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Financial risk management and fair values of financial instruments

12 Months Ended

Dec. 31, 2020

Text block [abstract]

Financial risk management and fair values of financial instruments

42. Financial risk management and fair values of financial instruments

a) Financial instruments

(a) Financial instruments by category

		December 31, 2019				December 31, 2020
		NT$000				NT$000
Financial assets
Financial assets at fair value through profit or loss
Financial assets mandatorily measured at fair value through profit or loss			11,038				63,488
Financial assets at fair value through other comprehensive income
Designation of equity instruments			121,808				262,007
Financial assets at amortized cost
Cash and cash equivalents			4,704,084				4,113,651
Financial assets at amortized cost			237,420				254,801
Notes receivable			765				599
Accounts receivable			4,452,904				5,364,156
Accounts receivable – related parties			1,045				—
Other receivables			89,676				51,436
Other receivables – related parties			2,948				—
Refundable deposits			21,145				21,186
			9,642,833				10,131,324
Financial liabilities
Financial liabilities at amortized cost
Notes payable			—				2,899
Accounts payable			819,548				966,821
Other payables			2,977,036				3,249,403
Long-term bank loans (including current portion)			9,041,645				7,733,565
Guarantee deposits			1,095				21,670
			12,839,324				11,974,358
Lease liabilities (including current portion)			692,951				870,495

(b) Risk management policies

i) The Group’s risk management objective is to manage the market risk, credit risk and liquidity risk related to its operating activities. The Group identifies, measures, and manages such risks by its policies and preferences.

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

iii) In order to minimize and manage financial risks, the Group’s overall risk management program focuses on analyzing, identifying, and evaluating financial risk factors that may potentially have adverse effects on the Group’s financial position, and provide feasible solutions to avoid those factors.

(c) Significant financial risks and degrees of financial risks

i) Market risk

The Group’s 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 foreign currency risk, interest rate risk, and other price risks.

In practice, the risk variable rarely changes individually, and the change of each risk variable is usually correlative. The following sensitivity analysis did not consider the interaction of each risk variable.

Foreign exchange risk

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

2. The Group applies natural hedges by using accounts receivable and accounts payable denominated in the same currency. However, this natural hedge does not concur with the requirement for hedge accounting. Furthermore, as net investments in foreign operations are for strategic purposes, they are not hedged by the Group.

3. The Group’s foreign currency exposure gives rise to market risks associated with exchange rate movements against the NT dollar for cash and cash equivalents, accounts receivable, other receivables, bank loans, accounts payable and other payables.

4. The Group’s businesses involve some non-functional currency operations. The information on assets and liabilities denominated in foreign currencies whose values would be materially affected by the exchange rate fluctuations is as follows:

		December 31, 2019
		Foreign currency				Exchange rate				Carrying amount (NT$000)
(Foreign currency: functional currency)
Financial assets
Monetary items
US$000			188,369				29.9800				5,647,303
JPY000			266,819				0.2760				73,642
RMB000			6,197				4.3050				26,678
Non-monetary items
JPY000			441,334				0.2760				121,808
RMB000			730,108				4.3050				3,143,117
Financial liabilities
Monetary items
US$000			7,867				29.9800				235,853
JPY000			1,033,394				0.2760				285,217

		December 31, 2020
		Foreign currency				Exchange rate				Carrying amount (NT$000)
(Foreign currency: functional currency)
Financial assets
Monetary items
US$000			175,840				28.4800				5,007,923
JPY000			137,635				0.2763				38,029
RMB000			6,838				4.3770				29,930
Non-monetary items
JPY000			948,270				0.2763				262,007
RMB000			690,178				4.3770				3,020,908
Financial liabilities
Monetary items
US$000			26,410				28.4800				752,157
JPY000			1,538,241				0.2763				425,016

5. The total exchange gains (losses), including realized and unrealized gains (losses) arising from significant foreign exchange variations on monetary items held by the Group for the years ended December 31, 2018, 2019 and 2020, amounted to gain of NT$93,104 thousand, loss of NT$154,993 thousand and loss of NT$355,255 thousand, respectively.

