Inside Cover: Spokesman Acting Spokesperson D. L. Tseng K. S. Chiang Vice President, Finance Director, Finance Division Tel: 886-3-5770355 Tel: 886-3-5770355 E-mail: [email protected] E-mail: [email protected] Vanguard International Semiconductor Corporation 123, Park Ave-3rd, Science-Based Industrial Park, Hsin-Chu 300, Taiwan R.O.C. Website: http: //www.vis.com.tw Tel: 886-3-5770355 Fax: 886-3-5788572 Fab1 123, Park Ave-3rd, Science-Based Industrial Park, Hsin-Chu 300, Taiwan R.O.C. Tel: 886-3-5770355 Fab2 9, Li-Shin Rd., Science-Based Industrial Park, Hsin-Chu 300, Taiwan R.O.C. Tel: 886-3-5632111 Fab3 168, Chang-Rong RD.,14 Neighborhood, ChangXing Vil., Luzhu Dist.,Taoyuan City, Taiwan ,R.O.C.. Tel: 886-3-3116111

Common Stock Transfer Agent China Trust Commercial Bank Transfer Agency Department Address: 5F, 83, Sec. 1, Chung-Ching S. Rd. Taipei, Taiwan 100, R.O.C. Website: http://www.ctbcbank.com Tel: 886-2-6636-5566

Auditors Yu-Feng Huang / Cheng-Chih Lin Deloitte & Touche 12th Floor, 156 Min Sheng E. Road, Sec. 3, Taipei 105, Taiwan R.O.C. Website: http: //www.deloitte.com.tw Tel: 886-2-2545-9988 Name of any exchanges where the company's securities are traded offshore, and method by which to access information on said offshore securities: Not applicable Contents

I. A Letter to Shareholders...... 1 II. A Brief Introduction of VIS...... 5 Company Profi le...... 5 III. Corporate Governance Report...... 7 A. Company Organization...... 7 B. Information on the company’s directors, supervisors, general manager, assistant general managers, deputy assistant general managers, and the chiefs of all the company’s divisions and branches...... 9 C. Remuneration to Directors, Supervisors & Managers...... 15 D. Implementation of Corporate Governance...... 19 E. Information Regarding VIS’s Independent Auditors...... 47 F. Information on Replacement of Certifi ed Public Accountant...... 47 G. Company Chairman, President, Financial or Accounting Head has Worked for Certifying Accounting Firm or Its Affi liate Business in the Past Year...... 47 H. Information on Net Change in Shareholding and Net Change in Shares Pledged by Directors, Supervisors, Management and Shareholders of 10% Shareholdings or More...... 47 I. Top 10 shareholders relation...... 48 J. VIS Long-Term Investment Ownership...... 49 IV. Information On Implementation Of The Company Funds Utilization Plans...... 50 A. Capital and shares...... 54 B. Issuance of Corporate Bond ...... 54 C. Issuance of Preferred Stock Issuance...... 54 D. Issuance of Depositary Shares Issuance...... 54 E. Status of Mergers and Acquisitions...... 54 F. Fund Plan Implementation...... 54 V. Operational Highlights...... 55 A. A description of the business...... 55 B. Industry survey and market analysis...... 68 C. Personnel Structure...... 73 D. Environmental Protection Measures...... 73 E. Employee / employer relations...... 76 F. Major Contracts...... 84 VI. Financial Statements...... 85 A. Brief Balance Sheets and Brief Statements of Income...... 85 B. Financial Analysis...... 87 C. Audit Committee’s Review Report...... 90 D. Financial Statements and Independent Auditors’ Report...... 91 E. Consolidated Financial Statements and Independent Auditors’ Report...... 91 F. The fi nancial impact to the Company due to company or affi liate companies fi nancial diffi culties...... 91 VII. Financial Position, Operating Results And Risk Management...... 92 A. Analysis of Consolidated Financial Position...... 92 B. Analysis of Consolidated Financial Performance...... 92 C. Analysis of Consolidated Cash Flow...... 93 D. Major Capital Expenditure...... 93 E. Long Term Investment...... 94 F. Risk Management...... 94 G. Other important matters...... 99 VIII. Special Notes...... 100 A. Affi liated Information...... 100 B. Private placements Securities...... 102 C. VIS Common Shares acquired, disposed of and held by subsidiaries...... 102 D. Other Necessary Supplement...... 102 E. Any Events in Y2016 that had Signifi cant Impacts on Shareholders’ Right or Security Prices as started in Item 3 paragraph 2 of Article 36 of Securities and Exchange Law of Taiwan...... 102 IX. Financial Statements, Consolidated Financial Statements and Independent Auditors’ Report ...... 103 Financial Statements and Independent Auditors' Report...... 103 Consolidated Financial Statements and Independent Auditors' Report...... 170 Vanguard International Semiconductor Corporation

I. A Letter to Shareholders Dear Shareholders, Buoyed by relatively stable economic conditions in the global economy, the semiconductor industry posted modest growth in 2016. In particular, the output value of the foundry industry grew by 9%, and the 8-inch wafer fabrication market, which comprises an important sector for VIS, also recorded slight growth of approximately 1%. In terms of the Company's overall operating performance in 2016, owing to the continued support of our longstanding customers and persistent efforts of our dedicated team of employees, VIS posted consolidated revenue of NT$25.83 billion in Y2016, an increase of 10.8% over Y2015’s consolidated revenue of NT$23.32 billion. And gross profit margin of about 34.6%, after-tax net income of approximately NT$5.54 billion, the earning per share of NT$3.35, and return on equity about 19.7% in Y2016. In the future, we will more actively invest in research and development to advance our process technologies and establish new customer bases, so as to deliver better performances in times of economic recovery.

Capacity and Business VIS’ capital expenditure amounted to approximately NT$ 1.3 billion with yearly capacity around 2.25 million wafers and capacity utilization was around 89% in Y2016. Annual wafer shipments reached 1.99 million units. In order to continually upgrade process technologies and expand production capacity, we estimate capital expenditure will be around NT$1.8 billion in Y2017.

Technology Development In order to provide customers with more competitive technologies and services, the company has continued to develop more specialized applications from core technologies and enhance the value of services we provide. In the field of display driver IC technology development, our 0.2um, 0.18um, 0.15um, and 0.11um high- voltage processes, and 0.16um, 0.11um high-voltage process with embedded non- volatile memory exclusively designed for touch panels, have entered into mass production. In BCD (Bipolar-CMOS-DMOS) processes for power management ICs, apart from the 0.5um, 0.4um, 0.35um, 0.25um, and 0.15um processes that have already put into mass production, the development of a next-generation 0.11um BCD process also will be completed qualification by mid of this year. Furthermore, we have completed development of second-generation 0.5um ultra low Rdson, simplified ultra-high- voltage and 0.25um SOI processes, and ready to be used for customers’ product design. Particularly, we have started mass production with unique Magnetic Sensor

1 Vanguard International Semiconductor Corporation

process technology which is mainly applied in mobile and automotive systems. In addition, with the prevalence of fingerprint identification becoming a standard design feature in many mobile devices, VIS's prescient commitment over the years to developing ICs for fingerprint sensors is now resulting in noticeable gains, and it is anticipated that this burgeoning technology will help contribute to further revenue growth in 2017. Meanwhile, VIS is keenly aware of the increasingly important role the internet of things (IoT) plays in the semiconductor industry. At present, the Company is continuing to invest substantial resources and attention on the development of embedded flash with the eventual goal of moving toward mass production, thereby enabling us to provide our customers with an even wider array of options. In the future, VIS will continue to develop next generation platforms to accommodate market demand, and collaborate with Taiwan Semiconductor Manufacturing Co. (TSMC) on the transfer of various advanced process technologies to satisfy customers’ need.

Visions and Outlook In 2016, the global economy continued to improve in tandem with stable economic growth in the US, and the eurozone also enjoyed widespread gains across leading indicators, portending a stronger overall economic outlook. Closely connected to GDP growth, the semiconductor industry registered a 1% increase in overall output value at approximately US$340 billion. Due to there is certain level of market demand for advanced process technologies, foundry industry grew by approximately 9%, achieving an output of US$53 billion, of which roughly US$15.4 billion was contributed by 8" foundry. As integral parts of the company's business, among of end products including displays, notebooks, tablets, mobile phones, and LCD TVs, only LCD TVs and mobile phones unit shipments disclosed single digit percentage growth YoY. Continuously cannibalized by tablets and smartphones, computer products indicated a decreased of about 6% throughout the year. In addition, VIS benefited from a series of transfer orders from the display panel supply chain, resulting in sales of display driver ICs exceeding initial forecasts for 2016. Furthermore, tablets, originally enjoyed high market demand, showed a dramatic decline of about 13% due to minimal changes in product design and low willingness for replacement from consumers. And mobile phone market demand was about flat to slightly increased, but their growth is no longer comparable to that in the past. As to the LCD TVs, thanks to the price drop of ultra-high resolution panel drove certain market demand, shipment increased by approximately 1%. With the sustained demand for UHD 4K panels fueling further

2 Vanguard International Semiconductor Corporation growth, the driver IC market yielded a substantial contribution to VIS's overall business performance in 2016. Moreover, VIS's commitment to expanding into the automobile electronics sector over the past decade is now steadily yielding tangible results, with many leading global customers showing keen interest in VIS's production of display driver ICs, power management ICs, and discrete components for use in automotive applications. In spite of the numerous challenges which persisted in the end-user market, VIS continued to incorporate various new production processes and techniques and transitioned into mass production at opportune times, resulting in an 11% growth in sales for wafer fabrication for the automotive IC market in 2016. Looking ahead to 2017, economic uncertainties concerning China and the European Union have dissipated considerably, and the latest projections by the International Monetary Fund (IMF) have even upwardly-adjusted China's GDP growth to 6.5% (an increase of 0.3%). Meanwhile, in the US, the unemployment rate steadily stabilized to around 4.6% and the average GDP growth rate surpassed 2%. According to the latest projections released by the IMF, the baseline global growth forecast for 2017 is estimated at about 3.4%, which is a marked improvement over 2016. The global semiconductor market is expected to reach US$364 billion, representing a growth of 7%. Driven by the demand of advanced technology process, the foundry industry is also expected to grow at an annual rate of roughly 7% to US$57 billion, of which roughly US$15.7 billion was contributed by 8" foundry to reach 2% growth YoY. With our display driver IC, power management and discrete power devices all exhibiting distinctive operational performances, and in order to diversify product and market centralization, reduce operating risks and extend its reaches in the high-margin market. In addition to our existing high-voltage analog, BCD, and ultra-high-voltage processes, the company will continue to accelerate the development projects relating to sensing devices, fingerprint sensor ICs, high current power management ICs, and embedded flash, to adapt to the energy saving and carbon reduction era and to satisfy market demand for automobile electronics and Internet of Things applications. We believe those efforts will be beneficial toward enhancing our business operations. Furthermore, the company will continue to engage more IDM companies and oversea customers to expand customer base and will strengthen ties and forge long-lasting partnerships with customers to secure our leading position among specialty IC foundry industries, and ultimately to become one of the world’s leading companies in HV, PMIC and discrete power in foundry industry. Finally, we would like to express our thankfulness to all shareholders, customers and employees for your continuing support and contributions to VIS. We wish you all the best of health and prosperity in the year ahead.

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Wafer shipments t housands of 8" wafers

2015

2016

2017*

0 1000 2000

*Y2017 sales forecast: 2,163 thousands wafers

Chairman & President Leuh Fang

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II. A Brief Introduction of VIS Company Profile Vanguard International Semiconductor Corporation (VIS) is a leading specialty IC foundry service provider. Since its founding in December 5th, 1994 in Hsinchu Science Park, Taiwan, VIS has been achieving continuous success in its technology development and production efficiency improvement. VIS has also been consistently offering its customers cost-effective solutions and high value-added services. VIS has three 8-inch fabs with a monthly capacity of approximately 187,000 wafers in Y2016. VIS is a spin-off of the Sub-Micron Project, sponsored by the Industrial Technology Research Institute (ITRI). Original investors include Taiwan Semiconductor Manufacturing Corporation (TSMC) and 13 other institutional investors. VIS was founded with the primary focuses on the production and development of DRAM and other memory IC. In March 1998, VIS became a listed company on the Taiwan Over- The-Counter Stock Exchange (OTC). Its main shareholders include Taiwan Semiconductor Manufacturing Corporation (TSMC), National Development Fund and other institutional investors. In 1999, VIS started to work as a subcontractor for TSMC for the manufacturing of logic and mixed signal products. In Y2000, VIS officially announced its plan to transform from a DRAM manufacturer into a foundry service provider. After that, VIS offers a various foundry process technologies, including High Voltage, and 0.18um flash and entered into mass production. In July 2004, VIS completely terminated its DRAM production and became a pure-play foundry company. In Y2007, VIS announced the procurement of 8” fabs from Winbond. With this acquisition, VIS unleashed the growth momentum, accommodated customers’ demands in capacity and technology, and provided a more comprehensive solution portfolio for our customers. In 2014, VIS acquired Nanya Technology's 8-inch fab located in Taoyuan County and machineries and equipment from Sumpro Electronic. This transaction not only granted VIS the opportunity to expand its production capacity, but also enabled VIS to grow continually and earn profits steadily.

VIS has continued its investment in the product development and process technology for the market needs. VIS offers a wide range of process technologies, including High Voltage, Ultra High Voltage, Bipolar CMOS DMOS (BCD), Silicon on Insulator (SOI), Discrete, Logic, Mixed-Signal, Analog, High Precision Analog, Magnetic Sensor, and Embedded Memory to further help increase its foundry customers’ global competitiveness. In order to enhance its IP service capability, VIS has continued its IP development by strengthening strategic relationship with its IP provision partners. Currently available

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IPs are standard cell library, SRAM, one-time programmable, multiple-time programmable, electrical fuse, power phantom cell, etc…Furthermore, we’re accelerating the set-up of non-volatile flash IP. With the help from strategic IP partners, VIS can also provide IPs that are required by specialty ICs. VIS has about 5,000 employees. We are committed to adhere to our customer- oriented business philosophy to provide our customers with continuously improved and enhanced specialty IC foundry services. To better serve its worldwide customers, VIS has established sales offices in Taiwan and sales representatives in worldwide main IC clusters. With our display driver IC, power management and discrete power devices all exhibiting distinctive operational performances, and in order to diversify product and market centralization, reduce operating risks and extend its reaches in the high-margin market. In addition to our existing high-voltage analog, BCD, and ultra-high-voltage processes, the company will continue to accelerate the development projects relating to sensing devices, fingerprint sensor ICs, high current power management ICs, and embedded flash, to adapt to the energy saving and carbon reduction era and to satisfy market demand for automobile electronics and Internet of Things applications. We believe those efforts will be beneficial toward enhancing our business operations. Furthermore, the company will continue to engage more IDM companies and oversea customers to expand customer base and will strengthen ties and forge long-lasting partnerships with customers to secure our leading position among specialty IC foundry industries, and ultimately to become one of the world’s leading companies in HV, PMIC and discrete power in foundry industry.

6 Vanguard International Semiconductor Corporation

III. CORPORATE GOVERNANCE REPORT A. Company Organization 1. Company's structure:

Chairman Office Internal Auditing President Office

Human Resources Div. Worldwide Sales & Planning Finance Operation & Env.Safety Research & Development

Legal Dept. Customer Engineering Div. Accounting Div. FAB1 Technology Development 1

Quality Reliability Assurance Div. Sales Div. Finance Div. FAB2 Technology Development 2

Sales Planning Dept. Public Relations & FAB3 Technology Development 3 Investor Relations Dept.

Field Technology Support Div. IT & E-commerce Div. Special Project Dept. Technology Development 4

Business Development Div. Material Management Div. Product Eng. Div. Design Service Engineering Div.

Backend Operation Div. Corporate Planning Div. Computer Int. Mfg. Div. Device Engineering Div.

Module Development Program Project Management Dept.

Risk & Env. Safety Mgt. Dept. Design System Technology Dept.

Design Service Dept.

7 Vanguard International Semiconductor Corporation

2. Tasks of its principal divisions:

President Management of company-wide operations. Establish VIS business strategy and target. VP of Finance Corporate Accounting Div., Finance Div., PR & IR dept., IT & E-commerce Div., Material Management Div., and Corporate Planning Div. Responsible for the company finance, accounting operation and material management, as well as BOD, establishing the company's external communication channel, and maintaining the company's corporate image, investor relationship, investment analysis, and long-term investment planning. VP of Worldwide Customer Engineering Div., Corporate Sales Div., Sales Planning dept., Field Technology Sales and Planning Support Div., Business Development Div., and Backend Operation Div.. Planning of company products, including sales and marketing for these products. Responsible for product service, market analysis and development, and establishing and execution of sales plan. VP of Research & Lead specialty technology and IP development, as well as providing services for device Development engineering, IP resources, ESD, PDK, layout, photomask solution, and CAD tool management. Incl.: Technology Development Div., Device Engineering Div., Design Service Engineering Div., Design System Technology Dept., Project Management Dept., and Design Service Dept.. VP of Operation & VP of Operation & Environment Safety Corporate Wafer Production, Risk & Env. Safety Environment Safety Management Dept., Computer Int. Mfg. Div., Product Engineering Div., Module Development Program and Special Project Dept.. Improve operation efficiency, and ensure timely delivery of high quality products to customers. General Counsel of Corporate legal affairs, Intellectual property protection and Legal compliances. Legal Human Resources Recruiting the most qualified and suitable talents, providing employee training & Div. development programs to meet company's growth, and establishing an effective & innovative personnel management system and work environment in order to attract and retain talents, and maintain good labor relations. Quality Reliability Corporate Quality Assurance Dept., Reliability Assurance Dept., Quality System Assurance Div. Management Dept., and in charge of product inspection, quality control, and promoting quality policy and strategy in VIS. Internal Auditing Evaluate the design and operating effectiveness of internal control systems, and provide suggestions to achieve the objectives of internal control systems.

8 B. Information on the company's directors, supervisors, general manager, assistant general managers, deputy assistant general managers, and the supervisors of all the company's divisions and branch units 1. Directors: December 31, 2016 Managers Are Spouse or Shareholding by Shareholding when Spouse & Minor Within Second-degree Date Tenure Date First Current Shareholding Nominee Education &Selected Past Title Nationality Name Sex Elected Shareholding Selected Current Positions Relative of Consanguinity to Elected (Year) Elected Arrangement Positions Each Other Shares % Shares % Shares % Shares % Title Name Relation Chairman R.O.C. Taiwan Semiconductor 2015.06.08 3 1994.11.10 546,223,493 33.33 464,223,493 28.32 Manufacturing Co., Ltd. (tsmc) Leuh Fang M 3,215,000 0.20 3,215,000 0.20 0 0 0 0 Fab Director, Taiwan President, Vanguard International None None None Semiconductor Manufacturing Semiconductor Corporation Company, Ltd. Director and President, VIS Vice President, SSMC Associates Inc. MS, Materials Science and Director and President, VIS Engineering, University of Investment Holding, Inc. Washington Director, VIS Micro, Inc. Director, J-MEX Inc. Taiwan Semiconductor 2015.06.08 3 1994.11.10 546,223,493 33.33 464,223,493 28.32 Manufacturing Co., Ltd. (tsmc) Representatives:

9 Vice R.O.C. F.C. Tseng M 1,444,282 0.09 1,444,282 0.09 0 0 0 President, Vanguard Chairman, TSMC China Company None None None Chairman International Semiconductor Ltd. Corp. Chairman, Global Unichip Corp. President, TSMC Vice Chairman, TSMC Ph.D. in Electrical Independent Director, Acer Inc. Engineering, National Chengkung University, Taiwan

Director R.O.C. National Development 2015.06.08 3 1999.03.01 274,029,592 16.72 274,029,592 16.72 Executive Secretary, National Counselor, National Development None None None Fund Development Fund, Executive Council Executive Yuan Yuan Representative: Director, Department of K. H. Hsiao M 0 0 0 0 0 00Sectoral Planning, CEPD, Executive Yuan Master's Degree in Agricultural Economics, National Taiwan University

Director R.O.C. Edward Y. Way M 2015.06.08 3 2010.05.26 0 0 0 0 0 0 0 0 Managing Partner & CEO, Independent Director, Synnex None None None Deloitte Taiwan Technology International Corp. MBA, University of Georgia Independent Director, Taiwan Semiconductor Corporation Vanguard International Cement Corp. Independent Director, Far Eastern Department Stores, Ltd. Semiconductor Corporation Vanguard International

Managers Are Spouse or Shareholding by Shareholding when Spouse & Minor Within Second-degree Date Tenure Date First Current Shareholding Nominee Education &Selected Past Title Nationality Name Sex Elected Shareholding Selected Current Positions Relative of Consanguinity to Elected (Year) Elected Arrangement Positions Each Other Shares % Shares % Shares % Shares % Title Name Relation Independent Director, Primax Electronics Ltd. Director, MITAC Holdings Corp. Representative Director, Wowprime Corp. Director, Iron Force Industrial Co., Ltd. Supervisor, Sercomm Corp., Representative Supervisor, Chilisin Electronics Corp., Representative Supervisor, KAIMEI ELECTRONIC CORP., Representative Supervisor, United Way of Taiwan Independent R.O.C. Chintay Shih M 2015.06.08 3 2012.06.12 0 0 0 0 0 0 0 0 Chairman, Institute for Professor, College of Technology None None None Director Information Industry Management, National Tsing Hua President, Industrial University Technology Research Institute Independent Director, FocalTech Dean, College of Technology Systems, Ltd. Management, National Tsing Independent Director, Sercomm Hua University Corp. Ph.D. Electric Engineering, Princeton University, USA Independent R.O.C. Benson W.C. Liu M 2015.06.08 3 2012.06.12 0 0 0 0 0 0 0 0 Chairman & CEO, Bristol- Independent Director, Global None None None 10 Director Myers Squibb (Taiwan) Ltd Unichip Corp. Master, International Business Independent Director, Polylite Administration, University of Taiwan Co.,Ltd. Northrop, USA Vice Chairman, Chinese Corporate Governance Association Director, Maywufa Company Ltd. Independent R.O.C. Kenneth Kin M 2015.06.08 3 2012.06.12 0 0 0 0 0 0 0 0 Senior Vice President, TSMC Professor, Department of None None None Director Vice President, Worldwide Economics, College of Technology Sales & Services, IBM Management, National Tsing Hua Microelectronics Division University Ph.D. Nuclear Engineering and Independent Director, eMemory Applied Physics, Columbia Technology Inc. University, USA Independent Director, AzureWave Technologies Inc. Director, MediaTek Inc. Major Shareholders of the Institutional Shareholders As of 7/3/2016 Institutional Shareholders Shareholders Ownership (%) ADR-Taiwan Semiconductor Manufacturing Company, Ltd. 20.68% National Development Fund, Executive Yuan 6.38% Government of Singapore 2.64% JPMorgan Chase Bank N.A. Taipei Branch in Custody for Saudi Arabian Monetary Agency 1.51% JPMorgan Chase Bank N.A. Taipei Branch in Custody for EuroPacific Growth Fund 1.37% Norges Bank 1.20% Taiwan Semiconductor Manufacturing Co., Ltd. JPMorgan Chase Bank, N.A., Taipei Branch in Custody for Stichting Depositary APG Emerging Markets Equity 0.98% Pool

Vanguard Emerging Markets Stock Index Fund, a Series of Vanguard International Equity Index Funds 0.97% JPMorgan Chase Bank N.A., Taipei Branch in Custody for Vanguard Total International Stock Index Fund, a Series 0.93% of Vanguard Star Funds JPMorgan Chase Bank N.A. Taipei Branch in Custody for ABU DHABI Investment Authority 0.92%

Institutional Shareholder Representatives for Major Shareholders of the Institutional Shareholders As of 12/31/2016 11 Institutional Shareholders Major Shareholders of the Institutional Shareholders Non, all are non--company organization Semiconductor Corporation Vanguard International Vanguard International Semiconductor Corporation

Independence Analysis of Board Members under Taiwan SFC Criteria:

February 28, 2017 Name Over 5 years of working experience Criteria（Note） College Instructor or Court Judge, Business, Legal, Number of other higher level in Prosecutor, Lawyer, Finance, public companies Business, Legal, Accountant, or other Accounting or that concurrently Finance, Accounting Certified company business 1 2 3 4 5 6 7 8 9 10 serve as an or company Professional expert required working independent business related area related to company experience director business Leuh Fang        0 F.C. Tseng         1 K. H. Hsiao          0 Benson W.C. Liu            2 Kenneth Kin             2 Chintay Shih             2 Edward Y. Way             4 Note : 1. Not an employee of affiliated companies of the company and company. 2. Not a director, supervisor of affiliated companies of the company. 3. Not a natural person shareholder directly or indirectly owning more than 1% of the Company outstanding shares, nor one of the Company top 10 natural person shareholders. 4. Not a spouse or a first-or-second-degree relative to any person specified in Criteria 1–3. 5. Not a director, supervisor or employee of a shareholder of juridical person of the Company directly or indirectly owning more than 5% of the Company's outstanding shares, nor one of the Company's top five share-holders of juridical person. 6. Not a director, supervisor, manager or shareholder holding more than 5%of the outstanding shares of certain companies or institutions that have financial or business relationship with the Company. 7. Not an owner, partner, director, supervisor, manager of any sole proprietor, partnership, company or institution and his/her spouse, or the specialist and his/her spouse, that provides finance, commerce, legal consultation and services to the Company or affiliated companies within one year. 8. Not a spouse or first-or-second-degree relative to any other director. 9. Not a juridical person or its representative as defined in Article 30 of Company Law. 10. Not a juridical person or its representative as defined in Article 27 of Company Law.

Diversity of directors: Vanguard International Semiconductor Corporation Corporate Governance Practice Principles: The composition of the board of directors should be diversified, such as different professional backgrounds, fields of work or gender, and possesses the necessary knowledge, skills and literacy to perform his duties. To achieve the ideal corporate governance, the board of directors shall possess the following abilities: 1. Ability to make operational judgments. 2. Ability to perform accounting and financial analysis. 3. Ability to conduct management administration. 4. Ability to conduct crisis management. 5. Knowledge of the industry. 6. An international market perspective. 7. Ability to lead. 8. Ability to make policy decisions.

