 million and NT$722 million, respectively.

Please refer to Note 11(7) for sensitivity analysis information of other equity instruments or derivatives that are linked to such equity instruments whose fair value measurement is categorized under Level 3.

(4)

Credit risk management

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

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

As of December 31, 2022 and 2023, accounts receivable from the top ten customers represent 56% and 67% of the total accounts receivable of the Company, respectively. The credit concentration risk of other accounts receivable is insignificant.

(5)

Liquidity risk management

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

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


	As of December 31, 2022
	Less than 1 year		2 to 3 years		4 to 5 years		> 5 years		Total
	NT$		NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Non-derivative financial liabilities
Payables	$	58,767,584	$	—	$	—	$	—	$	58,767,584
Guarantee deposits		238,416		3,867,087		169,419		26,482,079		30,757,001
Bonds payable (Note)		322,155		8,742,481		10,593,656		4,151,128		23,809,420
Long-term loans		3,246,153		8,425,744		7,798,280		3,031,293		22,501,470
Lease liabilities		658,092		1,222,822		1,207,385		4,299,914		7,388,213
Other financial liabilities		17,233,129		4,308,513		—		—		21,541,642

Total	$	80,465,529	$	26,566,647	$	19,768,740	$	37,964,414	$	164,765,330


	As of December 31, 2023
	Less than 1 year		2 to 3 years		4 to 5 years		> 5 years		Total
	NT$		NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Non-derivative financial liabilities
Short-term loans	$	13,780,612	$	—	$	—	$	—	$	13,780,612
Payables		52,202,821		—		—		—		52,202,821
Guarantee deposits		1,476,430		3,556,179		25,955,654		10,611,123		41,599,386
Bonds payable (Note)		14,797,772		10,980,506		12,321,345		2,132,963		40,232,586
Long-term loans		2,872,168		14,406,101		5,071,743		2,940,524		25,290,536
Lease liabilities		649,879		1,311,239		1,223,724		3,712,729		6,897,571

Total	$	85,779,682	$	30,254,025	$	44,572,466	$	19,397,339	$	180,003,512

Note: UMC issued unsecured exchangeable bonds where the bondholders may exchange the bonds at any time on or after October 8, 2021 and prior to June 27, 2026 into NOVATEK common shares which UMC holds and accounts for as equity instruments investments measured at fair value through other comprehensive income. The balances of equity instruments investments measured at fair value through other comprehensive income were NT$3,213 million and NT$5,753 million as of December 31, 2022 and 2023, respectively. All or any portion of the bonds will be redeemable at put price at the option of bondholders on July 7, 2024 at 98.14% of the principal amount.

(6)

Foreign currency risk management

UMC entered into forward exchange contracts for hedging the exchange rate risk arising from the net monetary assets or liabilities denominated in foreign currency. As of December 31, 2022 and 2023, all of these contracts have been settled.

(7)

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability.

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

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

A fair value measurement of a

non-financial

asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

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

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

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

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

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

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by

re-assessing

categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

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


	As of December 31, 2022
	Level 1		Level 2		Level 3		Total
	NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Financial assets:
Financial assets at fair value through profit or loss, current	$	669,444	$	—	$	36,474	$	705,918
Financial assets at fair value through profit or loss, noncurrent		6,626,088		468,164		10,690,399		17,784,651
Financial assets at fair value through other comprehensive income, current		3,213,057		—		—		3,213,057
Financial assets at fair value through other comprehensive income, noncurrent		8,366,276		—		3,610,267		11,976,543
Financial liabilities:
Financial liabilities at fair value through profit or loss, current		—		—		438,397		438,397


	As of December 31, 2023
	Level 1		Level 2		Level 3		Total
	NT$		NT$		NT$		NT$
	(In Thousands)		(In Thousands)		(In Thousands)		(In Thousands)
Financial assets:
Financial assets at fair value through profit or loss, current	$	443,601	$	—	$	—	$	443,601
Financial assets at fair value through profit or loss, noncurrent		6,424,475		19,300		10,251,085		16,694,860
Financial assets at fair value through other comprehensive income, current		5,753,379		—		—		5,753,379
Financial assets at fair value through other comprehensive income, noncurrent		8,693,193		—		3,237,388		11,930,581
Financial liabilities:
Financial liabilities at fair value through profit or loss, current		—		—		1,019,362		1,019,362

Fair values of financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income that are categorized into Level 1 are based on the quoted market prices in active markets. If there is no active market, the Company estimates the fair value by using the valuation techniques (income approach and market approach) in consideration of cash flow forecast, recent fund raising activities, valuation of similar companies, individual company’s development, market conditions and other economic indicators.