6. Analysis of foreign currency market risk arising from significant foreign exchange variations:

		Year ended December 31, 2018
		Sensitivity analysis
		Change in exchange rate				Effect on profit (loss) (NT$000)				Effect on other comprehensive income (NT$000)
Financial assets
Monetary items
US$000			5	%			261,492				—
JPY000			5	%			2,470				—
RMB000			5	%			1,979				—
Financial liabilities
Monetary items
US$000			5	%			27,997				—
JPY000			5	%			33,887				—

		Year ended December 31, 2019
		Sensitivity analysis
		Change in exchange rate				Effect on profit (loss) (NT$000)				Effect on other comprehensive income (NT$000)
Financial assets
Monetary items
US$000			5	%			282,365				—
JPY000			5	%			3,682				—
RMB000			5	%			1,334				—
Financial liabilities
Monetary items
US$000			5	%			11,793				—
JPY000			5	%			14,261				—

		Year ended December 31, 2020
		Sensitivity analysis
		Change in exchange rate				Effect on profit (loss) (NT$000)				Effect on other comprehensive income (NT$000)
Financial assets
Monetary items
US$000			5	%			250,396				—
JPY000			5	%			1,901				—
RMB000			5	%			1,497				—
Financial liabilities
Monetary items
US$000			5	%			37,608				—
JPY000			5	%			21,251				—

Price risk

1. The Group’s financial instruments, which are exposed to price risk, are the financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income. To manage its price risk arising from investments in financial instruments, the Group diversifies its portfolio. Diversification of the portfolio is in accordance with the limits set by the Group.

2. The Group invests in beneficiary certificates and listed stocks issued by the domestic companies. The prices of equity securities would change due to change of the future value of investee companies. For the years ended December 31, 2018, 2019 and 2020, it is estimated that the prices of equity securities increase or decrease by 1%, with all other variables held constant, would increase or decrease the Group’s profit before income tax by nil, nil and NT$531 thousand, respectively.

3. The Group’s investments in financial instruments comprise foreign unlisted stocks and partnership. The prices of financial instruments would change due to different valuation models and assumptions used. Analysis related to the effect on profit or other comprehensive income if these assumptions change is provided in Note 42 b) (g).

Interest rate risk on cash flow and fair value

1. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s bank loans with floating interest rates. The Group manages its interest rate risk by having a balanced portfolio of fixed and variable rate bank loans. The Group reassesses the hedge management periodically to make sure it complies with the cost effectiveness.

2. The sensitivity analysis depends on the exposure of interest rate risk at the end of the reporting period.

3. Analysis of debt with floating interest rates is based on the assumption that the outstanding debt at the end of the reporting period is outstanding throughout the period. The degree of variation the Group used to report to internal management is increase or decrease of 1% in interest rates which is assessed as the reasonable degree of variation by the management.

4. For the years ended December 31, 2018, 2019 and 2020, it is estimated that a general increase or decrease of 1% in interest rates, with all other variables held constant, would decrease or increase the Group’s profit before income tax approximately by NT$98,220 thousand, NT$90,660 thousand and NT$78,150 thousand, respectively, mainly due to the Group’s floating rate on bank loans.

ii) Credit risk

1. Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss, mainly resulted from its operating activities (primarily notes and accounts receivable) and from its financing activities (primarily deposits with banks and financial instruments). The Group is exposed to credit risk arising from the carrying amount of the financial assets recognized in the consolidated statements of financial position.

2. Each business unit performs ongoing credit evaluations of its debtors’ financial conditions according to the Group’s established policies, procedures and controls relating to customer credit risk management. The Group maintains an account for loss allowance based upon the available facts and circumstances, history of collection and write-off experiences of all trade and other receivables which consequently minimize the Group’s exposure to bad debts.

3. Credit risk from balances with banks and financial institutions is managed by the Group’s finance unit in accordance with the Group’s policies. Transaction counterparty of the Group is determined through its internal controls policy. For banks and financial institutions, only parties rated above BBB+ by Taiwan Ratings are accepted. The probability of counterparty default is remote, so there is no significant credit risk.