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Item operational accounting and knowledge of crisis international Lead and make judgments / financial the industry management market policy decisions management perspective Name administration Leuh Fang V V V V V F.C. Tseng V V V V V Benson W.C. Liu V V V V V Kenneth Kin V V V V V Chintay Shih V V V V V K. H. Hsiao V V V V V Edward Y. Way V V V V V

13 Semiconductor Corporation Vanguard International 2. Managers:

February 28, 2017 Managers Are Spouse or Shareholding by Within Second-degree Spouse & Minor Current Shareholding Nominee Relative of Title Name Sex Date Elected Shareholding Education &Selected Past Positions Selected Current Positions Arrangement Consanguinity to Each Other Shares % Shares % Shares % Title Name Relation MS, Materials Science and Engineering, Director and President, VIS Associates Inc. None None None University of Washington Director and President, VIS Investment Holding, President Leuh Fang M 2009.2.20 3,215,000 0.20% 0 0 0 0 Fab Director, Taiwan Semiconductor Inc. Manufacturing Company, Ltd. Director, VIS Micro, Inc. Vice President, SSMC Director, J-MEX Inc. Bachelor, National Chengchi University Director and Vice President, VIS Associates Inc. None None None Vice President, D. L. Tseng M 2011.5.1 52,727 0.00% 308,937 0.02% 0 0 Dept. Manager, Philips Electronics Director and CFO, VIS Investment Holding, Inc. Finance Director and CFO, VIS Micro Inc. Vice President MS, Electrical Engineering, University of Director and President, VIS Micro Inc. None None None Worldwide Cincinnati Thomas Chang M 2003.8.22 300,000 0.02% 0 0 0 0 Sales and Vice President, Mosel Vitelic Inc. Planning Ph. D., Electrical Engineering, Carnegie- None None None None Mellon University

14 Vice President General Manager, VIS Micro Inc Jun-Wei Research & M 2014.10.30 0 0.00% 0 0 0 0 Vice President of Technology, Kinetic Chen Development Technologies, Inc. Vice President of Technology, Advanced Analogic Technologies, Inc. Vice President MS, Electrical Engineering, National Tsing None None None None Operation & Hua University Chan-Jen Kuo M 2007.5.21 26,913 0.00% 0 0 0 0 Environment Safety Ph. D, Electrical Engineering, National None None None None Associate Vice Tsing Hua University President Chrong-Jung M 2015.12.01 0 0.00% 0 0 0 0 Professor, Electrical Engineering, National Research & Lin Tsing Hua University Development R&D Project Manager, TSMC C. Remuneration to Directors, Supervisors & Managers 1. Remuneration to Directors: Unit: NT$, in thousands

Remuneration to Directors Remuneration to Concurrent Employment A+B+C+D+E+F+G Other A+B+C+D as % of as % of remuneration Remuneration Retirement pay directors' Allowances(D) Net Income Salary, Bonuses & Retirement pay Title Name employees' compensation (G) Net Income from investment (A) (B) compensation (C) (Note) Allowances (E) (F) business except subsidiary VIS VIS & VIS VIS & VIS VIS & VIS VIS & VIS VIS & VIS VIS & VIS VIS & VIS VIS & Affiliates VIS VIS & Affiliates Affiliates Affiliates Affiliates Affiliates Affiliates Affiliates Cash Stock Cash Stock Affiliates Leuh Fang (Taiwan Semiconductor Chairman Manufacturing Co., Ltd. Representative) F.C. Tseng (Taiwan Vice Semiconductor Chairman Manufacturing Co., Ltd. 15 Representative) K. H. Hsiao (National Director Development Fund, Executive 4,620 4,620 0 0 14,100 14,100 905 905 0.35% 0.35% 9,101 9,101 0 0 29,199 0 29,199 0 1.05% 1.05% None Yuan Representative) Independent Benson W.C. Liu Director Independent Kenneth Kin Director Independent Chintay Shih Director Director Edward Y. Way Except above-mentioned, paid to directors for providing other service last year: 375

Note:

transportation professional practice Semiconductor Corporation Vanguard International Total allowances allowances Allowances(D) 720 185 905 Vanguard International Semiconductor Corporation

Range of Remuneration to Number of Director Directors (NT$) A+B+C+D A+B+C+D+E+F+G VIS VIS & Affiliates VIS VIS & Affiliates Less than 2,000,000 2,000,000～4,999,999 Leuh Fang (Taiwan Leuh Fang (Taiwan F.C. Tseng (Taiwan F.C. Tseng (Taiwan Semiconductor Semiconductor Semiconductor Semiconductor Manufacturing Co., Manufacturing Co., Ltd. Manufacturing Co., Manufacturing Co., Ltd. Representative) Ltd. Ltd. Representative) F.C. Tseng (Taiwan Representative) Representative) F.C. Tseng (Taiwan Semiconductor K. H. Hsiao (National K. H. Hsiao (National Semiconductor Manufacturing Co., Ltd. Development Fund, Development Fund, Manufacturing Co., Representative) Executive Yuan Executive Yuan Ltd. K. H. Hsiao (National Representative) Representative) Representative) Development Fund, Benson W.C. Liu Benson W.C. Liu K. H. Hsiao (National Executive Yuan Kenneth Kin Kenneth Kin Development Fund, Representative) Chintay Shih Chintay Shih Executive Yuan Benson W.C. Liu Edward Y. Way Edward Y. Way Representative) Kenneth Kin Benson W.C. Liu Chintay Shih Kenneth Kin Edward Y. Way Chintay Shih Edward Y. Way 5,000,000～9,999,999 10,000,000～14,999,999 15,000,000～29,999,999 30,000,000～49,999,999 Leuh Fang(Taiwan Leuh Fang (Taiwan Semiconductor Semiconductor Manufacturing Co., Manufacturing Co., Ltd. Ltd. Representative) Representative) 50,000,000～99,999,999 100,000,000~ Total 7 7 7 7

2. Remuneration to Supervisors: None

16 3. Remuneration to President and Vice Presidents: Unit: NT$, in thousands

Retirement pay Employee Profit Sharing (D) A+B+C+D as % Salary (A) Bonus (C) (B) （Note 1） of Net Income Other Title Name Remuneration VIS & VIS & VIS & VIS & VIS VIS & VIS VIS VIS Affiliates VIS Affiliates Affiliates Affiliates Affiliates Cash Stock Cash Stock President Leuh Fang Vice President, Finance D. L. Tseng Vice President Worldwide Sales and Thomas Chang Planning Vice President 25,520 29,878 0 0 17,563 17,563 63,920 0 63,920 0 1.93 2.01 None Jun-Wei Chen Research & Development Vice President Operation & Chan-Jen Kuo

17 Environment Safety Associate Vice President Chrong-Jung Lin Research & Development Note : As of the annual report publication date, prior to the shareholders meeting resolution concerning the Y2016 distribution of earnings, the board of directors approved a proposal determining the amounts of the bonuses granted to the president and vice president; the figure above is a tentative estimate, and the amount will be implemented following a resolution at the Y2017 shareholders meeting. Range of Remuneration to Name of President and Vice President President and Vice President (NT$) VIS VIS & Affiliates <2,000,000 2,000,000～4,999,999 5,000,000～9,999,999 10,000,000～14,999,999 D. L. Tseng, Thomas Chang, Jun-We Chen, Chan-Jen Kuo D. L. Tseng, Thomas Chang, Jun-We Chen, Chan-Jen Kuo 15,000,000～29,999,999 Chrong-Jung Lin Chrong-Jung Lin 30,000,000～49,999,999 Leuh Fang Leuh Fang

Total 6 6 Semiconductor Corporation Vanguard International Semiconductor Corporation Vanguard International

Employee Profit Sharing Granted to Management Team: February 28, 2017 Title Name Stock Cash Total Total as % of Net Income President Leuh Fang Vice President, Finance D. L. Tseng Vice President Marketing & Sales Thomas Chang 0 63,920 63,920 1.15 Vice President Research & Development Jun-Wei Chen Vice President Operation & Environment Safety Chan-Jen Kuo Associate Vice President Research & Development Chrong-Jung Lin

Note : As of the annual report publication date, prior to the shareholders meeting resolution concerning the Y2016 distribution of earnings, the board of directors approved a proposal determining the amounts of the bonuses granted to the president and vice president; the figure above is a tentative estimate, and the amount will be implemented following a resolution at the Y2017 shareholders meeting. 18 Vanguard International Semiconductor Corporation

4. Comparison and Description of all Company Paid Remuneration to Net Income Ratio Analysis and Company Remuneration Policy, Pattern, Procedures and Ties to the Operational Result （1） Analysis of Remuneration to Net Income Ratio in the last two years for Company Directors, Supervisors and Executive Officers: Unit: NT$, in thousands VIS Paid Remuneration as % of Net Income

Title Y2015 Y2016 Remuneration as % of Remuneration as % of Remuneration Net Income Remuneration Net Income Net Income Net Income Directors 44,065 1.06% 20,000 0.36%

Supervisors 0 4,157,583 0.00% 0 5,537,925 0.00% President and 95,255 2.29% 107,003 1.93% Vice Presidents Unit: NT$, in thousands VIS & Affiliates Paid Remuneration as % of Net Income

Title Y2015 Y2016 Remuneration as % of Remuneration as % of Remuneration Net Income Remuneration Net Income Net Income Net Income Directors 44,065 1.06% 20,000 0.36%

Supervisors 0 4,157,583 0.00% 0 5,537,925 0.00% President and 99,611 2.40% 111,361 2.01% Vice Presidents

（2） Company Remuneration Policy, Pattern, Procedures and Ties to the Operational Result: The compensation policy for board directors and supervisors is regulated in the company policy. Based on the general pattern in the industry, it is further adjusted by profit distribution approved by board and shareholder meetings. It is heavily influenced by the company operational result. Executive compensation and bonus situation is set by adjustable company rules, education and experience level, and comparison with industry peers. It is further adjusted by profit distribution approved by board and shareholder meetings. It is heavily influenced by company operational result. D. Implementation of Corporate Governance 1. Implementation of Board Meeting: The Board convened 5 meetings in Y2016. Meeting attendance was as follows:

19 Vanguard International Semiconductor Corporation

No. of Meetings No. of Meetings Title Name Attendance Rate Note Attended Substituted Chairman Leuh Fang 5 0 100% Vice Chairman F.C. Tseng 5 0 100% Independent Director Benson W.C. Liu 5 0 100% Independent Director Chintay Shih 5 0 100% Independent Director Kenneth Kin 5 0 100% Director Edward Y. Way 5 0 100% Director K. H. Hsiao 5 0 100% Supplement Notes: 1. There were no written or otherwise recorded resolutions on which an independent director had a dissenting opinion or qualified opinion in 2016. Opinions of Independent directors in respect of important proposals: Independent Director List on Article14- Expresses an BOD Meeting Important Proposals 3 of the Securities Objection or and Exchange Act Reservation The eighth sixth BOD To amend the Internal Control V meeting 2016.01.27 System. The eighth seventh BOD To approve capital injection to V meeting 2016.05.03 VIS Associates Inc., a wholly- owned subsidiary. The eighth eighth BOD To approve capital injection to V meeting 2016.08.05 VIS Associates Inc., a wholly- owned subsidiary. To approve the appointment of V Internal Audit Officer. The eighth ninth BOD To approve the hiring of an V meeting 2016.11.01 attesting CPA and the compensation given thereto. The eighth eleventh BOD To amend the Procedures for V meeting 2017.02.21 Acquisition or Disposal of Assets. To approve capital injection to V VIS Associates Inc., a wholly- owned subsidiary. To approve to establish VIS V Shanghai Company Limited. To approve the hiring of V attesting CPA of VIS Shanghai Company Limited and the compensation given thereto. To amend the Internal Control V System. Opinions of Independent directors in respect of the above proposals：None The responses to opinions of Independent directors : None Resolved: The above proposals were approved unanimously. 2. Recusals of directors due to conflicts of interests in 2016: Chairman and President: Leuh Fang recused himself from the discussion and voting of his performance and compensation resolution. 3. Measures taken to strengthen the functionality of the Board: a. VIS Board has approved “Corporate Governance Practice Principles” and “VIS Corporate Social Responsibility Principle” and continues to improve and strengthen the functionality of the Board. b. VIS Board continues to obtain a good performance on the Corporate Governance Ranking. c. VIS Board delegates various responsibilities and authority to two Board Committees, Audit Committee and Compensation Committee. Both the two Committees consist solely of the three Independent Directors. Each Committee’s chairperson regularly reports to the Board on the activities and actions of the relevant committee.

20 Vanguard International Semiconductor Corporation

Dissenting opinions held by directors and supervisors in respect of important resolutions passed by the board directors: None. The State of Participation in Board Meetings by the Supervisors: NA 2. Implementation of Audit Committee Meeting: The primary purpose of establishing the Audit Committee is to reinforce the oversight capabilities of the Board of Directors. The Audit Committee is tasked with overseeing adequate representation of the Company's financial statements, appointment (or dismissal) of certified public accountants as well as their competence, independence, and performance, effective implementation of the Company's internal controls, the Company's compliance with relevant laws and regulations, and control over existing or potential risks to the Company. The main scope of authority of the Audit Committee consists of the following: a. The adoption of or amendments to the internal control system pursuant to Article 14-1 of the Securities and Exchange Act. b. Assessment of the effectiveness of the internal control system. c. The adoption or amendment, pursuant to Article 36-1 of the Securities and Exchange Act, of the procedures for handling financial or business activities of a material nature, such as acquisition or disposal of assets, derivatives trading, loaning of funds to others, and endorsements or guarantees for others. d. Matters in which a director is an interested party. e. Asset transactions or derivatives trading of a material nature. f. Loans of funds, endorsements, or provision of guarantees of a material nature. g. The offering, issuance, or private placement of equity-type securities. h. The hiring or dismissal of a certified public accountant, or their compensation. i. The appointment or discharge of a financial, accounting, or internal audit officer. j. Annual, semi-annual, and quarterly financial reports. k. Review of the annual business report, the surplus earning distribution, or loss make-up proposal. l. Review the changes of accounting policies or accounting estimate and other material matters as may be required by this Corporation or by the competent authority. The qualifications of members of the Audit Committee are identical to those of the Compensation Committee.

21 Vanguard International Semiconductor Corporation

The Audit Committee convened 4 regular meetings in Y2016. Meeting attendance was as follows: No. of Meetings No. of Meetings Attendance Title Name Note Attended Substituted Rate Benson W.C. Independent Director 4 0 100% Liu Independent Director Chintay Shih 4 0 100% Independent Director Kenneth Kin 4 0 100% Supplement Notes: 1. In the event that the Audit Committee encounters any of the following conditions during the course of its operations, a description of the date, term, and content of the proposed motion of the Board of Directors along with the result of the Audit Committee's resolution and the Company's handling of the Audit Committee's opinion shall be provided. a. Conditions stipulated in Article 14-5 of the Securities and Exchange Act: Action Taken by Resolution the Company in Board of Proposed Motions Adopted by the Response to Directors Audit Opinion of the Committee Audit Committee All committee 1. Individual and Consolidated Financial members present All directors 6th Meeting Statements of the Company for CY2015 present (8th Term) Reviewed and 2. Revision to the Company's Internal approved Unanimously 2016/1/27 Control System resolved (2016/1/27) All committee members present All directors 7th Meeting Proposed capital increase of US$30 million present (8th Term) for the Company's subsidiary VIS Reviewed and Associates, Inc. approved Unanimously 2016/5/3 resolved (2016/5/3) 1. Proposed capital increase of US$45 All committee members present All directors 8th Meeting million for the Company's subsidiary present (8th Term) VIS Associates, Inc. Reviewed and approved Unanimously 2016/8/5 2. Appointment and dismissal of internal resolved auditing supervisors (2016/7/26) All committee Appointment and independence, suitability members present All directors 9th Meeting present (8th Term) for appointment, and performance Reviewed and evaluation of the Company's certified approved Unanimously 2016/11/1 public accountants. resolved (2016/11/1) b. Other resolutions not approved by the Audit Committee but passed by more than a two-thirds majority of all Board members: There were no instances of the Company adopting a resolution which was not approved by the Audit Committee but approved by more than a two-thirds majority of all Board members. 2. No refusing case for Audit Committee in the latest fiscal year. 3.Conditions concerning communication between the Company's independent

22 Vanguard International Semiconductor Corporation

directors, internal audit supervisors, and accountants (which shall include carrying out various tasks related to communication matters, methods, and results concerning the Company's financial affairs and sales performance): a. There are direct channels of communication available between all of the Company's independent directors and internal audit supervisors, resulting in a satisfactory level of communication. An Audit Committee meeting is convened at least once each quarter, consisting of a closed-door meeting with internal audit supervisors. The meeting shall include discussing and verifying the annual audit plan and current state of implementation of the Company's internal audit procedures. Each month, internal audit supervisors are to submit a report in writing to the independent directors and communicate important points of concern as deemed necessary. b. There is a satisfactory level of communication between the Company's independent directors and accountants. Each quarter, a closed-door meeting is held between the Audit Committee and the Company's accountants. The Company's accountants are tasked with discussing and communicating various matters with the independent directors, including submitting a report on the results of audits/reviews of the financial statements of VIS and other companies in which VIS is invested along with matters pertaining to material changes in accounting estimates, accounting principles, and important issues discussed with the supervisory authority, changes in securities and tax laws, and the statement of independence issued by the Company's accountants. To read a summary of the current state of communication between the Company's independent directors, internal audit supervisors, and accountants, please visit the official VIS website: http://www.vis.com.tw/visCom/chinese/d_ir/d0402_committees.htm

23 3. VIS Implementation as Required by Taiwan Financial Supervisory Commission: Semiconductor Corporation Vanguard International

Implementation Status Non-implementation Item and Its Reason(s) Yes No Description 1. Did the company formulate and disclose 9 VIS formulated our Corporate Governance Practice Principles according to the Corporate corporate governance practice principles Governance Best Practice Principles for TWSE/GTSM Listed Companies. on our website. It according to the Corporate Governance Best upholds principles regarding protecting the rights and interests of shareholders, strengthening None Practice Principles for TWSE/GTSM Listed the powers of the board of directors, fulfilling the function of Audit Committee, respecting the Companies? rights and interests of stakeholders and enhancing information transparency. The Corporate Governance Practice Principles is disclosed on our website. 2. Shareholding Structure & Shareholders' Rights 9 VIS has specific staffs handle shareholders’ suggestions, doubts and disputes. Meanwhile, the (1) Did the company establish internal operating "Procedures for Handling Shareholder Complaints" were formulated as an addition to the procedures to process shareholders' Company's internal control system. Matters related to shareholder complaints are solely handled suggestions, doubts, disputes, and litigation by the Legal Department and are implemented in accordance with the aforementioned matters, and implement the procedures procedures. accordingly?

(2) The Company's possession of major 9 VIS tracks the shareholdings of directors, officers, and shareholders holding more than 10% of

24 shareholder's list and the list of ultimate the outstanding shares of VIS. owners of these major shareholders None (3) Has the Company built and executed a risk 9 VIS has established proper organization control structure to monitor the major financial and management system and “firewall” between business operations in any of the subsidiaries. VIS also follows the internal control regulations the Company and its affiliates? to review related businesses of the subsidiaries regularly so as to built and executed a risk management system and “firewall” between the Company and its affiliates.

(4) Did the company develop internal rules for 9 VIS has formulated an "Operating Procedure for Processing of Major Internal Information", prohibiting company insiders from trading prohibiting company insiders from trading securities using information not disclosed to the securities using information not disclosed to market. the market? Implementation Status Non-implementation Item and Its Reason(s) Yes No Description 3. Composition and Responsibilities of the Board of Directors (1) Did the board of directors formulate 9 Provision 5 of the company's Regulation for Board Election specifically discloses the policy on appropriate policy on diversity based on the diversity of board of director members; Company requirements and the diversity of board of composition of its members and implement directors are considered in the nominations for re-electing directors of the board. such policy accordingly?

(2) In addition to establishing a remuneration 9 In addition to establishing a remuneration committee and audit committee, we did not set up committee and audit committee, did the other functional committees. company voluntarily set up other functional committees?

(3) Did the company formulate rules and 9 The Company has formulated a series of rules and polices pertaining to evaluations, including methods for board of directors’ performance "Policies, Systems, Standards, and Structure of the Performance Assessment and Remuneration assessments, and perform periodic of Directors" as well as a "Board of Directors Performance Evaluation Policy"; The scope of performance assessments each year? evaluation covers individual Board members, the Board as a whole, and functional committees. The methods of evaluation may be either internal evaluation, external evaluation, or both. 25 Internal evaluation includes self-evaluation by individual Board members, internal evaluation by the Board, internal evaluation by functional committees, re-evaluation by the Compensation None Committee, and resolutions of meetings of the Board. External evaluation includes evaluations by appointed external professional institutions, experts, or other appropriate methods. Internal evaluation shall be adopted for the evaluation of individual Board members and functional committees. Both internal and external evaluations shall be adopted for the evaluation of the Board as a whole. We formulate performance assessment items at the beginning of each year, evaluate the performance at the end of each year, and incorporate the assessment results into consideration for remuneration of the Board.

(4) Did the company evaluate the independence 9 The external performance assessment of 2016 was conducted by Taiwan Corporate Governance of Certified Public Accountants (CPA) Association, which has no business relations with VIS; it is an independent institution. The periodically? internal and external assessment results are disclosed on our website : http://www.vis.com.tw/visCom/english/d_ir/d0402_committees.htm

The Audit Committee annually evaluates the independence of Certified Public Semiconductor Corporation Vanguard International Accountants(CPA) mainly including financial interests, financing and guarantees, business relationships, employment, non-audited services, significant value of gifts, continuous engagements, etc. and assess CPA's performance and competence and reports the assessments to the board of directors. Implementation Status Semiconductor Corporation Vanguard International Non-implementation Item and Its Reason(s) Yes No Description 4. As a TWSE/TPEx-listed company, has VIS set 9 a. The Company has set up a dedicated corporate governance unit, i.e., the Company's up a full- (or part-) time corporate governance Financial Management Department under the Finance Division, which is overseen by the unit or personnel in charge of corporate Vice President of Finance and tasked with formulating and executing plans related to the governance affairs and designated a senior Company's corporate governance, handling corporate registration and amendment officer to be in charge of supervision registration, and other matters to effectively safeguard the rights and interests of (including but not limited to furnishing shareholders, reinforce the role of the Board of Directors and function of the Audit information required by directors and Committee, respect stakeholders' rights, and improve information transparency. None supervisors to conduct business, handling b. The Company's relevant departments and units including the Secretariat of the Board of matters relating to board meetings and Directors, Internal Audit Department, and Department of Human Resources are responsible shareholders' meetings as required by law, for furnishing information required by directors and supervisors to conduct business, and handling corporate registration and the Secretariat of the Board is tasked with carrying out relevant tasks relating to board amendment registration, producing minutes of meetings and shareholders' meetings in accordance with law and producing meeting board meetings and shareholders' meetings, minutes for board meetings and shareholders' meetings. etc.)? 5. Did the company maintain channels of 9 VIS attaches great importance to the communication between our stakeholders and us. The communication with its stakeholders stakeholders include but not limited to shareholders, employees, clients and supplies. We (including but not limited to shareholders, maintain good communication with our stakeholders through relevant departments depending

26 employees, clients and supplies), designate a on situation. Furthermore, we have publicly disclosed the contact information of our corporate None stakeholders section on its website, and spokesperson and relevant departments. Also, we have a stakeholder section on our corporate adequately respond to stakeholders' concerns website to address our corporate social responsibilities and any other issues. regarding corporate social responsibility? 6. Did the company engage a professional 9 We have designated Chinatrust Commercial Bank as our service agent to handle shareholders shareholder services agent to handle meeting matters. None shareholders meeting matters? 7. Information Disclosure None (1) Establishment of corporate website to 9 VIS discloses our financials, business and corporate governance status on its website at disclose information regarding the http://www.vis.com.tw Company's financials, business and corporate governance status

(2) Other information disclosure channels (e.g. 9 VIS has launched bilingual Chinese and English websites and has assigned the related English website, appointing responsible departments to collect and reveal company information, while the Public and Corporate people to handle information collection and Investor Relation department is in charge of integrated management. We have Investor disclosure, appointing spokesperson, Relations segment on our corporate website, and it contains historical Investor Conference webcasting investor conference) Report and the video of latest Investor Conference. In addition, VIS has assigned spokesman and acting spokesman as regulated. Implementation Status Non-implementation Item and Its Reason(s) Yes No Description 8. Has the Company disclosed other information 9 a. For employee rights and employee wellness, please refer to“Employee / employer relations” None to facilitate a better understanding of its on page xxxx of his Annual Report. corporate governance practices (e.g. including but not limited to employee rights, employee b. Investor relations : wellness, investor relations, supplier relations, VIS has specific staffs handle shareholders’ suggestions, doubts and disputes. In addition, we rights of stakeholders, directors’ training hold Investor Conference for institutional investors every quarter and we also disclose records, the implementation of risk Chinese and English financial reports on our corporate website. management policies and risk evaluation measures, the implementation of customer c. For supplier relations and rights of stakeholders, please refer to ȨImplementation of relations policies, and purchasing insurance Corporate Social Responsibility Measuresȩon page xxxx of this Annual Report. for directors)? d. Directors’ training records: All of our seven directs attend 100 hours of training in Y2016.

e. For the implementation of risk management policies and risk evaluation measures, please refer to ȨThe policy of the risk managementȩandȨThe organization chart of the risk managementȩon page xxx of this Annual Report. 27

f. Implementation of customer relations policies : From the moment we start negotiating with our customers about business opportunities, we require all customers to sign a Non-Disclosure Agreement. To protect customer privacy rights, we determine the security level of confidential information and establish corresponding control measures, requiring only those with permission to access the information. All other personnel must not attempt to make inquiries on customer information, and when customers make requests or apply for documents through our VIS- online system, proper authorization must be obtained.

g. We maintains D&O Insurance for its directors and officers. 9. Consulted the explanation of improvements to the corporate governance evaluation results for the most recent year published by the Taiwan Stock Exchange Corporation (TWSE) Corporate Governance Center and proposed fast-tracked implementation of improvements and related measures for areas which had yet to be rectified. For two years in a row, the Company has been ranked in the top 5% of the Corporate Governance Evaluation, and in 2016 the Chairman of the Board personally attended and presided over the 2016 General Shareholders' Meeting. In terms of other developments and improvements, we formulated the VIS Corporate Social Responsibility Principles, Corporate

Governance Practice Principles, VIS Ethical Corporate Management Best Practice Principles, and a Board of Directors Performance Assessment Policy. All of these new policies are Semiconductor Corporation Vanguard International publicly disclosed on our corporate website in both Chinese and English. The Company also submits a report regarding the improved items to the Board of Directors and, after taking into consideration the specific aspects of each industry segment and actual operating requirements, the Board is has continued its efforts to enhance the Company's corporate governance, thereby boosting the core competitiveness of VIS. Vanguard International Semiconductor Corporation

2. Compensation Committee VIS has established a Compensation Committee as required by the competent authority for assisting the BOD in the study and design of the compensation policy and structure in order to attract, motivate, reward, and retain talent. The functions of this committee are: Map out the compensation policy and structure, the method for the release of fees for directors and supervisors, the salaries of the managers and release of the salaries, the reward for the managers and incentives for motivating people, Planning and implementation of performance evaluations for the Board of directors (including the Chairman) and managers (including the President) any other duties assigned by or authorized by BOD. Members of the Compensation Committee

Over 5 years of working experience Criteria（Note） Number of other College Court Judge, Business, public Instructor or Prosecutor, Legal, companies that higher level in Lawyer, Finance, concurrently Remark Title Name Business, Legal, Accountant, or Accounting or serve as an Finance, other Certified company 1 2 3 4 5 6 7 8 member of Accounting or Professional business Compensation company expert related to required Committee business related company working area business experience Independent Chintay V V VVVVVVV V 2 Director Shih Independent Kenneth V V VVVVVVV V 3 Director Kin Independent Benson V VVVVVVV V 2 Director W.C. Liu Note : 1. Not an employee of affiliated companies of the company and company. 2. Not a director, supervisor of affiliated companies of the company and company. 3. Not a natural person shareholder directly or indirectly owning more than 1% of the Company outstanding shares, nor one of the Company top 10 natural person shareholders. 4. Not a spouse or a first-or-second-degree relative to any person specified in Criteria 1–3. 5. Not a director, supervisor or employee of a shareholder of juridical person of the Company directly or indirectly owning more than 5% of the Company's outstanding shares, nor one of the Company's top five share-holders of juridical person. 6. Not a director, supervisor, manager or shareholder holding more than 5%of the outstanding shares of certain companies or institutions that have financial or business relationship with the Company. 7. Not an owner, partner, director, supervisor, manager of any sole proprietor, partnership, company or institution and his/her spouse, or the specialist and his/her spouse, that provides finance, commerce, legal consultation and services to the Company or affiliated companies within one year. 8. Not a juridical person or its representative as defined in Article 30 of Company Law.

28 Vanguard International Semiconductor Corporation

Compensation Committee Operations Information 1. The company’s Compensation Committee is composed of three members 2. Term of office for the current members: June 8, 2015 to June 7, 2018. The committee has met 5 times in the most recent year. Membership and attendance information are provided below: No. of Meetings No. of Meetings Attendance Title Name Note Attended Substituted Rate Convener Kenneth Kin 5 0 100%

Member Chintay Shih 4 1 80% Member Benson W.C. Liu 5 0 100% Other items of note: 1. If the Board of Directors does not adopt or amend the Compensation Committee’s recommendations, the date, period, motion, decision of the board, and how the Company shall handle the Committee’s recommendations must be clearly stated: None. 2. If members of the Compensation Committee oppose or reserve their opinions for any resolved issues and have a record or written statement for it, the date, period, motion, and all opinions of the members and how these opinions were handled shall be clearly stated: None. 3. Matters concerning the Board of Directors Performance Evaluation Policy and methods and implementation status of performance evaluations (in cases where an external institution or experts are appointed to conduct evaluations of Board performance, the Company shall disclose the name of the external institution in question and names of the experts and a description of their specialties, and indicate whether the external institution and experts have business dealings with the Company and whether they are independent): The Company has formulated the Board of Directors Performance Evaluation Policy, which is a performance evaluation policy which applies to Board members. The scope of the performance evaluation for the Company's Board of Directors includes evaluating individual directors, the Board as a whole, and functional committees. Internal evaluation shall be adopted for the evaluation of individual Board members and functional committees. Both internal and external evaluations shall be adopted for the evaluation of the Board as a whole. (1) Internal performance evaluation for individual Board members: The evaluation items and evaluation forms compiled by the Compensation Committee during Q4 of each calendar year shall be used in the performance reviews carried out after the first quarter of the following calendar year (to be regularly implemented once annually), and the assessment results are incorporated into consideration for Board remuneration. Cumulative Evaluation Results for 2016: The performance of all directors was determined to have met expectations. (2) Internal performance evaluations for the Board as a whole and functional committees: The evaluation items and evaluation forms compiled by the Compensation Committee during the fourth quarter of each calendar year shall be used in the performance reviews carried out after the first quarter of the following calendar year (to be regularly implemented once annually). Cumulative evaluation results for 2016: The overall performance of the Board as a whole and each functional committee was determined to have met expectations. (3) External performance evaluation for the Board of Directors: At least once every three years, an outside professional institution is retained to carry out

29 Vanguard International Semiconductor Corporation

an assessment. For CY2016, the Company engaged the Taiwan Corporate Governance Association to carry out an assessment. Cumulative Evaluation Results for 2016: The Company's Board of Directors and management team were found to have maintained open and direct lines of communication; the Board of Directors provided guidance on the Company's developmental strategies, established an incentive mechanism for managers, exercised effective oversight of the VIS management team's operating achievements, reduced the Company's operating risks, and regularly examined the effectiveness and implementation of various systems, and furthermore gradually consolidated the Company's corporate governance culture, thereby ensuring the Company possesses a strong foundation for future sustainability.

30 3. Implementation of Corporate Social Responsibility Measures Current Situation Variation compared with the Corporate Social Responsibility Assessment Items Best Practice Principles for Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation 1. Implementation of Corporate Governance (1) Did the company formulate corporate social V (1) To implement corporate social responsibility and embrace the overall development of responsibility policies or systems and societies in Taiwan, VIS has established the "Corporate Social Responsibility Policy" review the effectiveness of its and "Corporate Social Responsibility Report". VIS commits to abide by ethical norms in implementation? business management, assume environmental protection responsibility, provide a safe working environment, and protect employee rights, as the crucial criteria for maintaining positive developments in our society. (2) Did the company periodically hold social V (2) To embrace social responsibility and promote corporate governance, VIS constantly responsibility training? reminds and promotes corporate governance concepts and arranges corporate social responsibility training to the board of directors, independent directors, and employees.