If there are restrictions on the sale or transfer of a financial asset, which are a characteristic of the asset, the fair value of the asset will be determined based on similar but unrestricted financial assets’ quoted market price with appropriate discounts for the restrictions. To measure fair values, if the lowest level input that is significant to the fair value measurement is directly or indirectly observable, then the financial assets are classified as Level 2 of the fair value hierarchy, otherwise as Level 3.

During the year ended December 31, 2022, there was no transfers between Level 1 and Level 2 fair value measurements. During the year ended December 31, 2023, as the private placement ordinary shares held by the Company’s subsidiary became publicly listed on the

over-the-counter

market in Taiwan in May 2023, the Company transferred NT$655 million of the financial assets at fair value through profit or loss measured at the end of the reporting period in the quarter from Level 2 to Level 1 fair value measurement.

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


	Financial assets at fair value through profit or loss															Financial assets at fair value through other comprehensive income
	Common stock			Preferred stock			Funds			Convertible bonds			Total			Common stock		Preferred stock		Total
	NT$			NT$			NT$			NT$			NT$			NT$		NT$		NT$
	(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)		(In Thousands)		(In Thousands)
As of January 1, 2022	$	3,584,326		$	2,580,246		$	3,464,652		$	234,936		$	9,864,160		$	2,351,603	$	151,859	$	2,503,462
Recognized in profit (loss)		(150,786	)		(328,602	)		519,572			(53,225	)		(13,041	)		—		—		—
Recognized in other comprehensive income (loss)		—			—			—			—			—			1,076,117		30,688		1,106,805
Acquisition		192,258			485,256			625,542			—			1,303,056			—		—		—
Disposal		(186,579	)		(15,782	)		(194,572	)		(149,850	)		(546,783	)		—		—		—
Return of capital		—			—			(26,672	)		—			(26,672	)		—		—		—
Transfer out of Level 3		(326,577	)		—			—			—			(326,577	)		—		—		—
Exchange effect		86,166			144,140			237,811			4,613			472,730			—		—		—

As of December 31, 2022	$	3,198,808		$	2,865,258		$	4,626,333		$	36,474		$	10,726,873		$	3,427,720	$	182,547	$	3,610,267


	Financial liabilities at fair value through profit or loss
	Derivatives
	NT$ (In Thousands)
As of January 1, 2022	$	2,380,599
Recognized in profit (loss)		(1,433,405	)
Derecognition		(508,797	)

As of December 31, 2022	$	438,397


	Financial assets at fair value through profit or loss																		Financial assets at fair value through other comprehensive income
	Common stock			Preferred stock			Funds			Convertible bonds			Others			Total			Common stock			Preferred stock			Total
	NT$			NT$			NT$			NT$			NT$			NT$			NT$			NT$			NT$
	(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)
As of January 1, 2023	$	3,198,808		$	2,865,258		$	4,626,333		$	36,474		$	—		$	10,726,873		$	3,427,720		$	182,547		$	3,610,267
Recognized in profit (loss)		(312,149	)		(277,994	)		(617,764	)		(8,828	)		—			(1,216,735	)		—			—			—
Recognized in other comprehensive income (loss)		—			—			—			—			—			—			(365,395	)		(7,484	)		(372,879	)
Acquisition		610,153			294,046			294,245			—			154,761			1,353,205			—			—			—
Disposal		—			(89,997	)		—			(27,740	)		—			(117,737	)		—			—			—
Return of capital		(1,384	)		—			(36,346	)		—			—			(37,730	)		—			—			—
Transfer out of Level 3		(461,403	)		—			—			—			—			(461,403	)		—			—			—
Exchange effect		2,230			(4,679	)		8,428			94			(1,461	)		4,612			—			—			—