4. The Group adopts the assumptions under IFRS 9 “Financial Instruments” and the default is deemed to have occurred when the contract payments are past due over 90 days.

5. The Group categorized contract assets, accounts receivable and other receivables by characteristics of credit risk and applied the simplified approach using loss rate methodology to estimate expected credit loss.

6. The Group referred to the forecastability of business monitoring indicators published by the ROC National Development Council to adjust the loss rate which is based on historical and current information when assessing the future default possibility of contract assets, accounts receivable and other receivables. As of December 31, 2019 and 2020 the loss rate methodologies are as follows:

		December 31, 2019
		Contract assets				Accounts receivable (including related parties)				Other receivables (including related parties)
		NT$000				NT$000				NT$000
Expected loss rate			0.030	%			0.030	%			0.030	%
Total carrying amount			377,983				4,455,300				92,642
Loss allowance			(114	)			(1,351	)			(18	)

		December 31, 2020
		Contract assets				Accounts receivable (including related parties)				Other receivables (including related parties)
		NT$000				NT$000				NT$000
Expected loss rate			0.030	%			0.030	%			0.030	%
Total carrying amount			389,133				5,365,776				51,446
Loss allowance			(117	)			(1,620	)			(10	)

7. Under the simplified approach, movements in relation to loss allowance for contract assets, accounts receivable, and other receivables are as follows:

		2018
		Contract assets				Accounts receivable (including related parties)				Other receivables (including related parties)
		NT$000				NT$000				NT$000
January 1_ IAS 39			—				—				—
Adjustments for applying new standards			(115	)			(1,819	)			(7	)
January 1_IFRS 9			(115	)			(1,819	)			(7	)
Provision for impairment loss			(20	)			(322	)			(7	)
Reversal of impairment loss			—				—				1
December 31			(135	)			(2,141	)			(13	)

		2019
		Contract assets				Accounts receivable (including related parties)				Other receivables (including related parties)
		NT$000				NT$000				NT$000
January 1			(135	)			(2,141	)			(13	)
Provision for impairment loss			—				—				(5	)
Reversal of impairment loss			21				790				—
December 31			(114	)			(1,351	)			(18	)

		2020
		Contract assets				Accounts receivable (including related parties)				Other receivables (including related parties)
		NT$000				NT$000				NT$000
January 1			(114	)			(1,351	)			(18	)
Provision for impairment loss			(3	)			(269	)			—
Reversal of impairment loss			—				—				8
December 31			(117	)			(1,620	)			(10	)

8. The Group’s recorded financial assets at amortized cost include time deposits with contract period over three months and restricted bank deposits. Because of the low credit risk, expected credit losses for the period are measured through a loss allowance at an amount equal to the 12-month expected credit losses. There is no significant provision for the losses.

iii) Liquidity risk

1. The Group manages and maintains adequate cash and cash equivalents to finance the Group’s operations, and minimize the impact from cash flow fluctuations. The Group also monitors its debt financing plans to ensure it is in compliance with the financial covenants required under its loan agreements.

2. The primary source of liquidity for the Group is from bank loans. See Note 17 for details of the unused credit lines of the Group as of December 31, 2019 and 2020.

3. The contractual undiscounted cash flows of accounts payable and other payables due within one year and is equivalent to their carrying amounts. Except for the aforementioned, the table below summarizes the maturity profile of the Group’s non-derivative financial liabilities based on the earliest repayment dates and contractual undiscounted payments, including principal and interest. The Group does not consider the probability of early repayments requested by the banks.