31 For example, formulating ethical norms for business practice represents the advocacy of integrity and ethical business behavior; promoting the importance of integrity and uprightness helps employees understand the concept and principles of business ethics, thereby motivating them to comply with laws and regulations. Employees' participation in relevant training programs is recorded and registered. The training outcomes are provided to their respective supervisors as reference for employee performance No variation assessments. (3) Did the company establish a unit V (3) The company has set up the "Corporate Social Responsibility Promotion Committee" to exclusively for the promotion of corporate take charge of establishing the corporate social responsibility policy and proposing and social responsibility, and did the board of implementing systems while at the same time constantly reflecting the implementation directors authorize high-level managements effectiveness and making constant improvements, ensuring execution of the company's to manage this unit and report management corporate social responsibility policy. The Committee periodically reports to the board of progress to the board of directors? directors regarding promotion progress. The structure of company’s CSR committee please refers to our website via http://www.vis.com.tw/visCom/english/download/csr_group.jpg (4) Did the company formulate reasonable V (4) VIS provides its employees with compensation above the standard of that of the same

remuneration policy, integrate employee industries. Additionally, the company's performance assessment system considers both Semiconductor Corporation Vanguard International performance assessments with the corporate company strategies and personal performance goals to keep employees' remunerations social responsibility policy, and establish an are closely linked with their performance. The purpose is to encourage and reward effective rewarding and punishment system? employees for their efforts during policy promotions, thereby strengthening the sustainability of future policy promotions. Semiconductor Corporation Vanguard International

Current Situation Variation compared with the Corporate Social Responsibility Assessment Items Best Practice Principles for Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation 2. Development of Sustainable Environment (1) Is the company committed to enhancing the V (1) Minimizing environmental impact through green production is VIS's core environmental usage efficiency of various resources and policy. In Y2016, the Company targeted 109 items in an endeavor to enhance the usage utilizing renewable materials that exert a efficiency of various resources, waste reduction and pollution minimization. For low impact on environmental load? example, VIS has made efforts to minimize the volume of chemicals and gases used in a production processes, to adopt the use of LED tube lighting at the Company's production facilities, to conduct an improvement plan for dry pump exhaust kits, reduction in ACT and NMP waste, and other measures designed to mitigate negative environmental impacts. (2) Did the company establish an appropriate V (2) In addition to upholding the spirit of continuous improvement embedded in the PDCA environmental management system (Plan-Do-Check-Action) methodology under ISO 14001, VIS conducts a review of according to its industry characteristics? relevant environmental protection laws and regulations on a monthly basis and makes 32 corresponding adjustments as needed. We also conduct discussion meetings with environmental, safety, and health committees of various levels. For example, fab No variation directors hold monthly committee meetings to examine environmental safety and health issues, and the various departments of each area (fab manufacturing, ADM administration, and IS & QRA) hold quarterly meetings to examine the Company's overall operations relating to environmental safety and health management systems. A report is then presented at a quarterly company-wide environmental safety and health committee meeting hosted by the President of VIS. (3) Did the company show concerns for the V (3) Climate change topics have attracted attention worldwide, so as to VIS. In addition to influence that climate change has on its following rules and regulations closely, VIS conducts corporation-wide GHG emission business activities, and embark on inventories annually as well as external verifications. Inventory and verification results inventorying greenhouse gas emissions and are reported to the government as well as the high level executives in the Health, Safety formulating strategies to conserve energy, and Environmental Protection Committee. reduce carbon emission, and decrease greenhouse gas volume? 3. Protection of Society's Public Interest No variation (1) Did the company formulate applicable V (1) VIS is dedicated to the establishment of harmonious atmosphere in labor-management managerial policies and procedures in relation through mutual trust in corporate management. VIS has established the accordance with relevant regulations and employee handbook, as well as the personnel regulations manual for employees to international human rights conventions? implement the rules. Current Situation Variation compared with the Corporate Social Responsibility Assessment Items Best Practice Principles for Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation (2) Did the company establish a staff complaint V (2) VIS is dedicated to the establishment of harmonious atmosphere in labor-management mechanism and channels, and adequately relation through mutual trust in corporate management. It embraces an active, open handle employee complains? management model to create a work environment that is both challenging and fun. VIS provides a variety of way to improving employee labor-management communication, such as hosting orientation of new people, quarterly labor-management meetings, and executive meetings. The company also sets up a mailbox for employee communication. In addition, VIS conducts survey on employee opinions regarding their satisfaction with management and the welfare system regularly. (3) Did the company provide employees a safe V (3) VIS highly values employees' physical and mental health, improvements in work healthy working environment, and environment, and provision of recreational activities and facilities, and exerts its utmost periodically educate employees on safety effort in reinforcing health and insurance-related services. To cater for employees' daily and health issues? lives, VIS not only offers a clean working environment with an array of recreational 33 facilities, but also a whole variety of recreational events to allow employees a chance to bring some relaxation and fulfillment to their life outside of work. In order to safeguard employee health, VIS offers physical health examinations to refreshers, specific employees, and in-service employees. In addition, we regularly promote special health checks. VIS procures flu vaccine, hiring doctors to administer it onsite for its employees. VIS has invited medical physicians to provide medical care services at our facilities; these services included providing health consultations, medical examinations, and assisting injured employees back to work. (4) Did the company devise a periodic V (4) Moreover, the company provided different channels for labor-management communication mechanism for its communications and agreements, such as hosting orientation of new people, quarterly employees, and notify employees in a labor-management meetings, and executive meetings. The company also sets up a reasonable manner of potential major mailbox for employee communication. In addition, VIS conducts survey on employee influences to the company's operational opinions regarding their satisfaction with management and the welfare system regularly. process? (5) Did the company establish effective career V (5) VIS has a comprehensive training system for training professional talents and development programs for its employees? developing employees’ potential. This comprehensive training system includes new comers’ orientation, managerial training, professional training, external training, and Semiconductor Corporation Vanguard International self- development. To systematize all learning process, we have established the Training Management System, which provides personal learning plans for the year or endurance cultivation programs for employees to build up personal learning roadmap and cultivate self-motivated learning culture. Semiconductor Corporation Vanguard International

Current Situation Variation compared with the Corporate Social Responsibility Assessment Items Best Practice Principles for Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation (6) Did the company formulate relevant policies V (6) VIS has established a Guideline for Handling Customer Complaints, providing for protection of consumer rights and customers a transparent, effective channel to file the complaints they have for our interests and consumer complaints products and services. In addition, the company handles customer complaints fairly and procedure with regards to research & instantly, and complies with relevant laws and regulations in respecting customer development (R&D), procurement, privacy and protection customer information. VIS also periodically assesses customer production, operating, and service satisfaction with the company, commissioning external agencies to handle such procedures? assessments. The company views customers as its crucial stakeholders, attending to customer opinions and using these opinions as the basis to improve service and product delivery performance. (7) Did the company comply with applicable V (7) The company complies with applicable laws, regulations, and international standards laws, regulations, and international when marketing its products and services. standards when marketing and labeling its 34 products and services? (8) Before cooperating with a supplier, did the V (8) Before cooperating with a new supplier, VIS's relevant unit would evaluate the supplier company assess whether the supplier had to ensure the supplier is not involved in activities that influence the environment and records of engaging in activities that society and fulfills legal requirements. influenced the environment and society? (9) In the contract signed between VIS and its V (9) The company specifies in the contract that the supplier must adhere to relevant laws and primary suppliers, does it include provisions regulations (including but not limited to the corporate social responsibility policy); stating the termination or rescindment of the failure to do so shall result in termination of cooperation with VIS. contract for instances when the supplier violates the company's corporate social responsibility policy such that its actions significantly influenced the environment and society? 4. Strengthening of Information Disclosure Measures (1) Did the company disclose any relevant and V VIS compiles a corporate social responsibility report each year and publishes such report on reliable corporate social responsibility the company website and on the Market Observation Post System, allowing investors access No variation information on its website and on the to relevant corporate social responsibility information. Market Observation Post System of the Taiwan Stock Exchange website? Current Situation Variation compared with the Corporate Social Responsibility Assessment Items Best Practice Principles for Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation 5. If the company did formulate principles for corporate social responsibility practices according to the Corporate Social Responsibility Best Practice Principles for TWSE/GTSM Listed Companies, please state the variations in the operations and rules of such practice: VIS has developed a VIS Corporate Social Responsibility Manual as a guide for the company to implement its social responsibilities; such implementation conforms to the spirit of the Corporate Social Responsibility Best Practice Principles for TWSE/GTSM Listed Companies. 6. Other Information for Better Understanding of the company's corporate social responsibility practices: The Company actively takes part in community and public charity events and consistently demonstrates its concern for disadvantaged persons within our communities by making tangible contributions to society. In January 2016, the Company established a program for raising charitable donations, and in response to the World Peace Association's call to raise funds to cover the cost of meals for undernourished schoolchildren during their winter break, VIS helped raise a total of over NT$970,000 in donations, resulting in a significant contribution to the meal assistance program. In addition, VIS also invited disadvantaged schoolchildren through a joint effort with the World Peace Association to participate in the Company's October 1st Family Day activity held at Lihpao Land, and VIS also donated NT$200,000 to help provide healthy meals for these disadvantaged schoolchildren. To care for those with physical and mental disabilities, the Company donated NT$200,000 to the St. Joseph Social Welfare Foundation and Syinlu Social Welfare Foundation each to fund learning and rehabilitation services for people with physical and mental disabilities. Our employees also formed a choir group to perform at the Foundation's charity events and Christmas 35 events to bring joy and warmth to friends of the community with physical and mental disabilities. Furthermore, the Company has continued to make its annual contribution of NT$200,000 to the St. Joseph Social Welfare Foundation's charity programs and Christmas events to bring joy and warmth to our friends in the community who have physical and mental disabilities. The VIS volunteer group visited the Hung Hua Orphanage, located in Dayuan District of Taoyuan City, to express their care, show concern, and distribute donated funds to the orphanage in person. VIS also sponsored National Tsing Hua University's "Sunrise Program" by providing an annual scholarship of NT$200,000 to two students who each come from a disadvantaged family background, enabling these low-income students to concentrate on their schooling without having to worry about financial concerns. VIS also sponsored "Hung Chin Digital Technology" with a grant of NT$50,000 to publish a book consisting of a collection of short stories intended to help prepare young people for a career in the industry and successfully delivered the book to students who come from financially underprivileged backgrounds. In an effort to help give back to society, VIS also sponsored the "TSMC Musical Theater Event for Parents and Children” by providing NT$100,000 in a bid to promote art education for children, and also invited disadvantaged minority groups to attend the performance. In addition, VIS also sponsored W.Island's "Traveling on a Mission" program by purchasing five round-trip plane tickets for families to travel to the National Defense Medical Center, at a total cost of NT$250,000, thereby helping to encourage young people to remain committed to pursuing their dreams. The Company's team of employees has also made great efforts to help citizens living in rural areas. For the Smangus, an indigenous tribe residing in the Xueshan Range located in Hsinchu's Jianshi Township, transportation is difficult and the local economy remains relatively undeveloped, so upon learning that the tribe had plans to establish a locally-governed kindergarten, VIS employees were eager to help out by raising funds. In all, our colleagues helped raise NT$1.22 million which was further matched by a donation of NT$780,000 from the Company for a grand total of NT$2 million to help the Smangus construct their new kindergarten and turn their dream into a reality. In addition, at the end of December, VIS invited the Smangus tribe to attend the Company's 2016 annual year-end party to celebrate together with VIS employees and even provided the visitors with a 1-day tour of the Hsinchu Science and Industrial Park. Furthermore, to promote social harmony, the Company has made a special sponsorship of NT$2 million to IC Broadcasting Co., Ltd. in 2015, to produce "The Future of Taiwan & Taiwan in Semiconductor Corporation Vanguard International the Future". In this program, current global trends, education in Taiwan, talented people, social livelihood, energy resources, and environmental protection etc. topics are discussed. After broadcasting the program, there was an astounding response, and to increase the impact of the event, and an additional NT$2.15 million was donated in a joint effort with Bookzone to publish "Tomorrow in Taiwan", a limited-edition publication. Afterward, 1,000 copies of the newly-printed books were donated to numerous libraries run by the central agency, local county and city governments, national-level high schools, and various colleges, and universities in Taiwan. Semiconductor Corporation Vanguard International

Current Situation Variation compared with the Corporate Social Responsibility Assessment Items Best Practice Principles for Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation Apart from corporate sponsorships, our employees regularly participate in donation drives for books and goods, and deliver donated items to nursing homes, children’s homes, and school children living in remote areas. Furthermore, employees and their families have formed a volunteer group whose members serve as volunteer guides on a rotating basis at the National Museum of Natural Science on weekends and holidays to explain to visitors the nature and applications of integrated circuits since Y2006; in Y2016, volunteer guide services were provided at the museum 138 times. Our colleagues also perform community volunteer service. Embracing the spirit of honoring old people as we do our own aged parents, VIS volunteers also visit the Hsinchu Home for Elderly Veterans on weekends and holidays where they help seniors enjoy their weekends as well as the St. Teresa Children's Center, where they spend time reading to children. Our volunteer colleagues have been very generous with their time, and performed community service work a total of 198 times in Y2016. In addition, the VIS volunteer group also issued a call to all colleagues to participate in a group walking event for people with disabilities held by Syin-lu Social Welfare Foundation to show their concern and provide encouragement. In addition, for Arbor Day, VIS cooperated with the Taiwan Forestry Research Institute by calling on volunteers to make an effort to help protect Taiwan's environment. In a bid to plant new trees to improve our environment, young saplings were distributed in Taoyuan, Hsinchu, and Taichung Station. 6. If the company's corporate social responsibility report passes the verification standards of relevant verification institutions, descriptions of it should be provided: Y2015 CSR report have been verified to comply with the accountability principles of inclusivity, materiality and responsiveness by the British Standards Institution (BSI) Taiwan branch office, according to the AA1000 AS: 2008 Assurance Standards and the requirements of GRI G4. And the report adheres to the "Core" option of the GRI G4, and conforms to the AA1000 Type II 36 high-level accountability. z ISO 9001 quality management system certification z ISO/TS 16949 vehicle quality management system certification z ISO 14001 environmental management system certification z OHSAS 18001 safety and health management system certification z QC 080000 Hazardous substance management system certification z Taiwan occupational safety and health management system (TOSHMS) verification z Greenhouse gas (GHG) accounting and verification in accordance with ISO-14064 z SONY Green Partner certification z Product carbon footprint calculation and verification z In June 2016, VIS participated in the MOEA Industrial Development Bureau's "Knowledge Management Competition" and win a silver medal and two honorable mentions. 4. Implementation of Integrity Management and Measures The company’s philosophy dictates that employees of the Company, regardless of their physical location, shall adhere to the highest standards of professional ethics and maintain such in their personal conduct. When engaged in day-to-day work, employees shall observe business ethics and maintain the Company’s reputation to gain the respect and trust of customers, suppliers, and all other professionals. Implementation of integrity management Current Situation Variation compared with the Ethical Corporate Management Best Practice Principles for Assessment Items Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation 1. Formulation of Integrity Management Policy and Measures (1) Did the company explicitly state the policy and V (1) In order to foster a corporate culture of ethical management and sound development, 37 practices of integrity management in its and offer a reference framework for establishing good commercial practices, the regulations and external documents, and did the company has established Integrity Management Policy and Measures. And article 1 board of directors and managements commit to of VIS's business philosophy: Honoring the principle of good faith, abiding by an implementing such management policy? exacting code of professional ethics. The company clearly regulates the practice of this philosophy in the "Professional Code of Ethics," requiring all employees to understand and abide by the professional code of ethics and personal integrity. In addition, the Professional Code of Ethics for Directors explicitly states the need for No variation directors to uphold the principle of good faith and abide by a behavior of professional standards. (2) Did the company formulate measures for V (2) The article 6, 21, and 24 of VIS Ethical Corporate Management Best Practice preventing dishonest behavior, specify operating Principles have formulated the related measures, and the company states the procedures, behavioral guidelines, violation operating procedures, methods, violation penalties, and system of appeal in its penalties, and system of appeal in such measures, Professional Code of Ethics, and provides employee training when encountering and implement such measures? conflicts of interest each year in accordance with the provisions in the Professional Code of Ethics. (3) Did the company adopt prevention measures V (3) The company specifies the reasonable scope of gift presentation and hospitality in its

against business activities within its business Professional Code of Ethics: Employees must uphold the highest standards of Semiconductor Corporation Vanguard International scope at a higher risk of being involved in an professional ethics toward the company's suppliers, contractors, customers, or other unethical conduct or those listed in Paragraph 2 of stakeholders (including governmental officials) and are absolutely forbidden from Article 7 of the Ethical Corporate Management bribes of any forms. In the VIS Corporate Social Responsibility Policy, VIS pledges Best Practice Principles for TWSE/GTSM Listed to uphold integrity in employee and executive conduct in all business activities and Semiconductor Corporation Vanguard International

Current Situation Variation compared with the Ethical Corporate Management Best Practice Principles for Assessment Items Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation Companies? internal interactions. Business books shall be clear and accurate, transparent, and compliant with applicable regulations and accurately reflect the financial performance and health of the Company. VIS will work against corruption in any and all forms, including extortion, bribery, and embezzlement. 2. Implementation of Integrity Management (1) Did the company assess the integrity of its V (1) The company mandates in its Professional Code of Ethics that employees must transaction parties, and specify provisions uphold the highest standards of professional ethics toward the company's suppliers, pertaining to behaviors of integrity in the contract contractors, customers, or other stakeholders (including governmental officials) and signed with the transaction party? are absolutely forbidden from bribes of any form. In addition, the Ethical Code of VIS and Supplier stipulates that either party may not give or receive bribes of any form or act in any way contrary to the interests of either party and shall avoid 38 engaging in frequent or improper hospitality behaviors during business activities. Suppliers in violation of the aforementioned regulation shall prompt VIS to stringently review its business cooperative relationship with the supplier and adopt necessary measures, including adjustment to the amount of purchases from the supplier. (2) Did the company establish a unit affiliated with V (2) To achieve sound ethical corporate management, the company assigned Human the board of directors exclusively for the Resource Division to responsible for establishing and supervising the No variation promotion of corporate integrity management and implementation of the ethical corporate management policies and prevention periodically report to the board of directors programs. The Human Resource Division shall be in charge of the following regarding the implementation progress? matters, and shall compile the report to the Audit Committee and report to the board of directors on a regular basis. Besides, the company has set up the "Corporate Social Responsibility Promotion Committee" to take charge of establishing the "corporate social responsibility policy" and proposing and implementing systems and assist with the promotion of corporate integrity management. In addition, the Committee periodically submits the company's corporate social responsibility report to the board of directors, and the board will supervise the implementation of corporate integrity management. (3) Did the company formulate policies for V (3) The company has formulated the Conflicts of Interest Prevention policy in the prevention against conflicts of interests, provide Professional Code of Ethics: Conflicts of interests shall be periodically reported on a appropriate channels of communication, and yearly basis and an appropriate channel of communication shall be provided for implement such policies and communication? implementation of preventive measures. Current Situation Variation compared with the Ethical Corporate Management Best Practice Principles for Assessment Items Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation (4) Did the company set up an effective accounting V (4) VIS has formulated accounting systems according to the International Financial system and internal control system to implement Reporting Standards (IFRS), mandating the need to adopt CPA’s opinions during integrity management, and designate internal accounting project assessments before presenting the most suitable project to the audit units or entrust accountants to perform executive-in-charge for review and approval; Furthermore, in light of changes to audits of these systems? accounting policies and estimations, the company has developed related procedures according to the Regulations Governing the Preparation of Financial Reports by Securities Issuers. All financial statements are audited by certified public accountants to ensure the fairness of the financial statements and are reviewed by the company's Audit Committee. VIS has established a comprehensive internal control system, to which control points for each operation have been incorporated. The system is reviewed and 39 modified on a yearly basis and inspected by internal audit units for functionality. Respective units are asked to perform spontaneous inspections on a daily basis. In addition, the Board of Directors and the management will discuss results of the spontaneous inspections and audit reports from the audit department periodically to ensure the reliability, transparency, effectiveness and efficiency, accuracy of financial reports, and compliance with the applicable laws and regulations of the company operation. (5) Did the company periodically hold internal and V (5) The Company periodically hosts internal training on ethical management each year, external training on integrity management? including online courses pertaining to corporate ethics principles, and designates relevant representatives to participate in external training programs or forums (e.g., a corporate governance forum hosted by the Agency Against Corruption). In addition, experts from the Taiwan Corporate Governance Association were also retained to visit the Company and carry out an ethics review. 3. Operation of VIS Whistle-Blowing System (1) Did the company establish concrete whistle- V (1) The company has formulated concrete whistle-blowing systems and convenient blowing and incentive systems and convenient whistle-blowing channels in the Professional Code of Ethics. Employees and whistle-blowing channels, and appoint a suitable stakeholders can directly make reports to the company's board of director Audit No variation Semiconductor Corporation Vanguard International personnel to handle the reported cases? Committee by using the whistle-blowing mailbox on the company website. In addition, dedicated units and personnel are appointed to handle reported cases. (2) Did the company devise standard operating V (2) The company has specified standard operating procedures for handling the procedures for handing the investigation of investigation of reported cases and relevant confidentiality mechanisms in the Semiconductor Corporation Vanguard International

Current Situation Variation compared with the Ethical Corporate Management Best Practice Principles for Assessment Items Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation reported cases and relevant confidentiality Professional Code of Ethics. mechanisms? The board of director Audit Committee shall appoint suitable supervisors to establish an investigatory group comprising personnel who specialize in internal audits, human resources, and legal affairs. Such investigatory group shall perform investigations and compile reports to the Audit Committee. If evidence of violation is identified, the subject being reported shall be given a chance for appeal, and the subject and his/her respective supervisor shall be informed of the penalties imposed thereof. (3) Did the company adopt measures for protecting V (3) The company has stipulated measures for protecting whistle-blowers from whistle-blowers from inappropriate disciplinary inappropriate disciplinary actions due to their whistle-blowing in the Professional actions due to their whistle-blowing? Code of Ethics; VIS holds the principle of fairness and confidentiality during the 40 investigation process. The company shall protect whistle-blowers handling the investigation from subjecting to unfair revenge or treatment. 4. Strengthening of Information Disclosure Measures (1) Did the company disclose the content and V The company has established a website for periodically disclosing relevant corporate promotion effectiveness of its integrity integrity management information on a yearly basis to its stockholders and investors. The No variation management principles on its website and on the information disclosed on the company website is uniformly compiled and announced by Market Observation Post System of the Taiwan public relation department. Stock Exchange website? 5. If the company did formulate principles for integrity management according to the Ethical Corporate Management Best Practice Principles for TWSE/GTSM Listed Companies, please state the variations in the operations and rules of such practice: In order to foster a corporate culture of ethical management and sound development, and offer a reference framework for establishing good commercial practices, the company has formulated principles for integrity management according to the Ethical Corporate Management Best Practice Principles for TWSE/GTSM Listed Companies. In addition, the company has specified operating procedures and methods in its Professional Code of Ethics: Employees shall honor the professional code of ethics, avoid pursuing personal interests, comply with the principles of confidentiality, engage in fair trade, protect and properly utilize company assets, adhere to laws and regulations, prevent conflicts of interests, offer or accept bribes and hospitality, and abide by operating procedures for punishment and appeals. The company has specified regulations and guidelines in the Professional Code of Ethics for Directors: The board of directors shall avoid personal conflicts of interest, avoid pursuing personal interests, keep confidential business secrets, engage in fair trade, prevent insider trading, adhere to laws and regulations, and present reports of misconduct, alleged dishonest or illegal activity. No variation with the above. 6. Other Information for Better Understanding of the company's integrity management practices: The Ethical Code of VIS and Supplier: We anticipate that all our suppliers, business partners, and other cooperating groups understand our standards of business ethics. All suppliers shall Current Situation Variation compared with the Ethical Corporate Management Best Practice Principles for Assessment Items Yes No Description TWSE/GTSM Listed Companies and Reason for the Variation acknowledge VIS's ethical conduct and confirm their compliance with the regulations stipulated in this document before engaging in business activities with VIS. In any case, suppliers in violation of the aforementioned regulation shall prompt VIS to stringently review its business cooperative relationship with the supplier and adopt necessary measures, including adjustment to the amount of purchases from the supplier. Professional Code of Ethics: We hope that our customers, suppliers, business partners, and other stakeholders can understand and support our professional code of ethics. Employees are required to periodically report of any violations to the principle of conflicts of interest according to regulations on a yearly basis. Each year, VIS also re-reviews and updates its Professional Code of Ethics according to recent laws and regulations and practices of its competitors. 41 Semiconductor Corporation Vanguard International Vanguard International Semiconductor Corporation

5. Disclosure of Company Governance Principles and Regulations VIS announced Corporate Governance Practice Principles is as below: http://www.vis.com.tw/visCom/download/d_ir/orporate_governance_rule_e .pdf

6. Other Important Information Disclosed for Better Understanding of Corporate Governance  Three out of the seven directors are independent directors  All members of the Compensation Committee and the Audit Committee are independent directors  VIS was granted the highest rating of “Outstanding” in Corporate Governance Assessment by Taiwan Corporate Governance Association.  VIS was ranked in the best Top 5% during the second Corporate Governance Evaluation.  VIS conducts an internal Board Performance Assessment once a year and the scope covers the assessment of individual directors, the Board as a whole, and functional committees. The results will be disclosed on the company website.  VIS’s Board Performance Assessment is conducted by an external independent professional institution or a panel of external experts and scholars once every three years.  VIS completed First External Evaluation of Board Performance by Taiwan Corporate Governance Association

42 Vanguard International Semiconductor Corporation

7. Internal Control: Vanguard International Semiconductor Corporation Internal Control Statement Date: February 21, 2017 The Company states the following with regard to its internal control system in Y2016, based on the findings of a self-evaluation: 1. The Company is fully aware that establishing, operating, and maintaining an internal control system are the responsibility of its Board of Directors and management. The Company has established such a system aimed at providing reasonable assurance of the achievement of objectives in the effectiveness and efficiency of operations (including profits, performance, and safeguard of asset security), reliability of financial reporting, transparency and efficiency, and compliance with applicable laws and regulations. 2. An internal control system has inherent limitations. No matter how perfectly designed, an effective internal control system can provide only reasonable assurance of accomplishing the three goals mentioned above. Furthermore, the effectiveness of an internal control system may change along with changes in environment or circumstances. The internal control system of the Company contains self-monitoring mechanisms, however, and the Company takes corrective actions as soon as a deficiency is identified. 3. The Company judges the design and operating effectiveness of its internal control system based on the criteria provided in the Regulations Governing the Establishment of Internal Control Systems (herein below, the regulations”). The internal control system judgment criteria adopted by the Regulations divide internal control into five elements based on the process of management control: 1. control environment, 2. risk estimation, 3. control activities, 4. information and communications, 5. monitoring. Each element further contains several items. Please refer to the Regulations for details. 4. The Company has evaluated the design and operating effectiveness of its internal control system according to the aforesaid criteria. 5. Based on the findings of the evaluation mentioned in the preceding paragraph, the Company believes that during the stated time period its internal control system (including its supervision of subsidiaries), encompassing internal controls for knowledge of the degree of achievement of operational effectiveness and efficiency objectives, reliability of financial reporting, and compliance with applicable laws and regulations, was effectively designed and operating, and reasonably assured the achievement

43 Vanguard International Semiconductor Corporation

of the above-stated objectives. 6. This Statement will become a major part of the content of the Company's Annual Report and Prospectus, and will be made public. Any falsehood, concealment, or other illegality in the content made public will entail legal liability under Articles 20, 32, 171, and 174 of the Securities and Exchange Law. 7. This statement has been approved by the Board of Directors Meeting held on February 21, 2017. All of the 7 attending directors affirmed the content of this Statement.

Vanguard International Semiconductor Corporation

Chairman & President Leuh Fang

44 Vanguard International Semiconductor Corporation

Where a CPA has been hired to carry out a special audit of the internal control system, furnish the CPA audit report: None

8. Legal Penalty: VIS has not violated in any aspect the internal control requirement that resulted in penalty.

9. Major Resolutions of Shareholders Meetings and Board Meetings: Review of Shareholder Meetings The Y2016 Regular Shareholders’ Meeting was held on June 7, 2016. The major resolutions and implementation status were as below: Date Subject Result Implementation status 2016.06.07 To amend the Articles of After voting by poll, was Implement as approved and disclose on Incorporation. approved as proposed. VIS's website. To approve the Y2015 After voting by poll, was Implement as approved and disclose on business report and approved as proposed. VIS's website. financial statements The proposal for Y2015 After voting by poll, was Set July 6, 2016 as recording date for profit distribution approved as proposed. dividend distribution. July 25, 2016 send out cash dividend. Review of Board Meetings Major resolutions adopted are summarized as below: Y2016： a. Agreed to convene the Y2016 regular shareholders meeting and related issues. b. Approved Y2015 annual business and operation report. c. Approved Y2015 annual financial report. d. Approved Y2015 profit distribution plan. e. Approved 2015 internal control system statement. f. Approved Y2016 remuneration of managerial officers. g. Approved Y2016 remuneration of chairman and directors. h. Amended the Articles of Incorporation. i. Approved Y2015 compensation of employees and directors. j. Approved Specialty TechFarm Inc., the subsidiary of VIS, to apply for liquidation. k. Amended the Internal Control System. l. Amend the performance index and the remuneration structure of the directors. m. Approved capital injection to VIS Associates Inc., a wholly-owned subsidiary. n. Approved Y2017 operation plan and capital expenditure budget plan. o. Approved Y2016 capital expenditure budget raising plan. p. Approved Y2017 Internal audit plan.

