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Financial risk management and fair values of financial instruments

12 Months Ended

Dec. 31, 2022

Text block [abstract]

Financial risk management and fair values of financial instruments

41.Financial risk management and fair values of financial instruments

a)Financial instruments

(a)Financial instruments by category

		December 31, 2021		December 31, 2022
		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		359,960		128,224
Financial assets at fair value through other comprehensive    income
Designation of equity instruments		384,521		338,102
Financial assets at amortized cost
Cash and cash equivalents		5,906,176		9,896,604
Financial assets at amortized cost		66,778		136,093
Notes receivable		1,035		—
Accounts receivable		6,344,246		4,381,563
Other receivables		86,879		131,863
Refundable deposits		21,278		21,771
		13,170,873		15,034,220
Financial liabilities
Financial liabilities at amortized cost
Short-term bank loans		731,751		—
Notes payable		23		132
Accounts payable		1,012,391		560,802
Other payables		4,378,439		3,796,481
Long-term bank loans (including current portion)		9,413,365		13,967,801
Lease liabilities (including current portion)		851,251		920,402
Guarantee deposits		21,625		21,600
		16,408,845		19,267,218

(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, 2021
		Foreign currency		Exchange rate		Carrying amount (NT$000)
(Foreign currency: functional currency)
Financial assets
Monetary items
US$000		188,143		27.6800		5,207,798
JPY000		141,523		0.2405		34,036
RMB000		4,944		4.3440		21,477
Non-monetary items
JPY000		1,598,839		0.2405		384,521
RMB000		827,811		4.3440		3,596,012
Financial liabilities
Monetary items
US$000		53,042		27.6800		1,468,203
JPY000		1,089,668		0.2405		262,005

		December 31, 2022
		Foreign currency		Exchange rate		Carrying amount (NT$000)
(Foreign currency: functional currency)
Financial assets
Monetary items
US$000		208,989		30.7100		6,418,052
JPY000		114,940		0.2324		26,712
RMB000		7,199		4.4080		31,733
Non-monetary items
JPY000		1,454,830		0.2324		338,102
RMB000		927,037		4.4080		4,086,378
Financial liabilities
Monetary items
US$000		11,031		30.7100		338,762
JPY000		1,587,732		0.2324		368,989

5.The total exchange (losses) gains, including realized and unrealized (losses) gains arising from significant foreign exchange variations on monetary items held by the Group for the years ended December 31, 2020, 2021 and 2022, amounted to (NT$355,255) thousand, (NT$89,152) thousand and NT$448,097 thousand, respectively.

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

		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		—

		Year ended December 31, 2021
		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%		260,390		—
JPY000		5%		1,702		—
RMB000		5%		1,074		—
Financial liabilities
Monetary items
US$000		5%		73,410		—
JPY000		5%		13,103		—

		Year ended December 31, 2022
		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%		320,903		—
JPY000		5%		1,336		—
RMB000		5%		1,587		—
Financial liabilities
Monetary items
US$000		5%		16,938		—
JPY000		5%		18,449		—

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, 2020, 2021 and 2022, 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 NT$531 thousand, NT$3,600 thousand and NT$1,282 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 41 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, 2020, 2021 and 2022, 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$78,150 thousand, NT$102,489 thousand and NT$140,561 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, 2021 and 2022 the loss rate methodologies are as follows:

		December 31, 2021
		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		400,375		6,346,156		86,895
Loss allowance		(120)		(1,910)		(16)

		December 31, 2022
		Contract assets		Accounts receivable (including related parties)		Other receivables (including related parties)
		NT$000		NT$000		NT$000
Expected loss rate		0.060%		0.060%		0.060%
Total carrying amount		381,587		4,384,232		131,908
Loss allowance		(229)		(2,669)		(45)

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

		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)

		2021
		Contract assets		Accounts receivable (including related parties)		Other receivables (including related parties)
		NT$000		NT$000		NT$000
January 1		(117)		(1,620)		(10)
Provision for impairment loss		(3)		(290)		(6)
December 31		(120)		(1,910)		(16)

		2022
		Contract assets		Accounts receivable (including related parties)		Other receivables (including related parties)
		NT$000		NT$000
January 1		(120)		(1,910)		(16)
Provision for impairment loss		(109)		(759)		(29)
December 31		(229)		(2,669)		(45)

8.The Group’s recorded financial assets at amortized cost include time deposits with contract period over 3 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 Notes 15 and 17 for details of the unused credit lines of the Group as of December 31, 2021 and 2022.