		December 31, 2019
		Within 1 year				1 to 3 years				3 to 5 years				Over 5 years				Total
		NT$000				NT$000				NT$000				NT$000				NT$000
Non-derivative financial liabilities
Long-term bank loans			914,159				1,786,842				6,848,327				—				9,549,328
Lease liabilities			36,806				60,111				57,836				762,699				917,452
Guarantee deposits			—				—				—				1,095				1,095
			950,965				1,846,953				6,906,163				763,794				10,467,875

		December 31, 2020
		Within 1 year				1 to 3 years				3 to 5 years				Over 5 years				Total
		NT$000				NT$000				NT$000				NT$000				NT$000
Non-derivative financial liabilities
Long-term bank loans			846,401				3,558,597				2,198,717				1,487,808				8,091,523
Lease liabilities			145,594				160,146				54,689				718,752				1,079,181
Guarantee deposits			—				—				—				21,670				21,670
			991,995				3,718,743				2,253,406				2,228,230				9,192,374

The difference between the floating interest rates and estimated interest rates will affect the non-derivative financial liabilities stated above.

b) Fair value information

(a) The different levels of inputs used in valuation techniques to measure fair value of financial and non-financial instruments are defined as follows:

Level 1:		Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date. An active market is a market in which trading for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:		Inputs other than quoted prices from Level 1 that are observable information for the asset or liability, either directly or indirectly.
Level 3:		Unobservable inputs for the asset or liability. The fair value of the Group’s investment in equity investment without active market is included in Level 3.

(b) The carrying amounts of cash and cash equivalents, financial assets at amortized cost, contract assets, notes receivable, accounts receivable (including related parties) , other receivables (including related parties), refundable deposits, long-term bank loans, contract liabilities, notes payable, accounts payable, other payables, lease liabilities and guarantee deposits are approximate to their fair values.

(c) The related information of financial and non-financial instruments measured at fair value by level on the basis of the nature, characteristics and risks of the assets and liabilities are as follows:

i) The related information of natures of the assets and liabilities is as follows:

		December 31, 2019
		Level 1				Level 2				Level 3				Total
		NT$000				NT$000				NT$000				NT$000
Assets
Recurring fair value measurements
Financial assets at fair value through profit or loss
- Foreign partnership interests			—				—				11,038				11,038
Financial assets at fair value through other comprehensive income
- Foreign unlisted stocks			—				—				121,808				121,808
			—				—				132,846				132,846

		December 31, 2020
		Level 1				Level 2				Level 3				Total
		NT$000				NT$000				NT$000				NT$000
Assets
Recurring fair value measurements
Financial assets at fair value through profit or loss
- Listed stocks			53,120				—				—				53,120
- Foreign partnership interests			—				—				10,368				10,368
Financial assets at fair value through other comprehensive income
- Foreign unlisted stocks			—				—				262,007				262,007
			53,120				—				272,375				325,495

ii) The methods and assumptions the Group used to measure fair value are as follows:

1. The fair value of the Group’s listed stocks is measured by using the market quoted prices, which is categorized within Level 1 fair value.

2. Except for listed stocks with active markets, the fair value of the Group’s other financial instruments is measured by using valuation techniques or by reference to counterparty quotes. The fair value of financial instruments measured by using valuation techniques can be referred to current fair value of instruments with similar terms and characteristics in substance, discounted cash flow method or other valuation methods, including calculated by applying model using market information available at the consolidated statement of financial position date.

3. The Group’s financial instruments issued by foreign partnerships are measured by using the discounted cash flow method, which derives present values estimates by discounting expected future operating effectiveness and free cash flow projections.

4. The Group’s financial instruments issued by foreign companies are measured by the comparable company valuation (EV/EBITDA ratio and P/B ratio).

5. The Group takes into account adjustments for credit risks to measure the fair value of financial and non-financial instruments to reflect credit risk of the counterparty and the Group’s credit quality.