45 Vanguard International Semiconductor Corporation

q. Agreed to Deloitte Touche Tohmatsu Limited to audit Y2017 financial statements of Vanguard and the subsidiaries. r. Approved the investment of preferred stocks of AnDAPT Inc. s. Approved the investment of preferred stocks of Quora Technology, Inc. t. Approved the disposal of common stocks of Image Technology Corp. u. Amended the Operational Procedures for Application of Halt and Resumption of Trading. v. Amended the Audit Committee Charter. w. Approved Ms. Hsiang-Hsuan Tseng to be appointed as Internal Audit Officer. x. Approved VIS Corporate Governance Practice Principles, VIS Corporate Social Responsibility Principles and VIS Ethical Corporate Management Best Practice Principles. y. Approved the Board of Directors Performance Assessment Policy. z. Amended the Policy of Corporate Social Responsibility. aa. Agreed a donation to Smangus for establishing kindergarten classrooms. Y2017 (As of February 28, 2017): a. Agreed to convene the Y2017 regular shareholders meeting and related issues. b. Approved Y2016 annual business and operation report. c. Approved Y2016 annual financial report. d. Approved Y2016 profit distribution plan. e. Approved 2016 internal control system statement. f. Approved Y2017 remuneration of managerial officers. g. Approved Y2017 remuneration of chairman and directors. h. Amended the Internal Control System. i. Approved Y2016 compensation of employees and directors. j. Approved capital injection to VIS Associates Inc., a wholly-owned subsidiary. k. Approved to establish VIS Shanghai Company Limited. l. Amended the Procedures for Acquisition or Disposal of Assets. 10. Dissenting Opinions Held by Directors and Supervisors in Respect of Important Resolutions Passed by the Board of Directors: No dissenting opinions held by directors in respect of important resolutions passed by the board of directors from Y2016 to publish of this annual report.

11. Personnel Termination Summary Related to Annual Financial Report: Title Name Date of Elected Date of Resigned Remark Director of Internal Tzu-Kang 1997/03/17 2016/09/30 Retirement Audit Division Chen

46 Vanguard International Semiconductor Corporation

E. Information Regarding VIS's Independent Auditors Unit: NT$, in thousands Whether the CPA's audit Non-audit Fee period covers an entire fiscal Accounting Name of Audit year Firm CPA Fee System Company Human Others Subtotal Yes No Audit Period Design Registration Resource (Note) Yu-Feng Deloitte & Huang 2016.01.01~ 5,300 0 0 0 290 290 v Touche Cheng-Chih 2016.12.31 Lin Note: Fees mainly related to taxation consulting service and review of valuation report.

The non-auditing fee amounted to NT$290 thousand is less than 25% of the audit fee. Audit fee of Y2016 did not reduce more than 15% of previous year.

F. Information on Replacement of Certified Public Accountant There is no replacement of certified public accountant in Y2015, Y2016, and as of February 28, 2017.

G. Company Chairman, President, Financial or Accounting Head has Worked for Certifying Accounting Firm or Its Affiliate Business in the Past Year: None

H. Information on Net Change in Shareholding and Net Change in Shares Pledged by Directors, Supervisors, Management and Shareholders of 10% Shareholdings or More: Y2016 01/01/2017 ~ 02/28/2017

Title Name Net Change in Net Change in Net Change in Net Change in Shareholding Shares Pledged Shareholding Shares Pledged

Taiwan Semiconductor 0 0 0 0 Manufacturing Co., Ltd.(tsmc) Representatives: Chairman Leuh Fang Vice Chairman F.C. Tseng Director National Development 0 00 0 Fund, Executive Yuan Representative: K. H. Hsiao Director Edward Y. Way 0 00 0 Independent Chintay Shih 0 0 0 0 Director Independent Benson W.C. Liu 0 0 0 0 Director

47 Vanguard International Semiconductor Corporation

Y2016 01/01/2017 ~ 02/28/2017

Title Name Net Change in Net Change in Net Change in Net Change in Shareholding Shares Pledged Shareholding Shares Pledged

Independent Kenneth Kin 0 0 0 0 Director President Leuh Fang 0 0 0 0 Vice President D. L. Tseng 0 0 0 0 Vice President Thomas Chang 0 0 0 0 Vice President Jun-Wei Chen 0 0 0 0 Vice President Chan-Jen Kuo (234,000) 0 0 0 Associate Chrong-Jung Lin 0 0 0 0 Vice President Major Taiwan Semiconductor 0 0 0 0 shareholder Manufacturing Co., Ltd.(tsmc) Major National Development 0 0 0 0 shareholder Fund, Executive Yuan Stock Trade with Related Party: None Stock Pledge with Related Party: None

I. Top 10 shareholders relation

As of February 28, 2017 Shareholding by Spouse & Minor Top 10 shareholders with the relation of Shareholding nominee Note Name shareholding SFAS No.6 arrangement Share % Share % Share % Name Relation Taiwan Semiconductor Manufacturing Co., 464,223,493 28.32%0000National Development Ltd.(tsmc) Fund, Executive Yuan Representatives: Representatives: Director of Chairman:Leuh Fang Director: tsmc Vice Chairman:F.C. Tseng K. H. Hsiao

274,029,592 16.72% 0000Taiwan Semiconductor National Development Fund, Executive Manufacturing Co., Yuan Ltd.(tsmc) Representatives: Representatives: Investee of Director: Director: NDF K. H. Hsiao Leuh Fang Director: F.C. Tseng SmallCap World Fund Inc. 81,256,386 4.96% 0000None JPMorgan Chase Bank N.A. Taipei Branch 71,771,446 4.38% 0000None in custody for Capital Income Builder JPMorgan Chase Bank N.A. Taipei Branch 67,990,000 4.15% 0000None in custody for The Income Fund of America JPMorgan Chase Bank， N.A.， Taipei 50,975,000 3.11% 0000None Branch in Custody for International Growth and Income Fund JPMorgan Chase Bank N.A. Taipei Branch 18,867,000 1.15% 0000None in custody for JPMorgan Funds JPMorgan Chase Bank N.A. Taipei Branch 17,989,000 1.10% 0000None in custody for Schroder International Selection Fund-Asian Absolute Return JPMorgan Chase Bank， N.A.， Taipei 17,868,352 1.09% 0000None Branch in Custody for Columbia Acorn Trust - Columbia Acorn International Seafarer Overseas Growth and Income 17,593,000 1.07% 0000None Fund

48 J. VIS Long-Term Investment Ownership As of February 28, 2017; Unit: shares; % Direct/Indirect Ownership by Total Ownership Ownership by VIS Directors, Supervisors, and Long-Term Investment Management Shares % Shares % Shares % VIS Associates Inc. 128,000 100.00% -- 128,000 100.00% Quora Inc. 5,000,000 32.76% --5,000,000 32.76% CMSC Inc. 9,902,000 24.94% --9,902,000 24.94% United Industrial Gases Co., Ltd. 4,246,079 1.95% 21,230,414 9.75% 25,476,493 11.70% Image Match Design Inc. 1,400,000 5.39% --1,400,000 5.39%

49 AnDAPT 1,000,000 7.08% --1,000,000 7.08% Champion Microelectronic Corp. 375,452 0.58% -- 375,452 0.58% Advanced Microelectronic Products, Inc 30,000,000 9.94% --30,000,000 9.94% Semiconductor Corporation Vanguard International Vanguard International Semiconductor Corporation

IV. INFORMATION ON IMPLEMENTATION OF THE COMPANY FUNDS UTILIZATION PLANS A. Capital and shares 1. Source of capital Unit: Shares As of February 28, 2017 Authorized Capital Paid-in Capital Remark

Capital Increase Date of Approval & Month/Year Price Sources of Shares Amount Shares Amount by Assets Approval Document Capital other than No. Cash 8/2014 NT$14.5 3,300,000,000 33,000,000,000 1,638,982,267 16,389,822,670 Exercise of (92)Tai-Tsai-Zheng employees (I) No.0920144383 stock options * There is no change of Capital in Y2015 & as of 2017/2/28. Unit: Shares As of February 28, 2017 Authorized Capital Type of Stock Note Listed Shares Non-listed shares Total Shares Common Stock 1,638,982,267 1,661,017,733 3,300,000,000 Shelf Registration: None 2. Shareholder Structure As of February 28, 2017 Foreign Other Domestic Government Financial Institutions Treasury Juridical Natural Total Agencies Institutions & Natural stock Person Persons Persons Number of Shareholders 1 8 103 659 33,832 0 34,603 Shareholding 274,029,592 16,592,078 502,101,040 757,457,066 88,802,491 0 1,638,982,267 Holding Percentage（%） 16.72% 1.01% 30.63% 46.22% 5.42% 0.00% 100.00%

3. Distribution Profile of Shareholder Ownership As of February 28, 2017 Shareholder Ownership (Share) Number of Shareholders Ownership (Share) Ownership (%) 1~ 999 18,677 5,128,920 0.31% 1,000~ 5,000 12,195 23,874,091 1.46% 5,001~ 10,000 1,869 12,880,068 0.79% 10,001~ 15,000 547 6,513,600 0.40% 15,001~ 20,000 250 4,481,178 0.27% 20,001~ 30,000 238 5,862,669 0.36% 30,001~ 50,000 208 8,152,734 0.49% 50,001~ 100,000 172 12,433,136 0.76% 100,001~ 200,000 138 19,978,680 1.22% 200,001~ 400,000 109 30,533,936 1.86% 400,001~ 600,000 45 22,650,184 1.38% 600,001~ 800,000 23 16,304,842 0.99% 800,001~1,000,000 13 12,090,363 0.74% Over 1,000,001 119 1,458,097,866 88.97% Total 34,603 1,638,982,267 100.00% Preferred Stock: Not Applicable

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4. Major Shareholders As of February 28, 2017 Major Shareholders Total Shares Owned Ownership (%) Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) 464,223,493 28.32% National Development Fund, Executive Yuan 274,029,592 16.72%

5. Market Price, Net Worth, Earnings and Dividends Per Common Share Unit: NT$; shares, in thousands Year 01/01/2017~ Y2015 Y2016 Item 02/28/2017 Market Highest Market Price 58.40 69.50 62.80 Price Per Lowest Market Price 31.50 36.90 55.30 Share Average Market Price 45.94 53.26 58.33 Net Worth Before distribution 16.72 17.51 - Per Share After distribution 14.12 (Note 4) - Diluted Weighted Average Shares 1,662,258 1,654,896 - Earnings Earnings Per Share Per Share 2.50 3.35 -

Cash Dividends 2.60 (Note 4)3.00 - Dividends from Dividends Retained Earnings - (Note 4) - Per Share Stock Dividends Dividends from Capital Surplus - (Note 4) - Accumulated Undistributed Dividends - - - Price/Earning Ratio (Note1) 18.38 15.90 - Return on Price/Dividend Ratio (Note 2) 17.67 (Note 4) - Investment Cash Dividend Yield Rate (Note 3) 5.66% (Note 4) - Note 1：Price / Earnings Ratio = Average Market Price / Earnings per Share Note 2：Price / Dividend Ratio = Average Market Price / Cash Dividends per Share Note 3：Cash Dividend Yield Rate = Cash Dividends per Share / Average Market Price Note 4：Pending shareholders' meeting resolution.

6. Dividend Policy According to the Company’s Articles of Incorporations, when allocating the earnings for each fiscal year, the Company shall first offset its losses in previous years and set aside a legal capital reserve at 10% of total remaining profits; this excludes circumstances in which accumulated legal capital reserve is equivalent to the total capital of the Company. The Company shall set aside or reverse a special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge. Any balance left over plus accumulated undistributed earnings shall be allocated according to the following principles per resolution of the shareholders' meeting: (1) Except for when distribution of capital reserve is conducted in accordance with Subparagraph 2 or Paragraph 1 of this article, the Company shall not allocate dividends or bonuses when there is no surplus earning. VIS may fully allocate its distributable earnings for the year based on factors such as financial, business, operation, etc. Earning distributions may be paid out with cash or stock dividends jointly or separately. Due to the steady growth

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experienced by our Company to date, the amount of cash dividends distributed shall be no less than 60% of the gross amount dividends. (2) In the event the Company suffers no losses in a certain year but possesses no distributable earnings, or the earnings of a certain year is significantly less than the earnings distributed by the Company during the previous year, or in consideration of the company's financial, business, or operational factors, the Company may allocate all or a portion of its reserve for distribution in accordance with relevant laws or regulations, or upon the provisions of competent authorities. Where legal reserve is distributed by issuing new shares or cash, only the portion of legal reserve which exceeds 25% of the paid-in capital may be distributed.

VIS aims for a steady dividend policy. Looking forward to next year, the cash dividend per share would be equal or more than the amount that to be distributed in Y2017.

Y2016 Profit Distribution for Common Shareholders, Directors Compensation, and Employee Compensation: Unit: NT$ Employee Date of Board Dividend to Common Shareholders Year Directors Compensation Compensation Resolution (Cash) (cash) 2016 2017/2/21 4,916,946,801

7. Stock Dividend Distribution: Not Applicable

a. The percentages or ranges with respect to employee, director, and supervisor compensation, as set forth in the company's articles of incorporation In compliance with the Company Act as amended in May 2015 and the amendments to the Articles as resolved by the shareholders’ meeting on June 2016, the Corporation should distribute no less than 10% of the current year’s profit as employees’ compensation in the form of stock or in cash as resolved by the board of directors. The employees include those of subsidiaries meeting some conditions agreed by the board of directors. The Corporation should also distribute no higher than 1% of the current year’s profit as remuneration to directors. However, the Corporation’s accumulated losses shall have been covered. If there is a change in the proposed amounts after the annual consolidated financial statements are authorized for issue, the differences are recorded as a change in accounting estimate. b. The basis for estimating the amount of employee, director, and supervisor compensation, for calculating the number of shares to be distributed as

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employee compensation, and the accounting treatment of the discrepancy, if any, between the actual distributed amount and the estimated figure, for the current period. For the year ended December 31, 2016, the employees’ compensation and the remuneration to directors were $831,803,372 and $14,100,000, respectively. The above calculated were at a certain percentage of the base income. Any discrepancy between amount resolved by the board of directors and the above estimated figure will be recorded a change in accounting estimate and adjusted to profit and loss of next year. c. Information on any approval by the board of directors of distribution of compensation. (1) The amount of any employees’ compensation distributed in cash or stocks and remuneration to directors and supervisors. If there is any discrepancy between that amount and the estimated figure for the fiscal year these expenses are recognized, the discrepancy, its cause, and the status of treatment shall be disclosed. The amounts of employees’ compensation and remuneration to directors resolved by the board of directors on February 21, 2017 were as follows ： The employees’ compensation amounted to NT$831,803,372. The distribution will be paid in cash. There is no difference between the amount resolved by the board of directors and the expense recognized in Year 2016. The remuneration to directors amounted to NT$14,100,000. The distribution will be paid in cash. There is no difference between the amount resolved by the board of directors and the expense recognized in Year 2016. (2) The amount of any employees’ compensation distributed in stocks, and the size of that amount as a percentage of the sum of the after-tax net income stated in the parent company only financial reports for the current period and total employees’ compensation: Not Applicable. d. The actual distribution of employee, director, and supervisor compensation for the previous fiscal year (with an indication of the number of shares, monetary amount, and stock price, of the shares distributed), and, if there is any discrepancy between the actual distribution and the recognized employee, director, or supervisor compensation, additionally the discrepancy, cause, and how it is treated. Distribution of employees’ compensation and remuneration to directors for the Year 2015 were as follows. 53 Vanguard International Semiconductor Corporation

Board of Directors Resolution Actual Distribution (January 27, 2016) Amount (NT$) Amount (NT$) Underlying Number of Shares Dilution Remuneration to 13,384,109 13,384,109 NA NA Directors Employees’ compensation in 623,637,511 623,637,511 NA NA cash Total 637,021,620 637,021,620 NA NA

The above figures have been recognized in the Year 2015 financial report. The remuneration to directors amounted to NT$13,384,109 which is NT$204,164 lower than the estimated amount recognized in Year 2015 financial report. The difference was due to the change in accounting estimate and adjusted to profit and loss in Year 2016. 8. Share Buy-back : None B. Issuance of Corporate Bond : None C. Issuance of Preferred Stock Issuance 1. Preferred Stock : None 2. Preferred Stock with Warrants : None D. Issuance of Depositary Shares Issuance: None 1. Status of Employee Stock Option Plan (ESOP): None 2. New restricted employee shares: None E. Status of Mergers and Acquisitions: None F. Fund Plan Implementation: None

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V. OPERATIONAL HIGHLIGHTS A. A description of the business 1. Scope of business VIS’ scope of business is in wafer foundry manufacturing. Main focuses on PMIC/LED/ LCD/ NVM/ Discrete processes to fulfill customers’ demand in computing, consumer, communication and automotive applications. At the same time, dedicate on the developing of BCD and high-voltage/ultra high- voltage new technologies. VIS also supports specialty IC process manufacturing, and committed to embedding zero defect mindset within production, supply chain management, and service flow, and dedicated to reach ultimate goal of zero defect by continuous improvement. Mean while, VIS is co-operating with various IP service providers to expand VIS service in manufacturing. Above are all for the purpose of establishing VIS as the preferred partner in specialty IC foundry & service AMT Item (NT$ in thousands) （1） Wafer Foundry 25,727,469 （2） Others 359,281 Less Sales returns and allowances 258,116 TTL Net Revenue 25,828,634

2. Overview of the industry Current state of industry and trends Macroeconomic aspects Figure 1 illustrates fluctuations in the unemployment rate of the US and major EU member states over the past year. At present, the US is maintaining a stable unemployment rate of less than 5%, and as of January 2017 the unemployment rate in the US was 4.7%. Although the average unemployment rate of the EU's 28 member states continued to hover around 8.4% over the past year, it still represented a clear and steady improvement as compared to the outset of the year (9%). In terms of the rate of unemployment of individual EU nations, Germany fared the best, with an unemployment rate reaching a low of just 3.3% in January, followed by the U.K. at 4.8%. Meanwhile, France — despite its stature as one of the largest economies in the EU — continued to struggle with higher than average unemployment even as it showed steady improvement within the same time period. As EU member states prepare to hold their respective national elections in 2017, notwithstanding some uncertainties related to the political climate, the global GDP growth rate is expected to continue to steadily increase, an estimate which is buttressed by the commitment of nations to effectively keep their rates of unemployment under control. Statistics and projections released by the IMF concerning global GDP growth for

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the period 2015–2018 are shown in Table 1. In particular, the figures demonstrate that the US was one of the first major nations to undergo a successful economic recovery in the wake of the 2008 financial crisis, owing in part to its quantitative easing (QE) policy. Concerning China's 2015 gradually planned decrease in investments on major infrastructure projects, the net effect of implementing various controls and regulations at the macroscopic level resulted in a diminished GDP growth rate of approximately 6.7% in 2016. Broadly speaking, in terms of GDP growth trends for 2017 and 2018, the latest figures published the IMF suggest that the US will continue to play a leading role as the new Trump administration expands investments on infrastructure spending, which is expected to decrease America's unemployment rate even further. Currently, it is estimated that the US will continue to maintain stable economic growth during the next one to two years which is likely to have a positive reverberating effect on the economies of other nations as well. The present fiscal policy of the eurozone, on the other hand, is expected to result in relatively flat growth. The ECB has already moved to extend the deadline of its QE program until the tail- end of 2017, a decision which is expected to continue to provide a certain degree of support for sustaining and growing the EU economy as evidenced by the IMF's forecasted GDP growth rate in the eurozone, which has consistently remained between 1.6% to 1.7%. With regard to China's continued efforts to drive down real estate prices through its affordable housing policy, China's GDP growth rate has sustained a noticeable decline compared to its performance in previous years which was driven in part by substantial investments in real estate, and this decline has been further exacerbated by the continued depreciation of the Chinese yuan. Owing to these and other factors, it is estimated that China's GDP growth rate in 2017 and 2018 will continue the trend of being subjected to slight downward revisions. In terms of the world economy, however, the general outlook for 2017 and 2018 remains positive, and a modest increase is anticipated in the global GDP growth rate over the next two years. Figure 1. Fluctuations in the unemployment rate of the US and EU member states in the past year. (January 2016 – January 2017’) 12.0%

10.0% 9.8%

8.0% 8.4% France 6.0% EU-28 4.8% UK 4.0% 4.7% USA Unemployment rate Unemployment 3.3% 2.0% Germany

0.0% Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan. 16' 16' 16' 16' 16' 16' 16' 16' 16' 16' 16' 16' 17'

Source：Bureau of Labor Statistics of USA, Eurostat (Feb. 2017)

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Statistics and forecasting of global GDP growth (2015-2018) 2015 2016 2017 e 2018 f Worldwide 3.1% 3.1% 3.4% 3.6% Advanced Economies 1.9% 1.6% 1.9% 2.0% Emerging and Developing Economies 4.0% 4.1% 4.5% 4.8% USA 2.4% 1.6% 2.3% 2.5% Euro Area 1.6% 1.7% 1.6% 1.6% Germany 1.5% 1.7% 1.5% 1.5% UK 2.2% 2.0% 1.5% 1.4% Japan 0.5% 0.9% 0.8% 0.5% Brazil -3.8% -3.5% 0.2% 1.5% Russia -3.7% -0.6% 1.1% 1.2% India 7.3% 6.6% 7.2% 7.7% China 6.9% 6.7% 6.5% 6.0% Source：IMF (Jan. 2017) Economic Output of Global Semiconductor and Foundry Industries In 2016, there were few if any particularly game-changing products released in the end-user market. While the market for smartphones continued to maintain some degree of growth momentum, the performance of this sector paled in comparison to previous years, and the continued slump in the market for consumer PCs further canceled out the modest gains generated by demand for hand-held devices. With regard to how the semiconductor industry fared as a result of the these circumstances, only a slight growth of 1% — a scale of approximately US$340 billion — was recorded (see Figure 2). Meanwhile, owing to the demand for mobile hand-held devices, the production capacity of semiconductor foundries for microprocessors, display driver ICs, and ICs for fingerprint sensor applications continued to result in impressive gains. In all, the output value of the global wafer fabrication market in 2016 posted a growth of 9%, amounting to approximately US$53 billion. Looking ahead to 2017, smartphones remain one of the primary focal points for the semiconductor industry, and there continues to be sustainable growth in the demand for foundries' production capacity, particularly for the production of key ICs utilized in smartphones such as microprocessors and memory and power management ICs which provide higher performance and greater energy-saving capabilities. In addition, a wave of new opportunities is being unleashed by wearable devices and IoT applications as well as the automotive industry's increasing focus in recent years on incorporating smart devices, greater connectivity, and energy-saving designs into their products. As a result, there is a consistent demand for a wide range of electronic components, presenting a promising area for new growth in the semiconductor industry. According to data published by Gartner, the semiconductor industry's total revenue for 2017 is poised to reach US$364 billion, a growth of about 7%. As for the foundry industry, it is estimated that the continued outsourcing of more orders by integrated device manufacturers (IDMs) will generate impressive results throughout the overall market, including projected growth of about 7% to reach a scale of US$57 billion.

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Global Semiconductor and Foundry Production Value 450 9% 9% 400 364 8% 340 7% 350 7% 7% 300 6% Semiconductor, $B 250 5%

$B Total Foundry, $B 200 4% YoY Semiconductor (YoY) 150 3% Total Foundry (YoY) 100 2% 1% 50 1% 53 57 0 0% 2016 2017 2018 2019 2020 2021

Source：Gartner (Dec. 2016) Revenue and ranking of global foundry providers

The following chart shows initial global foundry (including pure player foundry and IDM) revenue and market share projections from Gartner. TSMC remained the dominant player in 2016, and its 11% revenue growth was higher than the 9% figure for the industry as a whole. In addition, TSMC's market share rose from 54.3% in 2015 to 55.3% in 2016. GlobalFoundries returned to the No. 2 position with 8.7% market share. UMC was ranked third with 8.6% market share, followed by Samsung, while SMIC occupied fifth place with a market share of 5.5% and revenue growth of 31% contributed by the increase in market demand. TowerJazz attained its No. 6 position with an annual revenue growth of 27%, which is attributed to the M&A. Powerchip, also a memory foundry, ranked seventh with a market share of 1.9%. Here at VIS, our 2016 revenue of US$0.8 billion enabled us to secure a No. 9 ranking, occupying a market share of 1.5%. The top 10 firms enjoyed 11% revenue growth in 2016 and accounted for 94% of the overall market, compared with 92% in 2015; the foundry industry is dominated to a large degree by these major players.

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Global Pure Foundry Revenue and Market Share

2015 2016 YoY 2016 Company Foundry Type $M Share % $M Share % Rev. % Share % 1 tsmc Pure-FDY 26,566 54.3% 29,466 55.3% 11% 0.9% 2 GF Pure-FDY 4,673 9.6% 4,639 8.7% -1% -0.9% 3 UMC Pure-FDY 4,561 9.3% 4,592 8.6% 1% -0.7% 4 Samsung IDM 2,607 5.3% 3,700 6.9% 42% 1.6% 5 SMIC Pure-FDY 2,229 4.6% 2,921 5.5% 31% 0.9% 6 TowerJazz Pure-FDY 961 2.0% 1,220 2.3% 27% 0.3% 7 Powerchip Pure-FDY 985 2.0% 987 1.9% 0% -0.2% 8 Fujitsu Pure-FDY 845 1.7% 875 1.6% 4% -0.1% 9 Vanguard Pure-FDY 736 1.5% 802 1.5% 9% 0.0% 10 Huahong Grace Pure-FDY 651 1.3% 713 1.3% 10% 0.0% Top-10 44,814 91.7% 49,915 93.6% 11% 2.0% Top-10 % 92% 94% Others 4,077 8.3% 3,385 6.4% -17% -2.0% Total 48,891 100.0% 53,300 100.0% 9%

Source：Gartner (Jan. 2017) Taiwan Semiconductor Industrial

The following chart displays the statistics and forecasting of industry output values for various secondary semiconductor industries in Taiwan. According to the data presented by the Institute for Information Industry's MIC division, overall industry output in 2016 grew 14%, which is equivalent to a scale of NT$2591.6 billion. This performance is much better than the global semiconductor industries and is attributed to the growth from IC manufacturing, IC designs and packaging testing industries. It is expected that in 2017 the overall semiconductor industry in Taiwan will be able to achieve a 6% growth in output under the influence of IC manufacturing and packaging testing industries’ growth. Output values of various secondary semiconductor industries in Taiwan

Source: Institute for Information Industry's MIC division (Mar. 2017)

The following demonstrates 2016 rankings for revenues earned by the Top-9 foundry manufacturers of Taiwan (Remark: Revenue of Innotera Memories Inc. and Rexchip Electronics Corporation have been incorporated into Micron Technology data, its revenues cannot be determined and are therefore expressed as N/A). The top two providers in the foundry industry were TSMC

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and UMC, while VIS occupied 6th place. Currently, out of all foundry manufacturers in Taiwan, Nanya Technology Corporation is the only one DRAM manufacturer, whereas other firms, except for Winbond Electronics Corporation, which is an IDM firm, have all adopted a foundry operating model. Regarding the revenue rankings for Taiwan's Top ranked foundry manufacturers

Source: Company data (Jan. 2017)

The relationships between up-, mid-, and downstream industry segments are as shown in the following chart

Product development trends and state of competition a. Product development trends VIS provides the best quality IC foundry services and logic foundry process technology. Apart from existing logic, mixed-signal and high-voltage process, VIS also offers ultra high voltage, BCD (Bipolar-CMOS-DMOS), SOI (Silicon on Insulator), and embedded non- volatile memory processes. Our high voltage processes range from 10V to 800V, enabling us to satisfy the needs of different product specifications and help customers expand

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applications in different field. In response to the automobile industry's demand for semiconductors, VIS has actively proposed solution plans and applied for AEC-Q100 certifications to provide our customers with multiple choices of technical platforms. In light of the increasing need for consumable electronics, VIS has completed building the structure of an IC application platform for magnetic and fingerprint sensor process technologies, thereby providing customers with additional options other than driver ICs, power management ICs, and discrete components. Our wafer foundry services are closely linked with end markets, including computer, consumer electronics, and communications and automotive markets. We chiefly supply products for computers (including desktop, notebook, netbook, and tablet), LCD TVs, and cell phones; the following are demand forecasts for various end markets from the research firms: Computer： Soft demand continued to impact the shipment of PC products in 2016. The shipment of desktop computers was 104 million units with a drop of 9%. The declining trend is also observed in the notebook market, with a shipment of 155 million, which reflects a 5% drop. The shipment of tablet did not grow as the increased shipment of large size smartphones. Although Apple launched its 12.9" iPad Pro, hoping to motivate corporate clients in the use of tablet computers, the market did not seem to have adopted this trend, generating an overall shipment of 170 million, which reflects a 13% decrease. Looking ahead into 2017, the PC market is expected to continue to exhibit distress, including a declining trend in the growth of tablet computers. Projections and Annual Growth Rate of Global PC Shipments, including Tablets (in millions)

2016 2017 2018 2019 2020 2021 Desktop 104 98 96 95 93 91 Notebook 155 155 156 157 157 157 Tablet 170 164 165 169 171 171 Desktop YoY -9% -5% -2% -1% -2% -2% Notebook YoY -5% 0% 1% 1% 0% 0% Tablet YoY -13% -4% 1% 2% 1% 0% Source：IHS, Gartner, IDC (4Q16) Consumer Electronic： The following two tables depict the global shipment and resolution trend of LCD TVs. In 2016, a 1% annual growth rate (approximately 228 million) was observed, with FHD (1920x1080) accounting for 38%. The penetration rate of UFHD (3840x2160, 4k2k) was about 24%. According to IHS, Gartner, and IDC, the overall shipment of LCD TVs for the next few years is

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projected to grow by 3 to 5% annually. Regarding UFHD resolution devices, favorable growth is expected under the influence of price fluctuations, occupying 48% of the overall LCD TV market by 2021. A positive growth in the shipment of LCD TVs and enhanced panel resolution are market trends that positively influence VIS business performance in driver IC operations. Global TV Shipment Volume (in millions of units) and Annual Growth Rate

255 6% 250 5% 245 4% 240 235 232 3% LCD TV Mu YoY 230 228 2% LCD TV YoY 225 2% 1% 1% 220 215 0% 2016 2017 2018 2019 2020 2021

Source：IHS, Gartner, IDC (4Q16)

LCD Shipment Ratio by Resolution 2016 2017 2018 2019 2020 2021 1366 x 768 38% 33% 32% 31% 29% 28% 1920 x 1080 38% 32% 27% 25% 24% 23% 3840x1080 (4kx2k) 24% 35% 41% 44% 46% 48% 7680x4320 (8kx4k) 0% 0% 0% 1% 1% 1%

Source：IHS (4Q16) Communication： The following table depicts the global shipment and annual growth rate forecasts for mobile phones. Smartphones maintained small growth in 2016, but their growth is no longer comparable to that in the past. The annual growth rate of mid-/low-end devices was higher than that of high-end products, and this trend will continue into 2021. Regarding the average compound growth rate for shipments from 2016 to 2021, functional mobile phones register a decline of 13%, whereas mid-/low-end devices and premium high-end devices project a 4% and 3% growth, respectively. VIS supplies driver IC capacity for products with ramless in response to customer demands for mid-/low-end devices.