3.The contractual undiscounted cash flows of notes payable, accounts payable and other payables due within one year and is equivalent to its carrying amount. 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, 2021
		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
Short-term bank loans		733,523		—		—		—		733,523
Long-term bank loans		114,953		2,817,662		4,568,521		2,265,350		9,766,486
Lease liabilities		182,186		119,748		54,113		691,764		1,047,811
Guarantee deposits		—		—		—		21,625		21,625
		1,030,662		2,937,410		4,622,634		2,978,739		11,569,445

		December 31, 2022
		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		1,699,165		5,675,288		5,354,335		1,914,280		14,643,068
Lease liabilities		174,460		182,767		57,057		704,503		1,118,787
Guarantee deposits		—		—		—		21,600		21,600
		1,873,625		5,858,055		5,411,392		2,640,383		15,783,455

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 takes 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, other receivables, refundable deposits, bank loans, notes payable, accounts payable, other payables 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 based on the nature, characteristics and risks of the assets and liabilities are as follows:

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

		December 31, 2021
		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		359,960		—		—		359,960
Financial assets at fair value through other    comprehensive income
- Foreign unlisted stocks		—		—		384,521		384,521
		359,960		—		384,521		744,481

		December 31, 2022
		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		128,224		—		—		128,224
Financial assets at fair value through other    comprehensive income
- Foreign unlisted stocks		—		—		338,102		338,102
		128,224		—		338,102		466,326

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 value estimates by discounting expected future operating effectiveness and free cash flows 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, 2021 and 2022:

		December 31, 2021
		Debt instruments		Equity instruments		Total
		NT$000		NT$000		NT$000
January 1		10,368		262,007		272,375
Gains or losses recognized in profit or loss
Recorded as non-operating expenses		(941)		—		(941)
Gains or losses recognized in other comprehensive income
Recorded as unrealized gain on valuation of financial assets    at fair value through other comprehensive income		—		122,514		122,514
Sold in the period		(9,427)		—		(9,427)
December 31		—		384,521		384,521

		December 31, 2022
		Debt instruments		Equity instruments		Total
		NT$000		NT$000		NT$000
January 1		—		384,521		384,521
Gains or losses recognized in other comprehensive income
Recorded as unrealized loss on valuation of financial assets    at fair value through other comprehensive income		—		(46,419)		(46,419)
December 31		—		338,102		338,102

(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, 2021		Valuation technique		Significant unobservable input		Range		Relationship of inputs to fair value
		NT$000
Non-derivative equity   instrument:
Foreign unlisted stocks		384,521		Comparable companies		Price to book ratio multiple		3.46		The higher the multiple, the higher the fair value
						Enterprise value to EBITDA multiple		9.43		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, 2022		Valuation technique		Significant unobservable input		Range		Relationship of inputs to fair value
		NT$000
Non-derivative equity   instrument:
Foreign unlisted stocks		338,102		Comparable companies		Enterprise value to EBITDA multiple		4.82		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, 2021
						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 unlisted stocks		Price to book ratio   multiple		±1%		—		—		46		46
		Enterprise value to   EBITDA multiple		±1%		—		—		3,443		3,443
		Discount for lack   of marketability		±1%		—		—		4,585		4,585
						—		—		8,074		8,074

December 31, 2022

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 unlisted stocks

Enterprise value to   EBITDA multiple

±1%

—

—

2,876

2,883

Discount for lack    of marketability

±1%

—

—

3,990

4,039

—

—

6,866

6,922

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- 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 2022-03-24
-Paragraph 10
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-URIDate 2022-03-24

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