(d) The following table shows the movements of Level 3 for the years ended December 31, 2019 and 2020:

		December 31, 2019
		Debt instruments				Equity instruments				Total
		NT$000				NT$000				NT$000
January 1			11,471				174,357				185,828
Gains or losses recognized in profit or loss
Recorded as non-operating expenses			(433	)			—				(433	)
Gains or losses recognized in other comprehensive income
Recorded as unrealized losses on valuation of financial assets at fair value through other comprehensive income			—				(52,549	)			(52,549	)
December 31			11,038				121,808				132,846

		December 31, 2020
		Debt instruments				Equity instruments				Total
		NT$000				NT$000				NT$000
January 1			11,038				121,808				132,846
Gains or losses recognized in profit or loss
Recorded as non-operating expenses			(670	)			—				(670	)
Gains or losses recognized in other comprehensive income
Recorded as unrealized gains on valuation of financial assets at fair value through other comprehensive income			—				140,199				140,199
December 31			10,368				262,007				272,375

(e) The Group performs the fair value measurements being categorized within Level 3 with assistance from specialist. Such assessment is to ensure the valuation results are reasonable by applying independent information to make results close to current market conditions, confirming the resource of information is independent, reliable and in line with other resources and represented as the exercisable price, and frequently calibrating valuation model, updating inputs used to the valuation model and making any other necessary adjustments to the fair value.

(f) The following is the qualitative information and sensitivity analysis of changes in significant unobservable inputs under valuation model used in Level 3 fair value measurement:

Fair value as of December 31, 2019

Valuation technique

Significant unobservable input

Range (weighted average method)

Relationship of inputs to fair value

NT$000

Non-derivative debt instrument:

Foreign partnership interests

11,038

Discounted cash flow

Discount rate

0.30

%

The lower the discount rate, the higher the fair value

Non-derivative equity instrument:

Foreign unlisted stocks

121,808

Comparable companies

Price to book ratio multiple

1.22

The higher the multiple, the higher the fair value

Enterprise value to EBITDA multiple

10.51

The higher the multiple, the higher the fair value

Discount for lack of marketability

15.80

%

The higher the discount for lack of marketability, the lower the fair value

Fair value as of December 31, 2020

Valuation technique

Significant unobservable input

Range (weighted average method)

Relationship of inputs to fair value

NT$000

Non-derivative debt instrument:

Foreign partnership interests

10,368

Discounted cash flow

Discount rate

0.30

%

The lower the discount rate, the higher the fair value

Non-derivative equity instrument:

Foreign unlisted stocks

262,007

Comparable companies

Price to book ratio multiple

1.97

The higher the multiple, the higher the fair value

Enterprise value to EBITDA multiple

12.00

The higher the multiple, the higher the fair value

Discount for lack of marketability

15.80

%

The higher the discount for lack of marketability, the lower the fair value

(g) The Group has carefully assessed the valuation models and assumptions used to measure fair value. However, use of different valuation models or assumptions may result in different measurement. The following is the effect of profit or loss or of other comprehensive income from financial assets categorized within Level 3 if the inputs used to valuation models have changed:

						December 31, 2019
						Recognized in profit or loss								Recognized in other comprehensive income
		Input		Change		Favorable change				Unfavorable change				Favorable change				Unfavorable change
						NT$000				NT$000				NT$000				NT$000
Financial assets:
Foreign partnership interests		Discount rate		Note			—				—				—				—
Foreign unlisted stocks		Price to book ratio multiple		± 1%			—				—				53				53
		Enterprise value to EBITDA multiple		± 1%			—				—				850				900
		Discount for lack of marketability		± 1%			—				—				1,460				1,460
							—				—				2,363				2,413

										December 31, 2020
										Recognized in profit or loss								Recognized in other comprehensive income
		Input				Change				Favorable change				Unfavorable change				Favorable change				Unfavorable change
										NT$000				NT$000				NT$000				NT$000
Financial assets:
Foreign partnership interests			Discount rate				Note				—				—				—				—
Foreign unlisted stocks			Price to book ratio multiple				± 1	%			—				—				30				30
			Enterprise value to EBITDA multiple				± 1	%			—				—				2,153				2,153
			Discount for lack of marketability				± 1	%			—				—				3,142				3,084
											—				—				5,325				5,267

Note: Based on the Group’s assessment, change in input would not have significant impact on profit or loss or other comprehensive income.

X

- Definition

The disclosure of the entity's financial risk management practices and policies.

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Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef
-Name IAS
-Number 1
-IssueDate 2020-01-01
-Paragraph 10
-Subparagraph e
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-URIDate 2020-01-01

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