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Global Mobile Phone Shipments (in millions of units) and Growth Rate Forecast

16'-21' 2016 2017 2018 2019 2020 2021 CAGR Feature phone 393 349 300 240 208 202 -13% Utility/Basic Smart phone 854 907 960 1,013 1,044 1,064 4% Premium Smart Phone 637 669 705 715 727 732 3% Feature phone YoY -10% -11% -14% -20% -31% -16% Utility/Basic Smart phone YoY9%6%6%5%9%5% Premium Smart Phone YoY -5% 5% 5% 1% 3% 2% Source：IHS, Gartner, IDC (4Q16) Automotive Electronics The global automotive shipment volume is shown in the following figure. The shipment volume in 2016 was approximately 95 million vehicles, mostly traditional fossil fuel vehicles. The growth rate of battery electric, plug-in and hybrid electric vehicles will increase drastically as energy conservation and carbon reduction topics ferment and the European Union gradually implements laws and regulations for controlling automobile carbon dioxide emissions. It is predicted that 100 million new vehicles will be shipped in 2021, with electric vehicles accounting for 60% of the projected number. Global Automotive Shipment Volume (in millions of units)

120

100 43 80 Conventional vehicle 60 61 HEV Mu PHEV 40 50 EV 20 29 10 0 3 2016 2017 2018 2019 2020 2021 Source：IHS, Gartner (4Q16) The global automotive electronic semiconductor output value is illustrated in the following table. As can be seen, the '16-'20 annual compound growth rate was 7%. In addition to the aforementioned energy conservation requirements for battery electric vehicles, the automotive market will become highly dependent on semiconductor elements such as MCU and sensor as product designs that incorporate networking capabilities. Moreover, the industry output as a whole has the opportunity to achieve a scale of US$40.5 billion in 2020. VIS is currently actively cultivating this market in response to the growing demand for automotive electronics.

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Automobile semiconductor output value (US$ Billion)

16'-20' Category Device 2016 2017 2018 2019 2020 CAGR Total 31.2 33.3 35.5 38.0 40.5 7% ASIC 1.7 1.8 1.9 2.1 2.3 8% Application Specific ASSP 8.0 8.3 8.6 8.9 9.4 4% Analog 2.5 2.6 2.7 2.8 2.9 4% Discrete 4.5 4.7 4.9 5.2 5.6 5% Logic 0.8 0.9 1.0 1.1 1.2 10% General purpose Memory 1.5 1.6 1.5 1.5 1.5 -1% MCU 5.3 5.6 6.1 6.7 7.6 9% Optoelectronics 3.2 3.8 4.5 5.0 5.3 13% Nonoptical Sensors 3.7 4.0 4.3 4.6 4.8 7%

Source：Gartner (1Q16) b. Competitiveness In IC foundry processes, in addition to the 0.5um, 0.35um, 0.25um, 0.18um, 0.16um, and 0.11um processes, we have developed multiple integrated circuit technologies and successfully mass produced these products to enhance the competitiveness of our customers' products. In contrast to digital ICs, analog ICs, mixed-signal ICs, and high-voltage technologies are the key to bridging communication between reality and digital systems. The design of each product requires specific components and IP. VIS therefore cultivates the development of specific components and IP to help clients quickly enter the market. This business model of jointly developing novel technologies with our customers helps VIS in forming a consolidated, longstanding partnership with its customers.

3. Technology and R&D R&D expenses in past 2 years and to the day this report was printed. Year R&D spending (in NTD thousand) 2015 1,240,265 2016 1,555,504 2017/01/01–2017/02/28 261,309 In order to provide customers with more competitive technologies and services, the Company is continuously developing more specialized applications from its core technology as well as enhancing the value of the services we provide. In terms of technological developments for display driver IC, the 0.2um, 0.18um, and 0.15um high voltage production processes and the additional embedded non-volatile memory 0.16um high voltage production process, especially designed for touch panels, are now all being utilized in mass production. Besides, 0.11um high voltage process

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technology was developed from Y2012 and Finger Print IC technology was also co- worked with customer and developed since Y2014. For high growth of Automotive Display market, the Company is active developing Automotive Display Driver ICs and lists it to operational focus. The advanced 0.11um automotive technology platforms also passed automotive qualification and customers started verifying their products. With regards to the BCD (Bipolar-CMOS-DMOS) process for power management ICs, apart from the 0.5um, 0.4um, 0.35um, 0.25um, and 0.15um processes that have already gone into mass production. The advanced 0.11um BCD and 120V extension technology platforms also passed automotive qualification and customers started verifying their products. For sensor part, the 0.18um AMR platform in magnet resistor process has been validated by customer's eCompass product and been introduced into mass production. The advanced 0.11um AMR eCompass SOC platform has been adopted by customers and will be certified by the end of next year. In addition, customers are using 0.18um AMR platform to develop automotive and industrial magnet resistor products, plan to kick off mass production in next year. Moreover, the next generation of 0.5um ultra-high-voltage processing with ultra-low on resistance and cost effective version has been accomplished and is ready to be used in customers’ product designs. The high quality 0.5um HV SOI technology continues in mass production. The new generation, 0.25um and 0.15um HV SOI technologies, will be ramped up next year. In the future, Vanguard International will continue to actively develop the high voltage and power management technology components that the market demands and continue to collaborate with TSMC to develop even more advanced processes. It is expected that VIS will increase its R&D spending in Y2017 to 6% of its revenue. Project Description 0.5um UHV Low Ron & High Side Based on customer demand, develop UHV Technology Technology for Motor Driver IC & LED Driver IC. Develop 0.15um/0.11um with 120V extension power management IC technology platforms to supply Power Management IC Technology products for computers (including desktop, notebook, Platform netbook, and tablet), cell phones, and automotive application. Based on customer demand, develop display driver IC Display driver IC technology platform technology platform for 4K2K TV, tablet, mobile phone, touch panel and automotive panel display.

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Project Description Research and develop fingerprint IC technology Finger Print IC Technology Platform platform that fulfills the requirement of customization and industry's latest development applications. 4. Long and short-term business development plans Short-term development plan We are constantly innovating and developing new technologies. We have conducted R&D in the high-voltage process field for many years. In the short term we will continue to apply our high-voltage process technology to driver IC products, while developing BCD, UHV, SOI, NVM processes in an effort to response to customers' increasing diverse needs and enhance customer service quality. a. Short-term business development plan: We will strengthen our on-time delivery rate in order to boost customer satisfaction: We plan production of most of our products after orders have been accepted. Because our customers' exacting design and customization needs, we commonly engage in face-to-face communication with customers, and provide consulting-style services. Our superior process technology, professional technical personnel, and rigorous certification measures have helped us win our customers' trust. b. We will continue to improve our large panel driver ICs performance. We have developed e-book, tablet, and 3D TV applications, and hope to capture over 40% market share of for gate driver ICs and over 25% market share for source driver ICs. c. We will strive to develop high-efficiency, energy-conserving, carbon- reducing products. We look forward to the continued growth of our power management ICs in the following years. Our current main products include DC to AC power converters and AC to DC converters, which are used in small-/medium-size computers, smartphones, and LCD TVs. d. We will endeavor to set up an embedded Flash, magnetic and fingerprint sensor IC platform and expand other markets in addition to the driver IC and power management IC markets, in order to provide more devices solutions to customers. e. We will integrate our global resource and actively expand our foreign market.

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Long-term development plan a. We will accelerate the process of acquiring AEC-Q100 verification for our automotive application technology platform and actively explore the automotive electronics market b. We will strengthen our BCD, UHV, and Discrete R&D, enhance our yield rates and technological maturity, improve our processes, and cut costs. c. We will continue to develop new process technologies, keep on going processes for products with new specifications such as GaN, expand our range of product applications, widen our customer base, strengthen overseas market development. d. We will seek partners to establish strategic alliance and attempt to prolong the life cycle of our 8-inch FAB.

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B. Industry survey and market analysis 1. Market analysis Major product sales areas Unit: NT$, in thousands Y2015 Y2016 Net Revenue % Net Revenue % Asia 21,899,205 94 23,656,799 92 America 816,720 3 1,187,913 4 Europe 602,560 3 978,862 4 Oceania 1,236 0 5,060 0 Total 23,319,721 100 25,828,634 100

Market share VIS has cultivated the high-voltage process market for many years, and will continue to develop BCD and SOI process technology, boosting operating performance. VIS had revenue of approximately NT$25.8 billion in Y2016. According to statistics from the research firm, Gartner, VIS had a market share of roughly 1.5% in Y2016, making it the world's ninth largest pure foundry player. (Please see Industry Overview concerning future supply and demand and growth)

Favorable and unfavorable factors affecting competitive niche and development vision, and response measures Favorable competitive factors (1) As new information, communications, and consumer products emerge in rapid succession, shipment volumes have set new records. In addition, international IDM firms are constantly releasing foundry orders in order to boost the competitiveness of their products. As a result, the foundry market, which VIS is enjoying steady growth. Furthermore, future development trends for relevant end products such as LCD flat panel displays, PCs, handheld devices, and automotive electronics bode well for VIS, which will provide technical blueprints for process services, continuously monitor with market trends, and keep up with customers' needs. (2) VIS received ISO 9001 international quality certification in 1996, ISO 14001 international environmental certification in 1997, QS 9000 international quality management system certification in 2002, and ISO/TS 16949: 2002 international quality management system in 2004.

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Our first-rate manufacturing service standards and excellent relationships with large international manufacturers will greatly facilitate our future efforts to increase our market share. (3) VIS and TSMC maintain a close wafer foundry service relationship, and VIS has been transferred TSMC's 0.5um/0.35um /0.25um /0.18um /0.16um /0.11um process technologies, which have been successfully employed in mass production. VIS has also successfully developed many specialty IC technologies, which have been used in mass production. (4) Our highly effective management team, in conjunction with our professional process team and outstanding sales team, enable us to achieve superb business performance. (5) Our highly flexible customer support system helps us to form long-term partnerships with customers.

Unfavorable factors to competition (1) The current trend of component integration is such that, when the accumulated degree of integration is higher, the Company’s 8-inch process technology might not be able to meet the needs of advanced processing customers. (2) The merging and acquisition trend within semiconductor industries have elevated market centralization, which is detrimental to the Company's business operations. (3) China's self-sufficiency policies have caused tectonic plate shifts in our supply chain, and this shift is also detrimental to the Company's future operations, particularly with regards to the aspect of driver IC manufacture.

Response measures (1) We will continue to improve our process technology, quality, and mass production capability, reduce production costs for various products, enhance our yield rate and service, boost production efficiency, and consolidate our professional wafer foundry service capacity. (2) We will accelerate process development, make opportune innovations in the specialty IC foundry area, and consolidate our partnerships with customers by maintaining differentiation, making us become the best choice of specialty IC manufacturing service provider.

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(3) We will focus on and optimize high-voltage, ultra-high-voltage, and discrete elements, as well as BCD technology, and concentrate our resources in order to enhance our competitiveness. (4) We will strengthen our partnerships with customers and adopt an IDM Fab-lite strategy in order to better complement our customers. (5) We will strengthen marketing and customer service performance, continue to raise customer satisfaction, and achieve our goal of sustainable operation.

2. Major Applications of Products VIS provides world-class quality Logic IC manufacturing service. Those products can be applied into Computers and its peripherals (including TFT LCD monitor, CD-ROMs and Motherboard), Communications (including Mobile handset, Wireless LAN and Switch), and Consumer electronics (including High Resolution TV, e-book, DVD player, and Digital Still Camera).

Production Flow

70 3. Major Materials Supply Status Major Product Major Material Major Suppliers Supply Status FORMOSA SUMCO TECHNOLOGY Corp. SILTRONIC group. (Local Agent: Siltronic AG, Taiwan Branch) Wafer TAISIL ELECTRONIC MATERIALS Corp. Normal SHIN-ETSU HANDOTAI TAIWAN Co., Ltd. (Local Agent: TOPCO SCIENTIFIC Co., Ltd.) GLOBALWAFERS CO., LTD. CABOT MICROELECTRONICS Corp. TAIWAN Branch WAH LEE INDUSTRIAL Corp. Chemical Normal Logic Foundry BASF ELECTRONIC MATERIALS TAIWAN LTD. AIR PRODUCTS SAN FU GAS CO., LTD. TOKYO OHKA KOGYO Corp. Ltd. TOPCO SCIENTIFIC CO., LTD. Photo Resist Normal

71 SUMITRONICS TAIWAN CO., LTD. ROHM AND HAAS ELECTRONIC MATERIALS TAIWAN LTD. UNITED INDUSTRIAL GASES CO., LTD. BOC LIENHWA INDUSTRIAL GASES CO., LTD. Gas Normal AIR PRODUCTS SAN FU CO., LTD. SHOWA SPECIALTY GAS(TAIWAN) CO. LTD. 4. Suppliers and clients accounting for 10 percent or more of total procurement (sales) amount in either of the 2 most recent fiscal years a. Major Customers Unit: NT$, in thousands Y2015 Y2016 No Customer Net Revenue % Relation to VIS Customer Net Revenue % Relation to VIS 1 TSMC 7,100,082 30% Major Shareholder TSMC 6,702,249 26% Major Shareholder 2 B 4,577,103 20% None B 5,290,430 20% None Semiconductor Corporation Vanguard International Others 11,642,536 50% Others 13,835,955 54% Net Revenue 23,319,721 100% Net Revenue 25,828,634 100% Semiconductor Corporation Vanguard International

b. Major Suppliers Unit: NT$, in thousands Y2015 Y2016 No Supplier Amount % Relation to VIS Supplier Amount % Relation to VIS 1 Supplier 10001136 849,262 15 None Supplier 10001136 983,070 16 None 2 Supplier 10000784 508,218 9 None Supplier 10000784 753,863 12 None Others 4,318,378 76 Others 4,563,047 72 Net Procurement 5,675,858 100 Net Procurement 6,299,980 100 Reasons for changes： Supplier 10000784 purchasing increase：As capacity increase, demand for direct material increased. 5. Productions Over the Last Two Years Unit: Capacity and Quantity (8 inch equivalent wafer) / Amount (NT$, in thousands) Major Y2015 Y2016 Product Capacity Quantity Amount Capacity Quantity Amount Foundry 2,126,800 1,742,046 15,760,845 2,248,800 1,991,343 16,435,888 Total 2,126,800 1,742,046 15,760,845 2,248,800 1,991,343 16,435,888 72

6. Shipment and Net Revenue over the Last Two Years Units: Quantity (8 inch equivalent wafer) / Amount (NT$, in thousands) Y2015 Y2016 Domestic Export Total Domestic Export Total Quantity Net Revenue Quantity Net Revenue Quantity Net Revenue Quantity Net Revenue Quantity Net Revenue Quantity Net Revenue Wafer Foundry 1,437 18,612,340 299 4,398,065 1,736 23,010,405 1,644 20,152,126 348 5,317,227 1,992 25,469,353 Other 0 202,329 0 106,987 0 309,316 0 283,703 0 75,578 0 359,281 Total 1,437 18,814,669 299 4,505,052 1,736 23,319,721 1,644 20,435,829 348 5,392,805 1,992 25,828,634 Vanguard International Semiconductor Corporation

C. Personnel Structure As of February 28, 2017 Year 2015 2016 2017/02/28 Direct 2158 2254 2260 Personnel Indirect 2531 2720 2726 Total 4689 4974 4986 Average Age 36 37 37 Average Year of Service 6.63 6.85 6.86 PH. D 41 40 40 Master 1079 1247 1258 Average Year of Service College 2113 2191 2186 Education High School 1449 1489 1495 Less than 7 7 7 High School

D. Environmental Protection Measures Environmental Investment During 2016 and up to the date of publication of this report, there were no losses reported or penalties assessed as a result of environmental violations. VIS continuously improves our environmental management and upgrade pollution control equipments. In Y2016, in addition to the existing equipment maintenance, we continuously invested in purchasing pollution control equipments for special chemical substances, wastewater and exhaust, and local scrubbers. The total investment was around NT$218 million. VIS also made an investment around NT$22.13 million in green products procurement and will keep surveying and purchasing relative green products in order to fulfill our environmental protection responsibility. z Greenhouse Gases Emissions Management VIS firmly believes that global warming is a global concern, in which CO2 resulting in GHG (Greenhouse Gases) effect is one of the primary causes. Therefore, the Company has devoted great efforts in the reduction of GHG. In Y1994, VIS signed the “Memorandum of Cooperation for the Reduction of Perfluorinated Compounds (PFCs) Emissions” with TSIA. Specifically, VIS joined semiconductor industries from worldwide in addressing the reduction of PFCs emissions during manufacturing processes to mitigate the global greenhouse effect and achieve the goal of reducing PFC emissions. Since 2007, we have completed company-wide GHG inventory and verification for each year from 2000 to 2016 in compliance with ISO 14064. The GHG verification results not only enable us to better grasp the state of wafer production, but also help to map out the directions for our continued efforts in GHG reduction. Based on the verification results, the

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major emissions source has been shifted to the purchased electricity from PFCs. And the company’s GHG emissions in Y2014, Y2015, and Y2016 are 534 thousand tons CO2e, 627.6 thousand tons CO2e, and 721.1 thousand tons CO2e, respectively. As for the GHG reduction, the company has accomplished, from Y2014 to Y2016, 132.6 thousand tons CO2e, 189.3 thousand tons CO2e, 269.2 thousand tons CO2e, respectively. Furthermore, the company announced its safety, health, and environment policy to promote environmental protection and development of a sustainable environment. For details, please visit VIS website as follows: http://www.vis.com.tw/visCom/chinese/a_about/a04_environmental.htm  Energy Management The Company continues to conserve energy within its public facilities. For example, while maintaining high product quality, VIS has increased the environmental temperature in non-photo areas of cleanroom, improved energy consumption of fan filter units in the cleanroom, installed heat pumps on external air-conditioning boxes in the cleanroom, purchased energy-saving production equipment, and adopted variable frequency control systems in the vacuum pumps of manufacturing equipment in order to conserve energy. With respect to conserving natural gas, the external dew point temperature has been used to set the optimal operational level of boilers within each plant. Air pollution treatment equipment and the VOC burner were upgraded to recycle and reuse high-temperature exhaust gas. In 2011, we began to deploy instantaneous high-temperature heat pump energy conservation systems to reduce the Company's heating costs, drastically reducing the consumption of natural gas. In 2016 we conserved 15,940 Kwh of electricity, reducing electricity costs by approximately NT$33.62 million.  Air Pollution Control VIS currently has three wafer fabrication plants, all of which are equipped with extensive waste gas and wastewater collection, monitoring and treatment systems that surpass the regulatory requirements and operate continuously 24 hours a day. To prevent abnormal discharge of waste gas and wastewater during power outage, we have included our production machinery and pollution control equipment into the emergency power supply system to make sure that all waste gas and wastewater are adequately treated before discharge. For waste gas treatment, our various waste gas scrubbers are monitored 24 hours a day, allowing on-duty personnel to quickly manage any system issues that may occur. The level of

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volatile organic compounds in the treated waste gas we discharge is far below the legal standard.  Water resource management To effectively utilize limited water resources, we keep detailed monthly water use records and carry out comparative analyses of these records to ensure the effective collection and reuse of process water. With regards to non-process water conservation, we also constantly educate our employees on the importance of water conservation by displaying promotional material and posters, regulating the frequency of external wall cleaning, and the water usage in landscape maintenance. We are also taking steps to establish rainwater runoff collection systems in a further effort to reduce the use of tap water.  Prevention and control of water pollution For wastewater treatment, we have established a fully-functioning wastewater treatment plant to ensure that wastewater quality is stable and meets effluent standards. VIS's FAB1 and FAB2 have undergone continuous implementation of pollutant discharge reduction projects, such as reducing the content of ammonia nitrogen and TMAH (tetra-methyl ammonium hydroxide) in effluents. By focusing our attention on waste reduction at the source of the process, we have reduced usage of ammonia water and TMAH by 30% and 5%, respectively. With the installation of a TMAH wastewater treatment system in our FAB1, the quality of our wastewater now fully fulfills water quality standards stipulated by the Science Park. In light of the success at our FAB1 and FAB2, our FAB3 is currently undergoing a wastewater improvement plan. Currently, its wastewater quality now fulfills the regulatory standards for ammonia nitrogen discharge stipulated by the Environmental Protection Administration.  Waste management and recycling To ensure that waste generated at the Company is adequately managed, we have documented management measures in compliance with the spirit of ISO 14001, and require all employees to faithfully implement the tasks of waste classification, collection, storage, and disposal. We currently engage a qualified waste disposal and recycling organization to help us properly dispose, process, or reuse waste. As a result of our efforts, fabs have maintained a recycling rate of 90% over the past few years. Since July 2014 when Fab3 was acquired, the recycling rate of wastewater increased from 78.4% to 92.6%.

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With regard to VIS's promotion of environmental, safety, and health management, please see the chapter of E. Employee / employer relations, 5. Employee Working Environment and Personal Safety, or the VIS 2016 Corporate Social Responsibility Report for more details.

E. Employee / employer relations 1. Employee Benefit and Implementation VIS regards employee health in high priority and made great effort to improve working environment, set up leisure activities and facilities, and provide health and insurance services. VIS 2016 has been conferred a number of awards, including “Workplace Equal Rights”, “The Outstanding Company of Labor Safety and Health”, “The Pioneer of Influenza vaccine vaccination”. VIS cares for the overall quality of life of its employees. Not only do we offer a clean and beautiful working environment with an array of recreational facilities (basketball courts, gymnasium, recreation center, aerobics room, karaoke rooms, and lounge), we put on a whole variety of recreational events such as new year banquets, family days, Christmas parties, and a variety of sports competitions. Through the thoughtful planning of the benefits committee in putting on these events, we want to allow employees a chance to bring some relaxation and fulfillment to their life outside of work. In order to safeguard employee health, VIS not only offers pre-employment physical examinations and specific employee health exams, it also offers periodic physical exams for employees. In the winter of over10 years, VIS procures flu vaccine, hiring doctors to administer it onsite for its employees. Conferred the Infection Prevention Award by Department of Health for two consecutive years of 2009 and 2010 (the only winner in the park). VIS not only offers a clean working environment with an array of recreational facilities, but also a whole variety of recreational events to allow employees a chance to bring some relaxation and fulfillment to their life outside of work. In order to safeguard employee health, VIS offers physical health examinations to refreshers, specific employees, and in- service employees. In addition, we regularly promote special health checks such as: abdominal ultrasound, 3-in-1 package for women (pap smear, breast ultrasound, and gynecologic ultrasound), and taking mammograms. Hiring doctors to administer it onsite for its employees. VIS has invited medical physicians to provide medical care services at our facilities; these

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services included providing health consultations, medical examinations, and assisting injured employees back to work. Employee profit sharing plan: The profit sharing plan with employees refers to financial goal of the employees are in line with the business goal of the Company. All employees work hard for creating profit in a concerted effort. This allows the employees to share the joy of success of the Company. If there is a surplus at the end of the fiscal year after account settlement, specific percentage of the profit will be allocated as employee bonuses. Group insurance Labor insurance and national health insurance give basic protection for the employees. VIS seeks to provide better protection of its people by taking a group insurance policy to cover the inadequacy of the said insurance programs. Under this group insurance policy, the spouse and the dependents of the employees are also protected so that the families of VIS people can enjoy the benefits as well. The limitation of insurance benefits claim under the group policy is much lesser than the labor insurance and the benefit amount is higher. The Company pays for the group insurance premium and employees are entitled to take specific options on their own under the group coverage at their own cost. (The scope of coverage: life insurance, accident insurance, medical insurance on accidents, coverage for hospitalization and treatment of cancer.) 2. Training Education and Training programs: To better facilitate the Company's vision and help meet strategic goals, education and training programs are a critical area of focus for human resources, and to this end VIS has continued its endeavors to construct a comprehensive talent development system. To help employees develop and hone their core competencies, VIS has created a range of learning development programs tailored for individual employees covering subjects such as engineering, quality assurance, industrial safety, language training, management, and other types of courses. Furthermore, the Company also encourages employees to participate in continuing education and external training courses, reflecting our commitment to cultivating an educational environment characterized by a diverse collection of advanced learning and higher quality training programs. VIS offers more hours of training and dedicates more resources to training than its industry competitors. The hope is that each employee will use what he or she learns to raise the quality of

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his or her work. This in turn leads to higher profits for VIS, while at the same time furthering the careers of our employees. a. VIS has a comprehensive training system for training professional talents and developing employees’ potential. This comprehensive training system includes new comers’ orientation, professional / technical training, external training, managerial training and self- development. b. In order to effectively track each stage of our employee's education, VIS has created a robust e-training management program which serves as a basis for arranging future training and talent development plans. Each year, every employee designates personal learning and development goals, and after discussing the goals together with their supervisors, employees formulate personal development plans to achieve continuous growth and facilitate life-long learning goals. c. We provide an e-Learning web portal which offers over 750 courses, and the Company's educational materials are constantly being updated. At present, VIS's training covers a wide range of topics including engineering technology, professional competencies, management, and other courses on specialized skillsets. Our comprehensive learning programs feature extensive and innovative content, allowing VIS employees to expand their knowledge without limitations imposed by time or location. By learning at their own pace, employees can increase their competitiveness and foster a Company culture which values self- motivated education. Total over 100 thousand times online class was studied by company employees in Y2016. d. The training statistics of Y2016 are summarized in the following table. And employee average training hours in Y2016 was about 28.4 hours. Numbers of Total Training Total Employees Total Training Personnel Expense Trained Hours 4,974 8,911,011 114,871 142,304 3. Retirement Plan: The pension system under the “Pension Fund Statue” requires the allocation of specific amount of contribution for retirement equivalent to 6% of employees' monthly salaries allocated to their personal pension fund accounts at the Labor Insurance Bureau. The pension system under the “Labor Standards Act” requires guaranteed disbursement of pension funds whereby the Company shall make contributions to the employee pension fund on the basis of the total employee salaries. This fund shall be

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monitored by the Pension Reserve Monitoring Committee and deposited at the special account of the Bank of Taiwan under the title of the committee. 4. Other important agreements and employment protection policies: The Company treasures the establishment of harmonious atmosphere in labor-management relation through mutual trust in corporate management, and adopts the proactive openness model of management to create a challenging and joyful work environment. For example, VIS highly treasures the opinions of the employees and thereby established an “Employee Health Section” for handling labor- management relation and related matters. Different channels were cultivated for labor-management communications in order to create an open environment. Further to department meetings, which were held not on a regular basis, and orientation of new people, quarterly labor-management meetings, and executive meetings, VIS also set up a mailbox for employee communication. In addition, VIS conducts survey on employee opinions on their satisfaction with management and the welfare system regularly. VIS not only made efforts in sustaining positive labor-management relation, but also provided consultation services to employees, and organized related speech presentations and symposiums with the employees at any time as needed to strengthen the communications of idea and establish a consensus. Labor-management relation at VIS is harmonious, and there is no loss or damage deriving from labor-management disputes ever since its establishment. 5. Employee Working Environment and Personal Safety VIS's Environmental, Safety, and Health Policies When it comes to the Company's environmental, safety, and health policies, VIS places a strong emphasis on full participation by all employees to ensure across-the-board safety. After being reviewed and signed by VIS Chairperson and President Leuh Fang, the latest policies are posted on the Company's official website and the announcement board of each production site. To ensure that each employee clearly understands the Company's policies and works to achieve their objectives, the policies are also printed out onto cards which are then distributed to all employees, thereby facilitating widespread compliance. In addition, VIS's contractors are required to comply with the Company's policies pertaining to safety and health management. To this end, VIS has incorporated various informational directives concerning health, safety, and environmental policies into related education training provided to contractors, ensuring that all contractors

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which handle work for VIS clearly grasp the Company's health, safety, and environmental policies Environmental, Safety and Health Management Systems With regard to safety and health management as it relates to VIS's improvement-oriented management methodology, our primary strategy for boosting occupational safety is to prevent harm associated with equipment use to the greatest extent possible. To this end, the Company continually proposes and implements improvement plans where feasible in a bid to clamp down on potential safety and health risks. In terms of environmental protection, the top three approaches VIS has adopted to improve its impact on the environment are waste reduction, re-use and recycling, and energy conservation, all of which effectively serve to reduce the waste of resources. In the course of promoting our environmental, safety, and health management system, we create relevant forms in the system in order to comply with PDCA (Plan-Do-Check-Action) tracking methodology and to uphold our spirit of continuous improvement, including: Environmental Safety & Health (ESH) management system, regulatory compliance verification, corrective and preventive measures, and other systems for managing non-compliance. Promotion of Environmental, Safety, and Health in Each Department Each department designates senior personnel to record and assess safety and health risks and environmental aspects associated with the various types of occupational activities, products, and services encountered on the job as well as common occupational hazards, insurance company audits, recommendations from outside experts, and records of previous accidents and regulatory requirements of each department and partnering plants. In addition, VIS departments are required to submit ESH improvement proposals which address high-risk and significant environmental aspects. Proposals currently being implemented include the following: a. Formulating environmental, safety, and health management programs b. Determining and verifying regulatory compliance c. Measuring safety and health performance, and managing environmental monitoring d. Administering competitive KPI benchmarks for environmental, safety,

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and health compliance e. Carrying out internal and external audits Promotion of Environmental Safety and Health Education To enhance employee's comprehension of safety, health, and environmental protection concepts both inside and outside the Company, and to sharpen skills and awareness related to the safety of employees at their respective work sites, VIS has arranged classes as required by law and also formulated health, safety, and environmental training plans based on the actual needs of our plants to reinforce employees' safety and health awareness and sense of responsibility. a. Training for New Employees: Prior to officially starting work, all new employees must first complete a 6-hour set of comprehensive internal training courses on health, safety, and environmental education in order to ensure they fully understand VIS's environmental, safety, and health regulations and relevant company policies. b. On-the-Job Training Employees participate in various on-the-job training programs in order to enhance specific skill sets related to different job duties. c. Promoting Education: VIS is dedicated to fulfilling its responsibilities as a good corporate citizen, including participating in the "annual industrial safety and environmental protection month" events hosted by the Hsinchu Science Park Administration, ensuring that employees are able to participate in both on-site and off-site CSR activities. Company Achievements Relating to Environmental, Safety, and Health in 2016 a. FAB2 received EPA's bronze award at the 25th ROC Enterprises Environmental Protection Award. b. FAB2 received Excellence in 2016 Occupational Safety and Health Promotion Performance Award from the Hsinchu Science Park Administration. c. FAB3 received the Taoyuan Department of Environmental Protection's 2016 Award for Reduction of Air-borne Pollutants in Public and Private Spaces.