As of December 31, 2023	$	3,036,255		$	2,786,634		$	4,274,896		$	—		$	153,300		$	10,251,085		$	3,062,325		$	175,063		$	3,237,388


	Financial liabilities at fair value through profit or loss
	Derivatives
	NT$ (In Thousands)
As of January 1, 2023	$	438,397
Recognized in profit (loss)		580,965

As of December 31, 2023	$	1,019,362

The total profit (loss) of NT$330 million, NT$(74) million and NT$(1,329) million for the years ended December 31, 2021, 2022 and 2023, were included in profit or loss that is attributable to the change in unrealized gains or losses relating to those financial assets without quoted market prices held at the end of the reporting period.

The total profit (loss) of NT$(360) million, NT$829 million and NT$(581) million for the years ended December 31, 2021, 2022 and 2023, were included in profit or loss that is attributable to the change in unrealized gains or losses relating to those financial liabilities without quoted market prices held at the end of the reporting period.

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

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


As of December 31, 2022
Category	Valuation technique	Significant unobservable inputs	Quantitative information	Interrelationship between inputs and fair value	Sensitivity analysis of interrelationship between inputs and fair value
Unlisted stock	Market Approach	Discount for lack of marketability	0% - 50%	The greater degree of lack of marketability, the lower the estimated fair value is determined.	A change of 5% in the discount for lack of marketability of the aforementioned fair values of unlisted stocks could decrease/increase the Company’s profit (loss) for the year ended December 31, 2022 by NT$273 million and NT$198 million, respectively, and decrease/increase the Company’s other comprehensive income (loss) for the year ended December 31, 2022 by NT$248 million.
Embedded derivatives in exchangeable bonds	Binomial tree valuation model	Volatility	36.46%	The higher the volatility, the higher the estimated fair value is determined.	A change of 5% in the volatility could decrease/increase the Company’s profit (loss) for the year ended December 31, 2022 by NT$77 million and NT$67 million, respectively.


As of December 31, 2023
Category	Valuation technique	Significant unobservable inputs	Quantitative information	Interrelationship between inputs and fair value	Sensitivity analysis of interrelationship between inputs and fair value
Unlisted stock	Market Approach	Discount for lack of marketability	0% - 50%	The greater degree of lack of marketability, the lower the estimated fair value is determined.	A change of 5% in the discount for lack of marketability of the aforementioned fair values of unlisted stocks could decrease/increase the Company’s profit (loss) for the year ended December 31, 2023 by NT$261 million and NT$199 million, respectively, and decrease/increase the Company’s other comprehensive income (loss) for the year ended December 31, 2023 by NT$214 million.
Embedded derivatives in exchangeable bonds	Binomial tree valuation model	Volatility	27.70%	The higher the volatility, the higher the estimated fair value is determined.	A change of 5% in the volatility could decrease/increase the Company’s profit (loss) for the year ended December 31, 2023 by NT$119 million and NT$131 million, respectively.

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

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

The fair values of the Company’s cash and cash equivalents, receivables, refundable deposits, other financial assets, short-term loans, payables and guarantee deposits approximate their carrying amount.


As of December 31, 2022
			Fair value measurements during reporting period using
Items	Fair value		Level 1		Level 2		Level 3		Carrying amount
	NT$ (In Thousands)		NT$ (In Thousands)		NT$ (In Thousands)		NT$ (In Thousands)		NT$ (In Thousands)
Bonds payables (current portion included)	$	28,346,985	$	22,916,330	$	5,430,655	$	—	$	28,184,687
Long-term loans (current portion included)		19,279,342		—		19,279,342		—		19,279,342

As of December 31, 2023
			Fair value measurements during reporting period using
Items	Fair value		Level 1		Level 2		Level 3		Carrying amount
	NT$ (In Thousands)		NT$ (In Thousands)		NT$ (In Thousands)		NT$ (In Thousands)		NT$ (In Thousands)
Bonds payables (current portion included)	$	38,367,168	$	32,827,211	$	5,539,957	$	—	$	38,359,352
Long-term loans (current portion included)		22,883,344		—		22,883,344		—		22,883,344