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Promotion of employee health VIS takes on the responsibility for caring for and safeguarding the health of its employees. Apart from providing protective gears and conducting biannual measurement tests of the work environment, the in-house infirmary arranges regular health check-ups for employees. Our in-house infirmary arranges regular health check-ups or low-cost examination programs from time to time for our supervisors and employees, offers free flu shots, provides general physical health consultations, promotes breast feeding, and ensures a friendly environment for breast feeding is provided. We also hold special managerial/ departmental health classes and provide employees with stress-relieving massage service aimed at boosting employees' immunity and work efficiency. Our Health Promotion Committee holds health leisure activities occasionally to encourage and motivate employees and their spouses to cultivate the habit of exercising regularly to maintain vitality and health both physically and mentally. In addition, our infirmary holds various types of health workshops and health promotion awareness activities so as to enhance employees' awareness of personal health management.

Employee Behavior and Ethical Standards VIS takes the following as its core managerial principles:  rounded in integrity, guided by professional ethics.” Furthermore, it has established a code of professional conduct for its employees. Not only are employees asked to adhere to this code, they are forbidden from giving or taking bribes, from acting in any way contrary to the interests of the company, and from any instance of conflict of interest. Each year, employees are asked to fill out a conflict of interest disclosure form as well as a voluntary disclosure form. VIS has established a Proprietary Information Protection policy, which clearly lays out guidelines for confidential company information as well as the receiving, sending, saving and utilization of sensitive data. To align with the corporate vision and value, VIS specifies four core competencies as the behavior/ethical standards for management team and employees.  Integrity All VIS employees should emphasize business ethics, operation standards, professionalism, and work of the highest quality and devote completely to

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fulfilling the promise within the limits of the law once a promise is made. Integrity is a fundamental value of the company.  Customer Orientation VIS always places its customer needs first, and this principle drives its corporate culture. This allows VIS to anticipate and understand customers’ problems and needs, creating an atmosphere of open, direct, and constructive responsiveness and communication. In creating win-win situations, VIS is able to work with all customers and foster a spirit of teamwork.  Value Orientation VIS is constantly coming up with innovative ways of thinking, and works proactively to improve the way that it operates. Even in challenging times, VIS forges ahead and persists in doing what is right, fully living up to its roles, mission, and responsibilities.  Commitment VIS pledges to execute the most effective and timely strategy even in the most challenging and competitive of times. When taking on demanding new tasks, VIS works with enthusiasm, taking each task as an opportunity to learn and to make a real contribution. With focus and persistence in fulfilling our role, we meet our goals and get results. Through strategic thinking and overcoming challenges, VIS always gets the job done and with the highest quality. 2. Losses due to labor disputes from previous year till current year printing of annual report: VIS sees its employees as its most precious asset, and strives to allow employees to continue to develop. Thus, we have maintained harmonious labor relations and have not suffered any losses due to labor disputes.

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F. Major Contracts Major Contract Contracting Party Term of Agreement Major Contents of Agreement Limitation Manufacturing, License, Taiwan Semiconductor April 1, 2004 to TSMC grants specific process None and Technology Manufacturing Co., March 31, 2006 to technology license to VIS for Transfer Agreement Ltd. (TSMC) be renewed on an manufacturing TSMC and VIS foundry annual basis. products. VIS reserves certain capacity for TSMC. 84 Vanguard International Semiconductor Corporation

VI. FINANCIAL STATEMENTS A. Brief Balance Sheets and Brief Statements of Income 1. Brief Balance Sheets

Brief Consolidated Balance Sheets Unit: NT$, in thousands Year Financial analysis from 2012 to 2016 Item 2012 2013 2014 2015 2016 Current assets 15,976,612 21,556,195 25,114,426 24,800,749 25,662,921 Property, plant and equipment 8,219,842 6,639,474 7,983,767 6,979,397 6,284,081 Intangible assets 6,660 17,011 37,174 41,596 30,282 Other assets 579,088 637,279 619,403 562,499 3,002,758 Total Assets 24,782,202 28,849,959 33,754,770 32,384,241 34,980,042 Current liabilities Before distribution 3,242,906 3,697,865 5,391,799 4,262,001 5,476,672 After distribution 4,795,229 6,571,190 9,651,152 8,523,355 Note 1 Non-current liabilities 572,099 722,334 816,655 712,611 804,107 Total Liabilities Before distribution 3,815,005 4,420,199 6,208,454 4,974,612 6,280,779 After distribution 5,367,328 7,293,524 10,467,807 9,235,966 Note 1 Equity attributable to shareholders of parent company 20,967,197 24,429,760 27,546,316 27,409,629 28,699,263 Capital stock 16,284,830 16,365,859 16,389,823 16,389,823 16,389,823 Capital surplus 594,675 733,578 838,029 855,123 862,594 Retained earnings Before distribution 5,074,462 7,871,013 10,398,845 10,280,494 11,484,802 After distribution 3,522,139 4,997,688 6,139,492 6,019,140 Note 1 Other equity (68,993) (53,700) (70,506) (115,811) (37,956) Treasury stock (917,777) (486,990) (9,875) - - Non-controlling interests - - - - - Total Equity Before distribution 20,967,197 24,429,760 27,546,316 27,409,629 28,699,263 After distribution 19,414,874 21,556,435 23,286,963 23,148,275 Note 1 Note 1: Subject to change after shareholders' meeting resolution. Note 2: 2014 figures have been restated in accordance with 2013 version of IFRSs. Brief Unconsolidated Balance Sheets Unit: NT$, in thousands Year Financial analysis from 2012 to 2016 Item 2012 2013 2014 2015 2016 Current assets 15,776,312 21,344,163 24,875,522 24,545,917 24,829,499 Property, plant and equipment 8,219,778 6,639,170 7,983,500 6,979,148 6,282,629 Intangible assets 6,660 17,011 37,174 41,596 30,282 Other assets 778,604 845,519 856,692 813,426 3,828,955 Total Assets 24,781,354 28,845,863 33,752,888 32,380,087 34,971,365 Current liabilities Before distribution 3,242,058 3,693,769 5,389,917 4,257,847 5,467,995 After distribution 4,794,381 6,567,094 9,649,270 8,519,201 Note 1 Non-current liabilities 572,099 722,334 816,655 712,611 804,107 Total Liabilities Before distribution 3,814,157 4,416,103 6,206,572 4,970,458 6,272,102 After distribution 5,366,480 7,289,428 10,465,925 9,231,812 Note 1 Capital stock 16,284,830 16,365,859 16,389,823 16,389,823 16,389,823 Capital surplus 594,675 733,578 838,029 855,123 862,594 Retained earnings Before distribution 5,074,462 7,871,013 10,398,845 10,280,494 11,484,802 After distribution 3,522,139 4,997,688 6,139,492 6,019,140 Note 1 Other equity (68,993) (53,700) (70,506) (115,811) (37,956) Treasury stock (917,777) (486,990) (9,875) - - Total Equity Before distribution 20,967,197 24,429,760 27,546,316 27,409,629 28,699,263 After distribution 19,414,874 21,556,435 23,286,963 23,148,275 Note 1 Note 1: Subject to change after shareholders' meeting resolution. Note 2: 2014 figures have been restated in accordance with 2013 version of IFRSs.

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2. Brief Statements of Income

Brief Consolidated Statements of Comprehensive Income

Unit: NT$, in thousands Year Financial analysis from 2012 to 2016 Item 2012 2013 2014 2015 2016 Net revenue 17,190,000 21,135,060 23,931,479 23,319,721 25,828,634 Gross profit 3,978,189 6,862,933 8,613,673 6,897,266 8,924,152 Operating income 2,268,874 4,837,208 6,206,459 4,611,982 6,100,905 Non-operating income and expenses 272,879 225,123 289,607 326,529 159,189 Income before income tax 2,541,753 5,062,331 6,496,066 4,938,511 6,260,094 Income from operations of continued segments-after tax 2,329,692 4,370,988 5,440,081 4,157,583 5,537,925 Income (loss) from operations of discontinued segments-after tax - - - - - Net Income 2,329,692 4,370,988 5,440,081 4,157,583 5,537,925 Other comprehensive income (loss) 102 (6,821) (68,552) (61,886) 5,592 Total comprehensive income 2,329,794 4,364,167 5,371,529 4,095,697 5,543,517 Net income attributable to owner of the corporation 2,329,692 4,370,988 5,440,081 4,157,583 5,537,925 Net income attributable to non-controlling interests - - - - - Total comprehensive income attributable to owner of the corporation 2,329,794 4,364,167 5,371,529 4,095,697 5,543,517 Total comprehensive income attributable to non- controlling interests - - - - - Diluted earnings per share (Note 1) 1.48 2.71 3.30 2,50 3.35 Note 1: Based on weighted average outstanding shares in each year. Note 2: 2014 figures have been restated in accordance with 2013 version of IFRSs. Brief Unconsolidated Statements of Comprehensive Income

Unit: NT$, in thousands Year Financial analysis from 2012 to 2016 Item 2012 2013 2014 2015 2016 Net revenue 17,190,000 21,135,060 23,931,479 23,319,721 25,828,634 Gross profit 3,978,189 6,862,933 8,613,673 6,897,266 8,924,152 Operating income 2,268,095 4,835,731 6,204,596 4,610,048 6,097,353 Non-operating income and expense 273,475 225,271 289,373 328,012 166,174 Income before income tax 2,541,570 5,061,002 6,493,969 4,938,060 6,263,527 Income from operations of continued segments-after tax 2,329,692 4,370,988 5,440,081 4,157,583 5,537,925 Income (loss) from operations of discontinued segments-after tax - - - - - Net Income 2,329,692 4,370,988 5,440,081 4,157,583 5,537,925 Other comprehensive (loss) income 102 (6,821) (68,552) (61,886) 5,592 Total comprehensive income 2,329,794 4,364,167 5,371,529 4,095,697 5,543,517 Diluted earnings per share (Note 1) 1.48 2.71 3.30 2.50 3.35 Note 1: Based on weighted average outstanding shares in each year. Note 2: 2014 figures have been restated in accordance with 2013 version of IFRSs.

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3. Auditors’ Opinion VIS has retained Deloitte & Touche Certified Public Accountants as the external auditors over the last 5 years. Year CPA Audit Opinion 2012 Yu-Feng Huang, Cheng-Chih Lin An Unqualified Opinion 2013 Yu-Feng Huang, Cheng-Chih Lin An Unqualified Opinion 2014 Yu-Feng Huang, Cheng-Chih Lin An Unqualified Opinion 2015 Yu-Feng Huang, Cheng-Chih Lin An Unqualified Opinion 2016 Yu-Feng Huang, Cheng-Chih Lin An Unqualified Opinion

B. Financial Analysis Consolidated Financial Analysis Year Financial analysis from 2012 to 2016 Item 2012 2013 2014 2015 2016 Debt Ratio(%) 15.39 15.32 18.39 15.36 17.95 Capital Structure Long Term Capital to Properties, Plant and Analysis Equipment (%) 262.04 378.83 355.25 402.93 469.49 Current Ratio (%) 492.66 582.94 465.78 581.90 468.58 Liquidity Analysis Quick Ratio(%) 431.72 534.93 417.33 525.26 424.92 Times Interest Earned (Times) - - - - - Avg. Collection Turnover (Times) 6.93 7.51 6.82 6.62 7.36 Avg. Collection Days 53 49 54 55 50 Avg. Inventory Turnover (Times) 8.57 8.10 7.34 6.91 7.59 Operating Avg. Payment Turnover (Times) 22.56 18.27 15.43 16.11 16.83 Performance Avg. Inventory Turnover Days 43 45 50 53 48 Analysis Properties, Plant and Equipment Turnover (Times) 1.87 2.84 3.27 3.11 3.89 Total Assets Turnover (Times) 0.72 0.79 0.76 0.70 0.76 Return on Total Assets (%) 9.78 16.30 17.37 12.57 16.44 Return on Total Equity (%) 11.31 19.26 20.93 15.13 19.74 Profitability Pre-tax Income to Capital Stock (%) 15.61 30.93 39.63 30.13 38.19 Analysis Net Margin (%) 13.55 20.68 22.73 17.82 21.44 Basic Earnings per Share(NT$) (Note) 1.50 2.76 3.35 2.54 3.38 Diluted Earnings per Share(NT$) (Note) 1.48 2.71 3.30 2.50 3.35 Cash Flow Ratio (%) 179.89 203.71 123.63 168.52 145.58 Cash Flow Cash Flow Adequacy Ratio (%) 121.13 184.46 147.25 143.49 149.39 Cash Flow Reinvestment Ratio (%) 6.09 6.97 4.16 3.14 3.84 Leverage Operating Leverage 4.03 3.29 2.93 3.82 3.19 Analysis Financial Leverage 1.00 1.00 1.00 1.00 1.00 Analysis of variation over 20% - Y2016 vs. Y2015: 1. The properties, plant and equipment turnover increased by 25% was mainly due to the increase in net sales. 2. The return on total assets and return on total equity increased by 31% and 30%, respectively, were mainly due to the increase in net income. 3. The pre-tax income to capital stock increased by 27% was primarily due to the increase in net income. 4. The net margin increased by 20% as a result of the increase in net income. 5. The earnings per share increased by 34% as a result of the increase in net income. 6. The cash flow reinvestment ratio increased by 22% was mainly due to the increase in net cash flow from operating activities. Note 1: Based on weighted average outstanding shares in each year. Note 2: 2014 figures have been restated in accordance with 2013 version of IFRSs.

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Unconsolidated Financial Analysis Year Financial analysis from 2012 to 2016 Item 2012 2013 2014 2015 2016 Debt Ratio (%) 15.39 15.31 18.38 15.35 17.93 Capital Structure Long Term Capital to Properties, Plant and Analysis Equipment (%) 262.04 378.84 355.26 402.94 469.60 Current Ratio (%) 486.61 577.84 461.51 576.48 454.08 Liquidity Quick Ratio (%) 425.66 529.80 413.05 519.80 410.37 Analysis Times Interest Earned (Times) - - - - - Avg. Collection Turnover (Times) 6.93 7.51 6.82 6.62 7.36 Avg. Collection Days 53 49 54 55 50 Avg. Inventory Turnover (Times) 8.57 8.10 7.34 6.91 7.59 Operating Avg. Payment Turnover (Times) 22.56 18.27 15.43 16.11 16.83 Performance Avg. Inventory Turnover Days 43 45 50 53 48 Analysis Properties, Plant and Equipment Turnover (Times) 1.87 2.84 3.27 3.11 3.89 Total Assets Turnover (Times) 0.72 0.79 0.76 0.70 0.76 Return on Total Assets (%) 9.78 16.30 17.38 12.57 16.44 Return on Total Equity (%) 11.31 19.26 20.93 15.13 19.74 Profitability Pre-tax Income to Capital Stock (%) 15.61 30.92 39.62 30.12 38.21 Analysis Net Margin(%) 13.55 20.68 22.73 17.82 21.44 Basic Earnings per Share(NT$) (Note 1) 1.50 2.76 3.35 2.54 3.38 Diluted Earnings per Share(NT$) (Note 1) 1.48 2.71 3.30 2.50 3.35 Cash Flow Ratio (%) 179.85 203.77 123.41 168.53 145.55 Cash Flow Cash Flow Adequacy Ratio (%) 121.18 184.50 147.07 143.20 149.21 Cash Flow Reinvestment Ratio (%) 6.08 6.96 4.14 3.13 3.83 Leverage Operating Leverage 4.02 3.30 2.94 3.82 3.19 Analysis Financial Leverage 1.00 1.00 1.00 1.00 1.00 Analysis of variation over 20% - Y2016 vs. Y2015: 1. The current ratio and quick ratio decreased by 21%, respectively, were mainly due to the increase in payable. 2. The properties, plant and equipment turnover increased by 25% was mainly due to the increase in net revenue. 3. The return on total assets and return on total equity increased by 31% and 30%, respectively, were mainly due to the increase in net income. 4. The pre-tax income to capital stock and net margin increased by 27% and 20%, respectively, were primarily due to a increase in net income. 5. The basic and diluted earnings per share increased by 33% and 34%, respectively, were result of an increase in net income. 6. The cash flow reinvestment ratio increased by 22% was mainly due to the increase in net cash flow from operating activities. Note 1: Based on weighted average outstanding shares in each year. Note 2: 2014 figures have been restated in accordance with 2013 version of IFRSs. The calculation formula of financial analysis was listed as follows: 1. Capital Structure Analysis (1) Debt ratio = Total Liabilities / Total Assets (2) Long-term capital to properties, plant and equipment = (Equity + Non-current Liabilities) / Net Properties, Plant and Equipment 2. Liquidity Analysis (1) Current ratio = Current Assets / Current Liabilities (2) Quick ratio = (Current Assets -Inventories - Prepaid Expenses) / Current Liabilities (3) Times interest earned = Earnings before Interest and Taxes / Interest Expenses 3. Operating Performance Analysis (1) Average collection turnover = Net Revenue / Average Trade Receivables (2) Average collection days = 365 / Average collection turnover (3) Average inventory turnover = Cost of Revenue / Average Inventory (4) Average payment turnover = Cost of Revenue / Average Trade Payables (5) Average inventory turnover days = 365 / Average Inventory Turnover (6) Properties, plant and equipment turnover = Net Revenue / Average Net Properties, Plant and Equipment

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(7) Total assets turnover = Net Revenue / Average Total Assets 4. Profitability Analysis (1) Return on total assets = (Net Income + Interest Expenses * (1 - Effective tax rate)) / Average Total Assets (2) Return on total equity = Net Income / Average Total Equity (3) Net margin = Net Income / Net Revenue (4) Earnings per share = (Net Income Attributable to Owner of the Corporation - Preferred Stock Dividend) / Weighted Average Outstanding Shares 5. Cash Flow (1) Cash flow ratio = Net Cash Provided by Operating Activities / Current Liabilities (2) Cash flow adequacy ratio = Five-year sum of cash provided by operations / Five-year sum of capital expenditures, inventory additions, and cash dividends (3) Cash flow reinvestment ratio = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Properties, Plant and Equipment + Investment + Other Non-current Assets + Working Capital) 6. Leverage Analysis (1) Operating leverage = (Net Revenue - Variable Cost and Expenses) / Income from Operations (2) Financial leverage = Income from Operations / (Income from Operations - Interest Expenses)

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C. Audit Committee’s Review Report The company’s 2016 financial statement (including individual and consolidated financial reports), which was approved by our Audit Committee and authorized through the Board of Directors resolution, has been audited and certified by Deloitte & Touche, and for which an audit report has been issued. The Board of Directors has also prepared and submitted the Y2016 business report and earnings distribution plan, which have been audited and confirmed by our Audit Committee as having being properly prepared in accordance with Article 14-4 of the Securities and Exchange Law and Article 219 of the Company Act. Please kindly review and approve the provided information. The above is respectfully submitted at the VIS 2017 General Shareholders' Meeting

Vanguard International Semiconductor Corporation

Convener of the Audit Committee: Benson W.C. Liu

February 28, 2017

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D. Financial Statements and Independent Auditors’ Report Please refer to IX. Financial Statements, Consolidated Financial Statements and Independent Auditors’ Report

E. Consolidated Financial Statements and Independent Auditors’ Report Please refer to IX. Financial Statements, Consolidated Financial Statements and Independent Auditors’ Report

F. The financial impact to the Company due to company or affiliate companies financial difficulties: None

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VII. Financial Position, Operating Results and Risk Management A. Analysis of Consolidated Financial Position Unit: NT$, in thousands Year Difference 2016 2015 Item Amount % Current Assets 25,662,921 24,800,749 862,172 3 Property, Plant and Equipment 6,284,081 6,979,397 (695,316) (10) Other Non-Current Assets 3,033,040 604,095 2,428,945 402 Total Assets 34,980,042 32,384,241 2,595,801 8 Current Liabilities 5,476,672 4,262,001 1,214,671 29 Non-Current Liabilities 804,107 712,611 91,496 13 Total Liabilities 6,280,779 4,974,612 1,306,167 26 Capital Stock 16,389,823 16,389,823 0 0 Capital Surplus 862,594 855,123 7,471 1 Retained Earnings 11,484,802 10,280,494 1,204,308 12 Total Shareholders' Equity 28,699,263 27,409,629 1,289,634 5 Analysis for variation over 20% : 1. The increase in other non-current assets was mainly due to the increase of investments. 2. The increase in current liabilities was mainly due to the increase of payables. B. Analysis of Consolidated Financial Performance Unit: NT$, in thousands Year 2016 2015 Difference % Item Net Revenue $ 25,828,634 $ 23,319,721 $ 2,508,913 11 Cost of Revenue 16,904,482 16,422,455 482,027 3

Gross Profit 8,924,152 6,897,266 2,026,886 29 Operating Expenses 2,823,247 2,285,284 537,963 24

Operating Income 6,100,905 4,611,982 1,488,923 32 Non-operating Income and Expenses 159,189 326,529 (167,340) (51)

Income before Income Tax 6,260,094 4,938,511 1,321,583 27 Income Tax Expenses 722,169 780,928 (58,759) (8)

Net Income 5,537,925 4,157,583 1,380,342 33

Other Comprehensive Income (Loss) 5,592 (61,886) 67,478 (109)

Total Comprehensive Income $ 5,543,517 $ 4,095,697 $ 1,447,820 35

1. Analysis for variation over 20% : 1.1 The increase in gross profit was mainly due to higher sales volume and better capacity utilization. 1.2 The increase in operating expenses was mainly due to the increase of research and development expenses. 1.3 The increase in operating income, income before tax and net income were mainly due to the increase in gross profit. 1.4 The decrease in non-operating income and expenses was mainly due to recognition of impairment loss on financial assets. 1.5 The increase in other comprehensive income (loss) was due to unrealized loss on available-for-sale financial assets turning to impairment loss. 2. Reasons for changing the Company's major business; explain the variance resulting from the adjustment of selling prices or costs, the increase or decrease of quantity and the combination of production and selling, or the replacement of old products. If the Company's operation strategy, market situation, economic environment of other internal or external factors has changed or expects to have any significant changes, explain the fact, influencing factors and the possible impact to the Company's future finance and responding proposal : Not Applicable 3. Planned selling quantities and its base for next year. Explain the major factors that keep the Company's forecast sales quantity to rise or decline : Please refer to the " Letter To The Shareholders"

92 C. Analysis of Consolidated Cash Flow Unit : NT$, in millions Remedy for Cash Shortfall Cash Balance Net Cash Provided by Net Cash Used in Investing and Cash Balance 2016/1/1 Operating Activities Financing Activities 2016/12/31 Investing Plan Financing Plan 17,951 7,967 (8,353) 17,565 None None 1. Analysis of Cash Flows for Y2016: 1.1 Cash provided by operating activities NT$7,967 million was mainly from net income and depreciation/amortization. 1.2 Cash used in investing activities NT$4,091 million was mainly due to capital expenditures and the acquisitions of financial assets. 1.3 Cash used in financing activities NT$4,262 million was mainly for the payment of the cash dividends. 2. Remedy for Cash Shortfall and Liquidity Analysis : Not Applicable. 3. Cash Flow Projection for Next Year : Cash Balance Net Cash Provided by Net Cash Used in Investing and Cash Balance Remedy for Cash Shortfall 93 2017/1/1 Operating Activities Financing Activities 2017/12/31 Investing Plan Financing Plan 17,565 6,733 (5,417) 18,881 None None

1. Analysis of Cash Flows for Y2017: 1.1 Cash provided by operating activities NT$6,733 million was mainly from net income and depreciation/amortization. 1.2 Cash used in investing and financing activities NT$5,417 million was mainly due to capital expenditures and the payment of the cash dividends. D. Major Capital Expenditure Capital expenditure was approximately NT$1.3 billion in 2016 primarily spent on acquiring and renovation of facilities and equipments. Unit : NT$, in millions Actual or Planned Planned Completion Date Total Capital Execution of Major Capital Expenditure Project Sources of Capital Year/Month Expenditure Y2015 Y2016 Y2017

Purchasing and Renewing fab Semiconductor Corporation Vanguard International 1 plants, facilities, and process Owner Equity 2017.12 4,659 1,497 1,300 1,862 equipment Vanguard International Semiconductor Corporation

E. Long-term Investment Policy and Results VIS’s long-term investments were made for strategic purposes. In 2016, the investment loss was mainly due to recognizing the impairment loss of AMPI. Looking forward, VIS will continue to focus on strategic investment. F. Risk Management 1. Interest Rates Fluctuation, Foreign Exchange Rate Volatility and Inflation Interest rate: VIS’ exposure to interest rate fluctuation relates primarily to long-term liabilities for capital expenditures. Due to small scale of liabilities, no major impact is expected from interest rate fluctuation. VIS’ interest income are most sensitive to fluctuations in R.O.C. and U.S. interest rates. Changes in R.O.C. and U.S. interest rates affect the interest earned on the Company’s cash, cash equivalent and marketable securities and the fair value of those securities. Foreign exchange: VIS employs natural hedging and forward foreign exchange to avoid risks from exchange rate fluctuations. Most of VIS’ revenues are denominated in US dollar. VIS mainly utilizes spot and forward foreign exchange trading to adjust its foreign exchange position as per the foreign exchange market conditions for the purpose of reducing the impact of exchange rate fluctuation on the company. In addition, VIS’ materials and equipments payments are made in US Dollars, Japanese Yens and Euros, among which a substantial portion is in US Dollars. Henceforth, VIS enjoys a certain degree of natural hedge as a result of set-off between account payables and account receivables. But if the U.S. dollar appreciates significantly versus other major currencies, the demand for the products and services of VIS’ customers and for its goods and services will likely decrease, which will negatively affect our revenues. Inflation: Inflation in Taiwan was 1.4% in Y2016. This inflation rate did not impact on our operation and profit significantly. And we believe the impact will remain insignificant in the future if the inflation rate is similar to that of in the past. 2. High risk, high leveraged investment, lending, endorsement and guarantee for other parties and financial derivatives transactions VIS focuses on its foundry manufacturing operations and IC wafer production. Accordingly, the company does not engage in high risk/high

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leveraged investments. In order to control and monitor certain types of transactions, VIS has established internal control policies and procedures conforming to the relevant laws and regulations promulgated by the authorities concerned. These policies and procedures include 「Policies and Procedures for Financial Derivative Transactions 」 , 「 Procedures for Lending Funds to Other Parties」 and 「Procedures for Endorsement and Guarantee」. Until now, the company and affiliates have neither lent funds to others, nor provided endorsement or guarantee for others. Financial derivatives transactions that VIS enters into are strictly for hedging purpose and not for trading and speculative purposes. 3. R&D Plan and Progress In Y2016, VIS capital expenditure is about NT$1.3 billion, while in Y2017 capital expenditure is planned to be around NT$1.86 billion. Other than equipment and facility maintaining expense, capital expenditure covers the product and process R&D to provide complete IC manufacturing service for customers and to enhance our competitiveness in global market. VIS will continue to build on the existing foundation and strengthen the specialty process technologies. R&D budget in Y2017, estimated around 6% of total sales. (Please refer to「Technology and R&D Status」) 4. Changes in Domestic and International Policies and Regulations Management team closely monitors political and regulatory developments that could have a material impact on business and operations. Political and regulatory developments did not have any material adverse effect on VIS during Y2016. 5. Changes in Technology VIS has continued its investment in the product development and process technology for the market needs; on the other hand, we also adapt ourselves to the changes and needs due to technology evolutions to reduce risks and pursue long-term steady development in finance and business. (please refer to Overview of the Industry”) 6. Changes in Company Image The Company focuses on its primary business activities, upholds the principle of good faith, abides by rigorous code of professional ethics, endeavors to improve the Company's competitiveness and pursue corporate sustainability, and strictly forbids conducts that violate the Company's principle of good faith and core corporate values. The Company conducts regular inspections on its external environment, operating models, and management systems, simulates unexpected incidents

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that may influence corporate reputation, proposes response strategies, and minimizes the potential impact of uncertain factors and disasters that the Company may face in the future, in order to maintain the Company's normal operations and protect the overall interest of our shareholders, customers, and employees. Furthermore, the Company also actively participates in community and charity events in fulfillment of its corporate social responsibilities. From Y2016 to the publication date of this annual report, the Company has been and remains free of changes in corporate image or events that have influenced its capacity for crisis management. 7. Risks from Merge, Acquisition and Plant Expansion No merger and acquisition event occurred from Y2016 to the date of publishing this annual report. 8. Risks from Plant Expansion No plant expansion occurred from Y2016 to the publishing date of this annual report. 9. Risks from Concentration of Stock and Sales To avoid overly concentrated risk and to protect raw materials supply for the manufacturing process at all time, VIS has maintained multiple suppliers for the major materials to spread the risk. In Y2015 and Y2016, the top two customers have made around 50% and 46% of company annual sales respectively. The concentration of sales is the industry nature of our business as focused specialty foundry. To minimize the risks, we’ll continue to expand the product lines and customer base. 10. Transfer of Shareholdings of Directors, Supervisors or Large Shareholders The value of shareholders’ investment may be reduced by possible future sales of VIS shares owned by the major shareholders. No other transfer of shareholdings of directors, supervisors or large shareholders occurred from Y2016 to the date of publishing this annual report. 11. Change of Management No change of management occurred from Y2016 to the date of publishing this annual report. 12. Litigation or non-litigation proceedings No Litigation or non-litigation proceedings occurred from Y2016 to the date of publishing this annual report.

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13. Other Material Risks Measures responding to events that seriously impact on the company operations VIS regularly conducts drills and trainings for managing natural or man- made damage, such as typhoon, earthquake, fire, gas and chemicals leak, and establish broad and detailed prevention measures as well as contingent plans. VIS is capable of maintaining the company operations and protecting the interests of shareholders, customers and employees. No emergency event occurred from Y2016 to the publishing date of this annual report. The Policy of the risk management Vanguard International Semiconductor Corporation adopts professional risk assessment techniques and concepts from local and abroad to facilitate its pro-active risk prevention and loss control. By adopting effective engineering technologies and risk management policies, the Company is able to ensure employees' full participation and ongoing improvements. The Company has incorporated risk management measures into its daily operations. Every department is required to perform regular self assessments on risk control, while the board of directors and the executive management supervise the effectiveness of existing risk management measures and ensure that risks are kept within tolerable levels. The organization chart of the risk management Below is a description of the Company's risk management organization: Board of directors (including the Audit Committee): determines the overall risk management system and monitors to ensure that the system remains effective. The executive management (Chairman and President): executes the board's risk management decisions and supervises regional heads and the Health, Safety and Environmental Protection Committee. It is also responsible for identifying risks and monitoring the effectiveness of various control measures. The management (vice president and the Health, Safety and Environmental Protection Committee): consolidates information regarding the effectiveness of risk management activities; assists and supervises subordinates in identifying risks and implementing proper control. Risk management and policy execution units: the Company has specialized units responsible for identifying possible risks in daily operations and establishing control measures to address such risks. Their efforts are reviewed and reported to the management on a regular basis.

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Responsibilities of risk management and policy execution units are: Internal Auditing: The overall implementation of the risk management system, risk management guidance for various departments within the Company, progress review and control, ensuring the effectiveness and robustness of current practices, and reporting back their findings to the executive management and board of directors to help improve the risk management system. Legal: Responsible for managing the legal risks with accordance of laws from government and authorities, handling contract and law suit dispute to lower our legal risk; Human Resources: Responsible for human resources structure and utilization planning. Enhance man-power efficiency and improve industrial harmony to lower risks in management. Quality Reliability Assurance Div: In charge of product inspection, quality control, and promoting quality policy and strategy in VIS to reduce operating risk. Finance Div: Responsible for establishing the financial operation and planning systems. Evaluate and supervise the long-term investment decisions and executions. Under the risk management monitoring mechanism, conduct safety, liquidity and profitability analysis. Establish hedge process in foreign exchanges to lower the risks in finance. Operations and Environmental Safety: Corporate Wafer Production, Production Control, Special Project, Risk & Env. Safety Management, Operation Planning, Computer Int. Mfg., and Product Engineering. Improve operation efficiency, cost control, ensure timely delivery of high quality product to customers and reduce operating risk. Worldwide Sales and Planning: Oversees customer service planning and management for the purpose of reducing operational risks; explores local and foreign opportunities and gains control of customers' information to reduce market risks; learns the competition and market trends to develop marketing strategies. Research & Development: Leader to the IP Management, Design Service, Information Tech and eCommerce, and Technology divisions. Responsible for technology development and the provision of technical support to IP resources, Mask, CAD, and layout teams to reduce R&D risk. ACCT Div: Responsible for the establishment of the accounting system in order to achieve the goal of reliability of financial reporting to lower the risks in finance.

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MM Div.: Responsible for materials management, VIS will continue to monitor the inventory and the costs of the materials to reduce operating risk. ITEC Div.: Responsible for network planning, operations and network quality maintenance to lower information risk. G. Other important matters: None

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VIII. SPECIAL NOTES A. Affiliated Information 1. VIS Affiliated Companies Chart

2. Business Scope of the Affiliated Companies

Investee Company Major Business Items

VIS Associates Inc. Investment VIS Investment Holding, Inc. Investment VIS Micro, Inc. Marketing service

100 3. Affiliates Information Unit: USD, in thousands Date of Name of Enterprise Address Paid-in Capital Major Business / Production Items Establishment Trident Chambers, PO Box 146, Road Town Tortola, British VIS Associates Inc. 1996.9.24 USD 81,000 IC business investment Virgin Islands Corporation Trust Center 1209 Orange Street VIS Investment Holding, Inc. 1996.11.15 USD 6,250 IC business investment Wilmington, Delaware 19801 1475 S. Bascom Ave, Suite 109 VIS Micro, Inc. 1996.11.21 USD 200 Campbell, CA 95008 Conduct service and marketing activities Note: Foreign exchange rates on balance sheet date is $1 USD = $32.199 NTD. 4. VIS Shareholders Representing Both Holding Companies and Subordinates: None

5. Directors, Supervisors & Presidents of Affiliates Title Name or Representative Holding Shares 101 Name of Enterprise Shares (K) % VIS Associates Inc. Director Fang, Leuh ; Tseng, D. L. 81 100% VIS Investment Holding, Inc. Director Fang, Leuh ; Tseng, D. L. 63 100% VIS Micro, Inc. Director Fang, Leuh ; Tseng, D. L, Chang ; Tung-Lung 200 100%

6. Operating Highlights of Affiliates Unit: NT$, in thousands Name of Enterprise Capital Total Assets Total Liabilities Net Worth Net Revenue Operating Net Income (Loss) EPS (NT$) Income (after tax) VIS Associates Inc. $2,596,782 $2,722,779 $0 $2,722,779 $0 ($234) $12,596 $309.08 VIS Investment Holding, Inc. 201,244 70,993 145 70,848 0 (538) 8,014 128.22 Specialty TechFarm, Inc. (Note 2) 0 0 0 0 0 (120) (13,853) (1.39) VIS Micro, Inc. 6,440 77,671 20,217 57,454 92,555 4,444 3,464 17.32 Note 1: Foreign exchange rate for balance sheet amounts is $1 USD = $32.199 NTD. Semiconductor Corporation Vanguard International Foreign exchange rate for income statement amounts is $1 USD = $32.278 NTD. Note 2: Completed liquidation in April 2016. Semiconductor Corporation Vanguard International

B. Private placements Securities VIS has no private placements securities from Y2016 to the publishing date of this annual report.

C. VIS Common Shares acquired, disposed of and held by subsidiaries VIS Common Shares was not acquired, disposed of and held by subsidiaries from Y2016 to the publishing date of this annual report.

D. Other Necessary Supplement: None

E. Any Events in Y2016 that had Significant Impacts on Shareholders’ Right or Security Prices as started in Item 3 paragraph 2 of Article 36 of Securities and Exchange Law of Taiwan: None 102 Vanguard International Semiconductor Corporation

IX. Financial Statements, Consolidated Financial Statements and Independent Auditors’ Report

INDEPENDENT AUDITOR’S REPORT

The Board of Directors and Shareholders Vanguard International Semiconductor Corporation

Opinion

We have audited the accompanying parent company only financial statements of Vanguard International Semiconductor Corporation (the Corporation), which comprise the parent company only balance sheets as of December 31, 2016 and 2015, and the parent company only statements of comprehensive income, changes in equity and cash flows for the years then ended, and the notes to the parent company only financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying parent company only financial statements present fairly, in all material respects, the parent company only financial position of the Corporation as of December 31, 2016 and 2015, and the parent company only financial performance and the parent company only cash flows for the years then ended in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers.

Basis for Opinion

We conducted our audits in accordance with the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Parent Company Only Financial Statements section of our report. We are independent of the Corporation in accordance with The Norm of Professional Ethics for Certified Public Accountant of the Republic of China, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the parent company only financial statements for the year ended December 31, 2016. These matters were addressed in the context of our audit of the parent company only financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

The key audit matters of the parent company only financial statements of the Corporation for the year ended December 31, 2016, are described as follows:

Timing of revenue recognition

1. The sales revenue of the Corporation is material to the Corporation. Please refer to Note 23. The major types of transactions together with their timing of recognition are as follows:

1) Revenue generated from domestic shipment with the transaction term of ex-works accounted for approximately 58% of total revenue and is recognized as sales revenue at point of ex-factory. Revenue generated from domestic shipment with the transaction term of delivered-at-place accounted for 27% of total revenue and is also recognized at point of ex-factory due to its nature of the goods delivering and receiving are at the same day.

103 Vanguard International Semiconductor Corporation

2) Revenue generated from oversea shipment accounted for 15% of the total revenue depending on the trade terms where the revenue is recognized when the risk of goods is transferred to customers.

2. Revenues generated from either domestic or foreign shipments whose trade terms denote that the revenues are recognized at point of ex-factory consist of 98% of total revenue. The recognition process of revenue thereof is to have sales personnel verify the shipment on the computer system, and the system automatically recognizes the sale revenue and issues invoice. When the customers or their designated forwarders come to withdraw the goods, warehouse personnel will have them sign off on handheld devices and transmit the information to the shipping system. The system automatically checks the shipment on a daily basis. For goods that are not withdrawn, the system will notify sales personnel for confirmation and delete the shipping list where the sales revenue will be reversed automatically and the invoice cancelled.

3. Since the above process consists of manual controls, risk exists that revenue before or after the end of the reporting period being unrecognized in the appropriate period due to human errors.

4. We reviewed the revenue recognition policy of the Corporation, assessed the reasonableness of the revenue recognition, conducted on-site observation and recorded the details of the last shipment of the year ended 2016. We also traced all of the shipping records at December 31, 2016, against relevant supporting documents and accounting records to verify the accuracy of the timing of sales revenue recognition as well as the monetary amount, and evaluated whether the risk and rewards of goods are transferred.

Timing of capitalization of property, plant and equipment

1. The annual capital expenditure of the Corporation relating to property, plant and equipment is significant to its parent company only financial statements. Because of the significance of such expenditure, delaying in capitalization thereof may lead to the parent company only financial statements not fairly presented. Please refer to Note 15.

2. We reviewed the capital expenditure policy of the Corporation on property, plant and equipment, assessed the reasonableness of the timing of capitalization, and conducted procedures as follows:

1) Selecting samples of newly acquired items from the lists of Advance Payments and Construction in Progress of the year to verify whether they are included in the un-capitalized list of the current month.

2) Selecting samples from those that are transferred from Advance Payments and Construction in Progress to Property, Plant and Equipment of the year to verify whether such items are not included in the un-capitalized list of the current month.

3) Selecting samples from the un-capitalized list at the year end and perform on-site count to observe whether such items were not ready for their intended use.

4) Selecting samples of items that were not capitalized over three months from the un-capitalized list to examine whether the reasons of such items not capitalized explained by applicants or users were approved by supervisors.

Responsibilities of Management and Those Charged with Governance for the Parent Company Only Financial Statements

Management is responsible for the preparation and fair presentation of the parent company only financial statements in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers, and for such internal control as management determines is necessary to enable the preparation of parent company only financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the parent company only financial statements, management is responsible for assessing the Corporation’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Corporation or to cease operations, or has no realistic alternative but to do so.

104 Vanguard International Semiconductor Corporation

Those charged with governance, including the audit committee, are responsible for overseeing the Corporation’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Parent Company Only Financial Statements

Our objectives are to obtain reasonable assurance about whether the parent company only financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the auditing standards generally accepted in the Republic of China will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these parent company only financial statements.

As part of an audit in accordance with the auditing standards generally accepted in the Republic of China, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

1. Identify and assess the risks of material misstatement of the parent company only financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control.

3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

4. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Corporation’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the parent company only financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Corporation to cease to continue as a going concern.

5. Evaluate the overall presentation, structure and content of the parent company only financial statements, including the disclosures, and whether the parent company only financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

6. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Corporation to express an opinion on the parent company only financial statements. We are responsible for the direction, supervision and performance of the audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

105 Vanguard International Semiconductor Corporation

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the parent company only financial statements for the year ended December 31, 2016 and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partners on the audit resulting in this independent auditors’ report are Yu-Feng Huang and Cheng-Chih Lin.

Deloitte & Touche Taipei, Taiwan Republic of China

February 21, 2017

Notice to Readers

The accompanying parent company only financial statements are intended only to present the parent company only financial position, parent company only financial performance and parent company only cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such parent company only financial statements are those generally applied in the Republic of China.

For the convenience of readers, the independent auditors’ report and the accompanying parent company only financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent auditors’ report and parent company only financial statements shall prevail.

106 VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

PARENT COMPANY ONLY BALANCE SHEETS DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

2016 2015 2016 2015 ASSETS Amount % Amount % LIABILITIES AND EQUITY Amount % Amount %

CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents (Notes 4 and 6) $ 16,747,623 48 $ 17,698,175 55 Financial liabilities at fair value through profit or loss - Financial assets at fair value through profit or loss - current current (Notes 4, 7 and 29) $ 43,029 - $ 28,474 - (Notes 4, 7 and 29) 1,428,086 4 1,097,895 3 Derivative financial liabilities for hedging - current (Notes 4, 10 Available-for-sale financial assets - current (Notes 4, 8 and 29) 64,386 - - - and 29) - - 7,020 - Held-to-maturity financial assets - current (Notes 4, 5, 9 and 29) - - 139,502 - Notes and accounts payable 1,130,381 3 878,126 3 Notes and accounts receivable, net (Notes 4, 5 and 12) 3,348,347 10 2,519,513 8 Accrued profit sharing to employees and remuneration to directors Receivables from related parties (Notes 4, 5 and 30) 613,214 2 533,935 2 (Note 24) 845,903 3 637,226 2 Other receivables (Note 4) 137,385 - 125,952 - Payables to contractors and equipment suppliers 264,273 1 201,154 1 Other receivables from related parties (Notes 4 and 30) 824 - 15,084 - Other payables (Note 18) 2,133,501 6 1,718,057 5 Inventories (Notes 4, 5 and 13) 2,199,775 6 2,250,611 7 Other payables to related parties (Note 30) 95,230 - 72,640 - Prepaid expenses 190,538 1 162,653 1 Current income tax liabilities (Notes 4 and 25) 604,591 2 497,129 2 Other current assets (Notes 4, 17 and 29) 99,321 - 2,597 - Provisions - current (Notes 4, 5 and 20) 236,336 1 136,576 - Other current liabilities (Note 19) 114,751 - 81,445 - Total current assets 24,829,499 71 24,545,917 76 Total current liabilities 5,467,995 16 4,257,847 13 NON-CURRENT ASSETS Available-for-sale financial assets - non-current (Notes 4, 8 and NON-CURRENT LIABILITIES 29) 503,681 2 88,731 - Deferred income tax liabilities (Notes 4 and 25) 82,723 - 67,494 - Financial assets carried at cost - non-current (Notes 4 and 11) 85,327 - 62,717 - Net defined benefit liabilities - non-current (Notes 4, 5 and 21) 708,353 2 630,992 2 Investments accounted for using equity method (Notes 4 and 14) 2,931,772 8 352,458 1 Other non-current liabilities (Note 30) 13,031 - 14,125 -

107 Property, plant and equipment (Notes 4 and 15) 6,282,629 18 6,979,148 22 Intangible assets (Notes 4 and 16) 30,282 - 41,596 - Total non-current liabilities 804,107 2 712,611 2 Deferred income tax assets (Notes 4 and 25) - - 1,690 - Refundable deposits 4,471 - 4,278 - Total liabilities 6,272,102 18 4,970,458 15 Other non-current assets (Notes 4, 17 and 31) 303,704 1 303,552 1 EQUITY (Notes 4 and 22) Total non-current assets 10,141,866 29 7,834,170 24 Capital stock Common stock 16,389,823 47 16,389,823 50 Capital surplus 862,594 2 855,123 3 Retained earnings Legal reserve 3,506,771 10 3,091,013 10 Special reserve 115,811 - 70,506 - Unappropriated earnings 7,862,220 23 7,118,975 22 Total retained earnings 11,484,802 33 10,280,494 32 Other equity (37,956) - (115,811) -

Total equity 28,699,263 82 27,409,629 85

TOTAL ASSETS $ 34,971,365 100 $ 32,380,087 100 TOTAL LIABILITIES AND EQUITY $ 34,971,365 100 $ 32,380,087 100

The accompanying notes are an integral part of the parent company only financial statements. Semiconductor Corporation Vanguard International Vanguard International Semiconductor Corporation

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

PARENT COMPANY ONLY STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)

2016 2015 Amount % Amount %

NET REVENUE (Notes 4, 5, 20, 23 and 30) $ 25,828,634 100 $ 23,319,721 100

COST OF REVENUE (Notes 4, 13, 24 and 30) 16,904,482 65 16,422,455 70

GROSS PROFIT 8,924,152 35 6,897,266 30

OPERATING EXPENSES (Notes 4, 24 and 30) Marketing 278,986 1 205,436 1 General and administrative 992,309 4 841,517 4 Research and development 1,555,504 6 1,240,265 5

Total operating expenses 2,826,799 11 2,287,218 10

OPERATING INCOME 6,097,353 24 4,610,048 20

NONOPERATING INCOME AND EXPENSES (Note 4) Interest income 151,673 1 190,695 1 Dividend income 24,003 - 21,004 - Other income (Note 30) 83,448 - 71,830 - Gain on disposal of property, plant and equipment 2,634 - 28 - Gain on disposal of investment (Note 11) 14,925 - - - Gain (loss) on financial assets and liabilities at fair value through profit or loss 195,683 1 (146,066) (1) Share of profit of subsidiaries, associates and joint ventures (Note 14) 1,434 - 10,245 - Net foreign exchange (loss) gain (187,626) (1) 180,276 1 Impairment loss on financial assets (Note 8) (120,000) (1) - -

Total nonoperating income and expenses 166,174 - 328,012 1

INCOME BEFORE INCOME TAX 6,263,527 24 4,938,060 21

INCOME TAX EXPENSE (Notes 4 and 25) (725,602) (3) (780,477) (3)

NET INCOME 5,537,925 21 4,157,583 18 (Continued)

108 Vanguard International Semiconductor Corporation

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

PARENT COMPANY ONLY STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)

2016 2015 Amount % Amount %

OTHER COMPREHENSIVE INCOME (Notes 4 and 22) Items that will not be reclassified subsequently to profit or loss: Remeasurement of defined benefit plans (Note 21) $ (72,263) - $ (16,581) - Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations 2,496 - 10,992 - Unrealized gain (loss) on available-for-sale financial assets 74,911 - (54,307) - Cash flow hedges - - (70) - Share of other comprehensive income (loss) of subsidiaries, associates and joint ventures (Note 14) 448 - (1,920) -

Total other comprehensive income (loss) 5,592 - (61,886) -

TOTAL COMPREHENSIVE INCOME $ 5,543,517 21 $ 4,095,697 18

EARNINGS PER SHARE (Note 26) Basic $3.38 $ 2.54 Diluted $3.35 $ 2.50

The accompanying notes are an integral part of the parent company only financial statements. (Concluded)

109 Semiconductor Corporation Vanguard International VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

PARENT COMPANY ONLY STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

Other Equity Unrealized Exchange (Losses) Retained Earnings Differences on Gains on Unappropriated Translation of Available-for-sale Capital Stock Capital Surplus Legal Reserve Special Reserve Earnings Foreign Operations Financial Assets Cash Flow Hedges Treasury Stock Total Equity

BALANCE, JANUARY 1, 2015 $ 16,389,823 $ 838,029 $ 2,547,224 $ 53,700 $ 7,797,921 $ (50,082) $ (20,494) $ 70 $ (9,875) $ 27,546,316

Appropriation of prior year's earnings Legal reserve - - 543,789 - (543,789) - - - - - Special reserve - - - 16,806 (16,806) - - - - - Cash dividends - 26% - - - - (4,259,353) - - - - (4,259,353)

Changes in capital surplus from investment in subsidiaries, associates and joint ventures accounted for using equity method - (9,181) ------(9,181)

Net income for the year ended December 31, 2015 - - - - 4,157,583 - - - - 4,157,583

Other comprehensive income for the year ended December 31, 2015 - - - - (16,581) 9,072 (54,307) (70) - (61,886)

Total comprehensive income for the year ended December 31, 2015 - - - - 4,141,002 9,072 (54,307) (70) - 4,095,697 110 Share-based payment transaction - 26,275 ------9,875 36,150

BALANCE, DECEMBER 31, 2015 16,389,823 855,123 3,091,013 70,506 7,118,975 (41,010) (74,801) - - 27,409,629

Appropriation of prior year's earnings Legal reserve - - 415,758 - (415,758) - - - - - Special reserve - - - 45,305 (45,305) - - - - - Cash dividends - 26% - - - - (4,261,354) - - - - (4,261,354)

Changes in capital surplus from investment in subsidiaries, associates and joint ventures accounted for using equity method - 7,471 ------7,471

Net income for the year ended December 31, 2016 - - - - 5,537,925 - - - - 5,537,925

Other comprehensive income for the year ended December 31, 2016 - - - - (72,263) 2,944 74,911 - - 5,592

Total comprehensive income for the year ended December 31, 2016 - - - - 5,465,662 2,944 74,911 - - 5,543,517

BALANCE, DECEMBER 31, 2016 $ 16,389,823 $ 862,594 $ 3,506,771 $ 115,811 $ 7,862,220 $ (38,066) $ 110 $ - $ - $ 28,699,263

The accompanying notes are an integral part of the parent company only financial statements. Vanguard International Semiconductor Corporation

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

2016 2015

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax $ 6,263,527 $ 4,938,060 Adjustments for: Depreciation 2,031,909 2,303,867 Amortization 21,061 15,347 Net (gain) loss on financial assets and liabilities at fair value through profit or loss (4,096) 1,118 Interest income (151,673) (190,695) Dividend income (24,003) (21,004) Share-based payment - 26,278 Share of gain of subsidiaries, associates and joint ventures (1,434) (10,245) Gain on disposal of property, plant and equipment (2,634) (28) Gain on disposal of investments (14,925) - Impairment loss on financial assets 120,000 - Net loss on foreign currency exchange 6,527 6,968 Changes in operating assets and liabilities: Financial assets held for trading 1,276 504,866 Notes and accounts receivable (828,834) 741,931 Receivables from related parties (79,279) 195,236 Other receivables (8,981) 12,907 Other receivables from related parties 14,260 3,431 Inventories 50,836 247,789 Prepaid expenses (27,885) (49,008) Other current assets (127) 198 Financial liabilities held for trading 14,555 (62,110) Derivative financial liabilities for hedging (7,020) (8,186) Notes and accounts payable 252,255 (281,940) Other payables 415,444 5,880 Other payables to related parties 22,590 (41,353) Provisions 99,760 25,670 Other current liabilities 33,306 (6,275) Net defined benefit liabilities 5,098 1,305 Accrued profit sharing to employees and remuneration to directors 208,677 (213,257) Cash generated from operations 8,410,190 8,146,750 Interest received 150,223 191,356 Income tax paid (601,222) (1,162,012)

Net cash provided by operating activities 7,959,191 7,176,094 (Continued)

111 Vanguard International Semiconductor Corporation

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

2016 2015

CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of financial assets designated as fair value through profit or loss $ (1,909,981) $ (1,342,920) Proceeds from disposal of financial assets designated as fair value through profit or loss 1,582,610 549,963 Acquisitions of available-for-sale financial assets (525,947) - Acquisitions of held-to-maturity financial assets - (141,305) Proceeds from disposal of held-to-maturity financial assets 141,212 - Acquisitions of financial assets measured at cost (32,610) - Proceeds from disposal of financial assets measured at cost 24,925 - Acquisitions of investment accounted for using equity method (2,567,465) - Acquisitions of property, plant and equipment (1,277,959) (1,501,065) Proceeds from disposal of property, plant and equipment 6,573 28 (Increase) decrease in refundable deposits (193) 799 Acquisitions of intangible assets (10,132) (26,731) (Increase) decrease in other financial assets (102,331) 383,748 Dividends received 24,003 21,004

Net cash used in investing activities (4,647,295) (2,056,479)

CASH FLOWS FROM FINANCING ACTIVITIES Decrease in other non-current liabilities (1,094) (85,232) Cash dividends (4,261,354) (4,259,353) Treasury stock transferred to employees - 9,873

Net cash used in financing activities (4,262,448) (4,334,712)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (950,552) 784,903

CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 17,698,175 16,913,272

CASH AND CASH EQUIVALENTS, END OF THE YEAR $ 16,747,623 $ 17,698,175

The accompanying notes are an integral part of the parent company only financial statements. (Concluded)

112 Vanguard International Semiconductor Corporation

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

NOTES TO PARENT COMPANY ONLY FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

1. ORGANIZATION

Vanguard International Semiconductor Corporation (the “Corporation”) was incorporated in Hsinchu Science-based Industrial Park in December 1994 and commenced business in January 1995. The Corporation engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks.

The Corporation’s shares have been traded over the counter on the Republic of China (ROC) GreTai Securities Market since March 25, 1998.

The parent company only financial statements are presented in the Corporation’s functional currency, New Taiwan dollars.

2. APPROVAL OF FINANCIAL STATEMENTS

The parent company only financial statements were approved and authorized for issue by the Board of Directors on February 21, 2017.

3. APPLICATION OF NEW, AMENDED OR REVISED STANDARDS AND INTERPRETATIONS

a. Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC) endorsed by the FSC for application starting from 2017

Rule No. 1050050021 and Rule No. 1050026834 issued by the FSC stipulated that starting January 1, 2017, the Corporation should apply the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRS, IAS, IFRIC and SIC (collectively, the “IFRSs”) issued by the IASB and endorsed by the FSC for application starting from 2017.

New, Amended or Revised Standards and Interpretations Effective Date (the “New IFRSs”) Announced by IASB (Note 1)

Annual Improvements to IFRSs 2010-2012 Cycle July 1, 2014 (Note 2) Annual Improvements to IFRSs 2011-2013 Cycle July 1, 2014 Annual Improvements to IFRSs 2012-2014 Cycle January 1, 2016 (Note 3) Amendments to IFRS 10, IFRS 12 and IAS 28“'Investment Entities: January 1, 2016 Applying the Consolidation Exception” Amendment to IFRS 11 “Accounting for Acquisitions of Interests in January 1, 2016 Joint Operations” IFRS 14 “Regulatory Deferral Accounts” January 1, 2016 Amendment to IAS 1 “Disclosure Initiative” January 1, 2016 Amendments to IAS 16 and IAS 38 “Clarification of Acceptable January 1, 2016 Methods of Depreciation and Amortization” Amendments to IAS 16 and IAS 41 “Agriculture: Bearer Plants” January 1, 2016 (Continued)

113 Vanguard International Semiconductor Corporation

New, Amended or Revised Standards and Interpretations Effective Date (the “New IFRSs”) Announced by IASB (Note 1)

Amendment to IAS 19 “Defined Benefit Plans: Employee July 1, 2014 Contributions” Amendment to IAS 27 “Equity Method in Separate Financial January 1, 2016 Statements” Amendment to IAS 36 “Impairment of Assets: Recoverable Amount January 1, 2014 Disclosures for Non-financial Assets” Amendment to IAS 39 “Novation of Derivatives and Continuation of January 1, 2014 Hedge Accounting” IFRIC 21 “Levies” January 1, 2014 (Concluded)

Note 1: Unless stated otherwise, the above new or amended IFRSs are effective for annual periods beginning on or after their respective effective dates.

Note 2: The amendment to IFRS 2 applies to share-based payment transactions with grant date on or after July 1, 2014; the amendment to IFRS 3 applies to business combinations with acquisition date on or after July 1, 2014; the amendment to IFRS 13 is effective immediately; the remaining amendments are effective for annual periods beginning on or after July 1, 2014.

Note 3: The amendment to IFRS 5 is applied prospectively to changes in a method of disposal that occur in annual periods beginning on or after January 1, 2016; the remaining amendments are effective for annual periods beginning on or after January 1, 2016.

The initial application in 2017 of the above IFRSs and related amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers would not have any material impact on the Corporation’s accounting policies, except for the following:

1) Amendments to IFRS 13 “Fair Value Measurement”

The basis for conclusions of IFRS 13 was amended by the Annual Improvements to IFRSs: 2010-2012 Cycle to clarify that when the amendment becomes effective in 2017, the short-term receivables and payables with no stated interest rate will be measured at their invoice amounts without discounting, if the effect of not discounting is immaterial. Otherwise, the material effect of discounting will be adjusted retrospectively. The application of the amendment in 2017 is expected to have no impact.

2) Amendment to IAS 24 “Related Party Disclosures”

IAS 24 was amended by the Annual Improvements to IFRSs: 2010-2012 Cycle to clarify that a management entity providing key management personnel services to the Corporation is a related party of the Corporation. Consequently, the Corporation is required to disclose as related party transactions the amounts incurred for the service paid or payable to the management entity for the provision of key management personnel services. However, disclosure of the components of such compensation is not required. The application of the amendment in 2017 is expected to have no impact.

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3) Amendment to IAS 36 “Impairment of Assets”

The amendment “Disclosures for Non-financial Assets” clarifies that the recoverable amount of an asset or a cash-generating unit is disclosed only when an impairment loss on the asset has been recognized or reversed during the period. Furthermore, if the recoverable amount of an item of property, plant and equipment for which impairment loss has been recognized or reversed is fair value less costs of disposal, the Corporation is required to disclose the fair value hierarchy. If the fair value measurements are categorized within Level 2/Level 3, the valuation technique and key assumptions used to measure the fair value are disclosed. The discount rate used is disclosed if such fair value less costs of disposal is measured by using present value technique. The amendment will be applied retrospectively.

4) Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers

The amendments include additions of several accounting items and requirements for disclosures of impairment of non-financial assets as a consequence of the IFRSs endorsed by the FSC for application starting from 2017. In addition, as a result of the post implementation review of IFRSs in Taiwan, the amendments also include emphasis on certain recognition and measurement considerations and add requirements for disclosures of related party transactions and goodwill.

The amendments stipulate that other companies or institutions of which the chairman of the board of directors or president serves as the chairman of the board of directors or the president, or is the spouse or second immediate family of the chairman of the board of directors or president of the Corporation are deemed to have a substantive related party relationship, unless it can be demonstrated that no control, joint control, or significant influence exists. Furthermore, the amendments require the disclosure of the names of the related parties and the relationship with whom the Corporation has significant transaction. If the transaction or balance with a specific related party is 10% or more of the Corporation’s respective total transaction or balance, such transaction should be separately disclosed by the name of each related party.

The amendments also require additional disclosure if there is a significant difference between the actual operation after business combination and the expected benefit on acquisition date.

The disclosures of related party transactions will be enhanced when the above amendments are retrospectively applied in 2017.

Except for the above impacts, as of the date the parent company only financial statements were authorized for issue, the Corporation continues assessing other possible impacts that application of the aforementioned amendments and the related amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers will have on the Corporation’s financial position and financial performance, and will disclose these other impacts when the assessment is completed. b. New IFRSs in issue but not yet endorsed by the FSC

The Corporation has not applied the following IFRSs issued by the IASB but not yet endorsed by the FSC.

The FSC announced that amendments to IFRS 4 (only the overlay approach can be applied), IFRS 9 and IFRS 15 will take effect starting January 1, 2018. As of the date the parent company only financial statements were authorized for issue, the FSC has not announced the effective dates of other new IFRSs.

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Effective Date New IFRSs Announced by IASB (Note 1)

Annual Improvements to IFRSs 2014-2016 Cycle Note 2 Amendment to IFRS 2 “Classification and Measurement of January 1, 2018 Share-based Payment Transactions” Amendment to IFRS 4 “Applying IFRS 9 Financial Instruments with January 1, 2018 IFRS 4 Insurance Contracts” IFRS 9 “Financial Instruments” January 1, 2018 Amendments to IFRS 9 and IFRS 7 “Mandatory Effective Date of January 1, 2018 IFRS 9 and Transition Disclosures” Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets To be determined by IASB between an Investor and its Associate or Joint Venture” IFRS 15 “Revenue from Contracts with Customers” January 1, 2018 Amendment to IFRS 15 “Clarifications to IFRS 15 Revenue for January 1, 2018 Contracts with Customers” IFRS 16 “Leases” January 1, 2019 Amendment to IAS 7 “Disclosure Initiative” January 1, 2017 ‡†‡–•–‘ ͳʹ“‡ ‘‰‹–‹‘‘ˆ‡ˆ‡””‡†ƒš••‡–•ˆ‘” January 1, 2017 ”‡ƒŽ‹œ‡†‘••‡•” Amendments to IAS 40 “Transfers of investment property” January 1, 2018 IFRIC 22 “Foreign Currency Transactions and Advance January 1, 2018 Consideration”

Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on or after their respective effective dates.

Note 2: The amendment to IFRS 12 is retrospectively applied for annual periods beginning on or after January 1, 2017; the amendment to IAS 28 is retrospectively applied for annual periods beginning on or after January 1, 2018.

1) IFRS 9 “Financial Instruments”

Recognition and measurement of financial assets

With regards to financial assets, all recognized financial assets that are within the scope of IAS 39 “Financial Instruments: Recognition and Measurement” are subsequently measured at amortized cost or fair value. Under IFRS 9, the requirement for the classification of financial assets is stated below.

For the Corporation’s debt instruments that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, their classification and measurement are as follows:

a) For debt instruments, if they are held within a business model whose objective is to collect the contractual cash flows, the financial assets are measured at amortized cost and are assessed for impairment continuously with impairment loss recognized in profit or loss, if any. Interest revenue is recognized in profit or loss by using the effective interest method;

b) For debt instruments, if they are held within a business model whose objective is achieved by both the collecting of contractual cash flows and the selling of financial assets, the financial assets are measured at fair value through other comprehensive income (FVTOCI) and are assessed for impairment. Interest revenue is recognized in profit or loss by using the effective interest method, and other gain or loss shall be recognized in other comprehensive income, except for impairment gains or losses and foreign exchange gains and losses. When the debt

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instruments are derecognized or reclassified, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss.

Except for above, all other financial assets are measured at fair value through profit or loss. However, the Corporation may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss. No subsequent impairment assessment is required, and the cumulative gains or losses previously recognized in other comprehensive income cannot be reclassified from equity to profit or loss.

Impairment of financial assets

IFRS 9 requires impairment loss on financial assets to be recognized by using the “Expected Credit Losses Model”. The credit loss allowance is required for financial assets measured at amortized cost, financial assets mandatorily measured at FVTOCI, lease receivables, contract assets arising from IFRS 15 “Revenue from Contracts with Customers”, certain written loan commitments and financial guarantee contracts. A loss allowance for the 12-month expected credit losses is required for a financial asset if its credit risk has not increased significantly since initial recognition. A loss allowance for full lifetime expected credit losses is required for a financial asset if its credit risk has increased significantly since initial recognition and is not low. However, a loss allowance for full lifetime expected credit losses is required for trade receivables that do not constitute a financing transaction.

For purchased or originated credit-impaired financial assets, the Corporation takes into account the expected credit losses on initial recognition in calculating the credit-adjusted effective interest rate. Subsequently, any changes in expected losses are recognized as a loss allowance with a corresponding gain or loss recognized in profit or loss.

Hedge accounting

The main changes in hedge accounting amended the application requirements for hedge accounting to better reflect the entity’s risk management activities. Compared with IAS 39, the main changes include: (1) enhancing types of transactions eligible for hedge accounting, specifically broadening the risks eligible for hedge accounting of non-financial items; (2) changing the way hedging derivative instruments are accounted for to reduce profit or loss volatility; and (3) replacing retrospective effectiveness assessment with the principle of economic relationship between the hedging instrument and the hedged item.

Transition

Financial instruments that have been derecognized prior to the effective date of IFRS 9 cannot be reversed to apply IFRS 9 when it becomes effective. Under IFRS 9, the requirements for classification, measurement and impairment of financial assets are applied retrospectively with the difference between the previous carrying amount and the carrying amount at the date of initial application recognized in the current period and restatement of prior periods is not required. The requirements for general hedge accounting shall be applied prospectively and the accounting for hedging options shall be applied retrospectively.

2) Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture”

The amendments stipulated that, when an entity sells or contributes assets that constitute a business (as defined in IFRS 3) to an associate or joint venture, the gain or loss resulting from the transaction is recognized in full. Also, when an entity loses control of a subsidiary that contains a business but retains significant influence or joint control, the gain or loss resulting from the transaction is recognized in full.

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Conversely, when an entity sells or contributes assets that do not constitute a business to an associate or joint venture, the gain or loss resulting from the transaction is recognized only to the extent of the unrelated investors’ interest in the associate or joint venture, i.e. the entity’s share of the gain or loss is eliminated. Also, when an entity loses control of a subsidiary that does not contain a business but retains significant influence or joint control in an associate or a joint venture, the gain or loss resulting from the transaction is recognized only to the extent of the unrelated investors’ interest in the associate or joint venture, i.e. the entity’s share of the gain or loss is eliminated.

3) IFRS 15 “Revenue from Contracts with Customers” and related amendment

IFRS 15 establishes principles for recognizing revenue that apply to all contracts with customers, and will supersedes IAS 18 “Revenue”, IAS 11 “Construction Contracts” and a number of revenue-related interpretations.

When applying IFRS 15, an entity shall recognize revenue by applying the following steps:

z Identify the contract with the customer; z Identify the performance obligations in the contract; z Determine the transaction price; z Allocate the transaction price to the performance obligations in the contract; and z Recognize revenue when the entity satisfies a performance obligation.

In identifying performance obligations, IFRS 15 and related amendment require that a good or service is distinct if it is capable of being distinct (for example, the Corporation regularly sells it separately) and the promise to transfer it is distinct within the context of the contract (i.e. the nature of the promise in the contract is to transfer each of those goods or services individually rather than to transfer combined items).

When IFRS 15 and related amendment are effective, an entity may elect to apply this Standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this Standard recognized at the date of initial application.

4) IFRS 16 “Leases”

IFRS 16 sets out the accounting standards for leases that will supersede IAS 17 and a number of related interpretations.

Under IFRS 16, if the Corporation is a lessee, it shall recognize right-of-use assets and lease liabilities for all leases on the parent company only balance sheets except for low-value and short-term leases. The Corporation may elect to apply the accounting method similar to the accounting for operating lease under IAS 17 to the low-value and short-term leases. On the parent company only financial statements of comprehensive income, the Corporation should present the depreciation expense charged on the right-of-use asset separately from interest expense accrued on the lease liability; interest is computed by using effective interest method. On the parent company only statements of cash flows, cash payments for the principal portion of the lease liability are classified within financing activities; cash payments for interest portion are classified within operating activities.

The application of IFRS 16 is not expected to have a material impact on the accounting of the Corporation as lessor.

When IFRS 16 becomes effective, the Corporation may elect to apply this Standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the initial application of this Standard recognized at the date of initial application.

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5) Amendments to IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses”

The amendment clarifies that the difference between the carrying amount of the debt instrument measured at fair value and its tax base gives rise to a temporary difference, even though there are unrealized losses on that asset, irrespective of whether the Corporation expects to recover the carrying amount of the debt instrument by sale or by holding it and collecting contractual cash flows.

In addition, in determining whether to recognize a deferred tax asset, the Corporation should assess a deductible temporary difference in combination with all of its other deductible temporary differences, unless the tax law restricts the utilization of losses to deduction against income of a specific type, in which case, a deductible temporary difference is assessed in combination only with other deductible temporary differences of the appropriate type. The amendment also stipulates that, when determining whether to recognize a deferred tax asset, the estimate of probable future taxable profit may include some of the Corporation’s assets for more than their carrying amount if there is sufficient evidence that it is probable that the Corporation will achieve this, and that the estimate for future taxable profit should exclude tax deductions resulting from the reversal of deductible temporary differences.

6) IFRIC 22 ȸForeign Currency Transactions and Advance Consideration”

IAS 21 stipulated that a foreign currency transaction shall be recorded on initial recognition in the functional currency by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. IFRIC 22 further explains that the date of the transaction is the date on which an entity recognizes a non-monetary asset or non-monetary liability from payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the entity shall determine the date of the transaction for each payment or receipt of advance consideration.

The Corporation shall apply IFRIC 22 either retrospectively or prospectively to all assets, expenses and income in the scope of the Interpretation initially recognized on or after (a) the beginning of the reporting period in which the entity first applies IFRIC 22, or (b) the beginning of a prior reporting period presented as comparative information in the financial statements of the reporting period in which the entity first applies IFRIC 22

Except for the above impact, as of the date the parent company only financial statements were authorized for issue, the Corporation is continuously assessing the possible impact that the application of other standards and interpretations will have on the Corporation’s financial position and financial performance, and will disclose the relevant impact when the assessment is completed.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICY

a. Statement of compliance

The parent company only financial statements have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers.

b. Basis of preparation

The parent company only financial statements have been prepared on the historical cost basis except for financial instruments which are measured at fair values.

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The fair value measurements, where are grouped into Levels 1 to 3 based on the degree to which the fair value measurement inputs are observable and based on the significance of the inputs to the fair value measurement in its entirety, are described as follows:

1) Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

2) Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

3) Level 3 inputs are unobservable inputs for the asset or liability.

When preparing its parent company only financial statements, the Corporation used equity method to account for its investment in subsidiaries, associates and joint ventures. The amounts of the net profit for the year, other comprehensive income for the year and total equity in the parent company only financial statements were the same as the amounts attributable to the owner of the Corporation in its financial statements.

c. Classification of current and non-current assets and liabilities

Current assets include:

1) Assets held primarily for the purpose of trading;

2) Assets expected to be realized within 12 months after the reporting period; and

3) Cash and cash equivalents unless the asset is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.

Current liabilities include:

1) Liabilities held primarily for the purpose of trading;

2) Liabilities due to be settled within 12 months after the reporting period; and

3) Liabilities for which the Corporation does not have an unconditional right to defer settlement for at least 12 months after the reporting period.

Assets and liabilities that are not classified as current are classified as non-current.

d. Foreign currencies

In preparing the parent company only financial statements, transactions in currencies other than the Corporation’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions.

At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items arising from settlement or translation are recognized in profit or loss in the period in which they arise except for exchange differences on transactions entered into in order to hedge certain foreign currency risks.

Non-monetary items measured at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Exchange differences arising from the retranslation of non-monetary items are included in profit or loss for the period except for exchange differences arising from the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which case, the exchange differences are also recognized directly in other comprehensive income.

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Non-monetary items that are measured at historical cost in a foreign currency are not retranslated. e. Inventories

Inventories consist of raw materials, supplies and spare parts, work-in-process and finished goods and are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Inventories are recorded at the weighted-average cost on the balance sheet date. f. Investment in subsidiaries

The Corporation uses the equity method to account for its investments in subsidiaries.

Subsidiary is an entity that is controlled by the Corporation.

Under the equity method, investment in a subsidiary is initially recognized at cost and adjusted thereafter to recognize the Corporation’s share of the profit or loss and other comprehensive income of the subsidiary. The Corporation also recognizes the changes in the Corporation’s share of equity of subsidiaries.

Changes in the Corporation’s ownership interest in a subsidiary that do not result in the Corporation losing control of the subsidiary are equity transactions. The Corporation recognizes directly in equity any difference between the carrying amount of the investment and the fair value of the consideration paid or received.

The Corporation assesses its investment for any impairment by comparing the carrying amount with the estimated recoverable amount as assessed based on the entire financial statements of the invested company. Impairment loss is recognized when the carrying amount exceeds the recoverable amount. If the recoverable amount of the investment subsequently increases, the Corporation recognizes the reversal of the impairment loss; the adjusted post-reversal carrying amount should not exceed the carrying amount that would have been recognized (net of amortization or depreciation) had no impairment loss been recognized in prior years. An impairment loss recognized on goodwill cannot be reversed in a subsequent period.

Profits or losses resulting from downstream transactions are eliminated in full in the parent company only financial statements. Profits and losses resulting from upstream transactions and transactions between subsidiaries are recognized in the parent company only financial statements only to the extent of interests in the subsidiaries that are not related to the Corporation. g. Investment in associates

An associate is an entity over which the Corporation has significant influence and that is neither a subsidiary nor an interest in a joint venture.

The Corporation uses the equity method to account for its investments in associates.

Under the equity method, investment in an associate is initially recognized at cost and adjusted thereafter to recognize the Corporation’s share of the profit or loss and other comprehensive income of the associate. The Corporation also recognized the changes in the share of equity of associates.

When the Corporation subscribes for additional new shares of the associate at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of the Corporation’s proportionate interest in the associate. The Corporation records such a difference as an adjustment to investments with the corresponding amount charged or credited to capital

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surplus - changes in the Corporation’s share of the equity of associates. If the Corporation’s ownership interest is reduced due to the additional subscription of the new shares of associate, the proportionate amount of the gains or losses previously recognized in other comprehensive income in relation to that associate is reclassified to profit or loss on the same basis as would be required if the investee had directly disposed of the related assets or liabilities. When the adjustment should be debited to capital surplus, but the capital surplus recognized from investments accounted for by the equity method is insufficient, the shortage is debited to retained earnings.

The entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its recoverable amount with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.

When the Corporation transacts with its associate, profits and losses resulting from the transactions with the associate are recognized in the Corporation’s parent company only financial statements only to the extent that interests in the associate are not related to the Corporation.

h. Property, plant, and equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and accumulated impairment loss.

Depreciation on property, plant and equipment is recognized using the straight-line method. Each significant part is depreciated separately. The estimated useful lives, residual values and depreciation method are reviewed at the end of each year, with the effect of any changes in estimates accounted for on a prospective basis.

On derecognition of an item of property, plant and equipment, the difference between the disposal proceeds and the carrying amount of the asset is recognized in profit or loss.

i. Intangible assets

1) Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are initially measured at cost and subsequently measured at cost less accumulated amortization and accumulated impairment loss. Amortization is recognized on a straight-line basis. The estimated useful life, residual value, and amortization method are reviewed at the end of each year, with the effect of any changes in estimates accounted for on a prospective basis.

2) Internally-generated intangible assets - research and development expenditure

Expenditure on research activities is recognized as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from the development phase of an internal project is recognized if, and only if, all of the following have been demonstrated:

a) The technical feasibility of completing the intangible asset so that it will be available for use or sale;

b) The intention to complete the intangible asset and use or sell it;

c) The ability to use or sell the intangible asset;

d) How the intangible asset will generate probable future economic benefits;

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e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

f) The ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognized for internally-generated intangible assets is the aggregate of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Subsequent to initial recognition, they are measured on the same basis as intangible assets that are acquired separately.

3) Derecognition of intangible assets

On derecognition of an intangible asset, the difference between the net disposal proceeds and the carrying amount of the asset is recognized in profit or loss. j. Impairment of tangible and intangible assets other than goodwill

At the end of each reporting period, the Corporation reviews the carrying amounts of its tangible and intangible assets, excluding goodwill, to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. When it is not possible to estimate the recoverable amount of an individual asset, the Corporation estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

The recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount, with the resulting impairment loss recognized in profit or loss.

When an impairment loss subsequently is reversed, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but only to the extent of the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized in profit or loss. k. Financial instruments

Financial assets and financial liabilities are recognized when the Corporation becomes a party to the contractual provisions of the instruments.

Financial assets and financial liabilities are initially recognized at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

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Financial assets

All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis.

1) Measurement category

Financial assets are classified into the following categories: Financial assets at fair value through profit or loss, held-to-maturity financial assets, available-for-sale financial assets, and loans and receivables.

a) Financial assets at fair value through profit or loss

Financial assets are classified as at fair value through profit or loss when the financial asset is either held for trading or it is designated as at fair value through profit or loss.

A financial asset may be designated as at fair value through profit or loss upon initial recognition if:

i Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

ii The financial asset forms part of a Corporation of financial assets or financial liabilities or both, which is managed and evaluated performance on a fair value basis, in accordance with the Corporation’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

iii The contract contains one or more embedded derivatives so that the entire hybrid (combined) contract can be designated as at fair value through profit or loss.

Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset. Fair value is determined in the manner described in Note 29.

b) Held-to-maturity financial assets

The corporate bonds which the Corporation invests in and has positive intent and ability to hold to maturity are classified as held-to-maturity financial assets.

Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method less any impairment.

c) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as loans and receivables, held-to-maturity financial assets or financial assets at fair value through profit or loss.

Available-for-sale financial assets are measured at fair value. Changes in the carrying amounts of available-for-sale monetary financial assets relating to changes in foreign currency exchange rates, interest income calculated using the effective interest method and dividends on available-for-sale equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognized in other comprehensive income and will be reclassified to profit or loss when the investment is disposed of or is determined to be impaired.

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Dividends on available-for-sale equity instruments are recognized in profit or loss when the Corporation’s right to receive the dividends is established.

Available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment loss at the end of each reporting period and are presented in a separate line item as financial assets carried at cost. If, in a subsequent period, the fair value of the financial assets can be reliably measured, the financial assets are remeasured at fair value. The difference between carrying amount and fair value is recognized in other comprehensive income on financial assets. Any impairment losses are recognized in profit and loss.

d) Loans and receivables

Loans and receivables (including cash and cash equivalent, accounts receivable, other receivables, and other financial assets) are measured at amortized cost using the effective interest method, less any impairment, except for short-term receivables when the effect of discounting is immaterial.

Cash equivalent includes time deposits and repurchase bonds, which are highly liquid, readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. These cash equivalents are held for the purpose of meeting short-term cash commitments.

2) Impairment of financial assets

Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

Objective evidence of impairment could include: Significant financial difficulty of the debtor; or it becoming probable that the debtor will enter bankruptcy or financial reorganization.; or a default or delinquency in interest or principal payments; or extension of the maturity date; or significant financial difficulty of the final issuer or debtor; or disappearance of an active market for that financial asset because of the issuer’s financial difficulties or other reasons.

Accounts receivable that are assessed as not impaired individually are further assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of accounts receivable could include the Corporation’s past experience in the collection of payments, an increase in the number of delayed payments, as well as observable changes in national or local economic conditions that correlate with defaults on receivables.

For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the financial assets at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

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For available-for-sale equity investments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

For all other financial assets, objective evidence of impairment could include:

a) Significant financial difficulty of the issuer or counterparty; or

b) Breach of contract, such as a default or delinquency in interest or principal payments; or

c) It is becoming probable that the borrower will enter bankruptcy or financial re-organization; or

d) The disappearance of an active market for that financial asset because of financial difficulties.

When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the period.

In respect of available-for-sale equity securities, impairment loss previously recognized in profit or loss is not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income. In respect of available-for-sale debt securities, the impairment loss is subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.

For financial assets that are carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. When trade receivables are considered uncollectible, they are written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss except for uncollectible trade receivables that are written off against the allowance account.

3) Derecognition of financial assets

The Corporation derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income is recognized in profit or loss.

Equity instruments

Equity instruments issued by the Corporation are classified as equity in accordance with the substance of the contractual arrangements and the definitions of an equity instrument.

Equity instruments issued by the Corporation are recognized at the proceeds received, net of direct issue costs.

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Financial liabilities

1) Subsequent measurement

Except the following situation, all the financial liabilities are measured at amortized cost using the effective interest method:

Financial liabilities at fair value through profit or loss

Financial liabilities are classified as at fair value through profit or loss when the financial liability is either held for trading or is designated as at fair value through profit or loss.

Financial liabilities held for trading are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any interest or dividend paid for the financial liability. Fair value is determined in the manner described in Note 29.

2) Derecognition of financial liabilities

The difference between the carrying amount of the financial liability derecognized and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss.

Derivative financial instruments

The Corporation enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risks, including foreign exchange forward contracts and currency-swap contracts.

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. When the fair value of derivative financial instruments is positive, the derivative is recognized as a financial asset; when the fair value of derivative financial instruments is negative, the derivative is recognized as a financial liability.

Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the contracts are not measured at fair value through profit or loss. l. Hedge accounting

The Corporation designates certain hedging instruments, which include derivatives in respect of foreign currency risk, as both fair value hedges and cash flow hedges. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges.

1) Fair value hedges

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in profit or loss in the line item relating to the hedged item.

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Hedge accounting is discontinued prospectively when the Corporation revokes the designated hedging relationship; or when the hedging instrument expires or is sold, terminated, or exercised; or when the hedging instrument no longer meets the criteria for hedge accounting.

2) Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss.

The associated gains or losses that were recognized in other comprehensive income are reclassified from equity to profit or loss as a reclassification adjustment in the same period when the hedged item affects profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the associated gains and losses that were recognized in other comprehensive income are removed from equity and included in the initial cost of the non-financial asset or non-financial liability.

Hedge accounting is discontinued prospectively when the Corporation revokes the designated hedging relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when the hedging instrument no longer meets the criteria for hedge accounting. The cumulative gain or loss on the hedging instrument that has been previously recognized in other comprehensive income from the period when the hedge was effective remains separately in equity until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in profit or loss.

m. Provisions

Provisions are measured at the best estimate of the discounted cash flows of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation.

n. Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Sales returns are recognized at the time of sale according to the reliable estimate of future returns based on past experience and other relevant factors.

1) Sale of goods

Revenue from the sale of goods is recognized when all the following conditions are satisfied:

a) The Corporation has transferred to the buyer the significant risks and rewards of ownership of the goods;

b) The Corporation retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

c) The amount of revenue can be measured reliably;

d) It is probable that the economic benefits associated with the transaction will flow to the Corporation; and

e) The costs incurred or to be incurred in respect of the transaction can be measured reliably.

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The Corporation does not recognize sales revenue on materials delivered to subcontractors because this delivery does not involve a transfer of risks and rewards of materials ownership.

2) Dividend and interest income

Dividend income from investments is recognized when the shareholder’s right to receive payment has been established provided that it is probable that the economic benefits will flow to the Corporation and the amount of income can be measured reliably.

Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Corporation and the amount of income can be measured reliably. Interest income is accrued on a time basis by reference to the principal outstanding and at the applicable effective interest rate. o. Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

1) The Corporation as lessor

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Contingent rents are recognized as income in the period in which they are incurred.

2) The Corporation as lessee

Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Contingent rents are recognized as an expense in the period in which they are incurred. p. Employee benefits

1) Short-term employee benefits

Liabilities recognized in respect of short-term employee benefits are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service.

2) Retirement benefits

Payments to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions.

Defined benefit costs (including service cost, net interest and remeasurement) under defined benefit retirement benefit plans are determined using the projected unit credit method. Service cost (including current service cost) and net interest on the net defined benefit liability are recognized as employee benefits expense in the period they occur. Remeasurement, comprising actuarial gains and losses and the return on plan assets (excluding interest), is recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss.

Net defined benefit liability represents the actual deficit in the Corporation’s defined benefit plan.

3) Termination benefits

A liability for a termination benefit is recognized at the earlier of when the Corporation can no longer withdraw the offer of the termination benefit and when the Corporation recognizes any related restructuring costs.

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q. Share-based payment arrangements

Employee stock options granted to employee

The fair value at the grant date of the employee share options is expensed on a straight-line basis over the vesting period, based on the Corporation’s best estimates of the number of shares or options that are expected to ultimately vest, with a corresponding increase in capital surplus - employee stock options. It is recognized as an expense in full at the grate date if vesting immediately.

At the end of each reporting period, the Corporation revises its estimate of the number of employee share options expected to vest.

r. Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

1) Current tax

According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as income tax in the year the shareholders approve to retain the earnings.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

2) Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences probable that taxable profits will be available against which those deductible temporary differences can be utilized.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, except where the Corporation is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. A previously unrecognized deferred tax asset is also reviewed at the end of each reporting period and recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Corporation expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

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3) Current and deferred tax for the year

Current and deferred taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred taxes are also recognized in other comprehensive income or directly in equity, respectively.

s. Treasury stocks

Repurchase of the Corporation’s own equity instruments (treasury stocks) is recognized and deducted directly from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Corporation’s own equity instruments.

5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Corporation’s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

a. Revenue recognition

The Corporation recognizes revenue when the conditions described in Note 4 (n) are satisfied. The Corporation also records a provision for estimated future returns and other allowances in the same period the related revenue is recorded. Provision for estimated sales returns and other allowances is generally made and adjusted at a specific percentage based on historical experience and any known factors that would significantly affect the allowance, and our management periodically reviews the adequacy of the percentage used.

As of December 31, 2016 and 2015, the Corporation recognized provisions for estimated sales returns and other allowances of $236,336 thousand and $136,576 thousand, respectively.

b. Held-to-maturity financial assets

Management has reviewed the Corporation’s held-to-maturity financial assets in light of its capital maintenance and liquidity requirements and has confirmed the Corporation’s positive intention and ability to hold those assets to maturity.

c. Estimated impairment of accounts receivable

When there is objective evidence of impairment loss, the Corporation takes into consideration the estimation of future cash flows. The amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. Where the actual future cash flows are less than expected, a material impairment loss may arise.

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d. Write-down of inventory

The net realizable value of inventory is the estimated selling price in the ordinary course of business less the estimated costs of completion and disposal. The estimation of net realizable value was based on current market conditions and the historical experience with product sales of a similar nature. Changes in market conditions may have a material impact on the estimation of the net realizable value.

e. Recognition and measurement of defined benefit plans

The net defined benefit liabilities and the resulting defined benefit costs under the defined benefit pension plans are calculated using the projected unit credit method. Actuarial assumptions comprise the discount rates, rates of employee turnover, future salary increases, etc. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of expenses and liabilities.

6. CASH AND CASH EQUIVALENTS December 31 2016 2015

Deposits in bank $ 15,206,166 $ 16,511,530 Cash equivalents Bonds acquired under resale agreements 1,541,457 1,186,645

$ 16,747,623 $ 17,698,175

The market rate intervals of cash and cash equivalents at the end of the reporting period were as follows:

December 31 2016 2015

Bank deposits 0%-1.40% 0%-4.00% Bonds acquired under resale agreements 0.42%-1.50% 0.35%-5.10%

7. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

December 31 2016 2015

Financial assets designated as at FVTPL

Credit linked notes (a) $ 715,491 $ 1,094,381 Interest rate linked notes (a) 612,427 - Exchange linked notes (a) 96,613 - 1,424,531 1,094,381

Financial assets held for trading

Derivative financial assets (not designated as hedging instruments) Forward exchange contracts (b) 1,098 3,514 Currency-swap contracts (c) 2,457 - 3,555 3,514

Financial assets at FVTPL - current $ 1,428,086 $ 1,097,895 (Continued)

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December 31 2016 2015

Financial liabilities held for trading

Derivative financial liabilities (not designated as hedging instruments) Forward exchange contracts (b) $ 42,073 $ 15,720 Currency-swap contracts (c) 956 12,754

Financial liabilities at FVTPL - current $ 43,029 $ 28,474 (Concluded) a. The Corporation entered into structured investment contracts with bank in 2016 and 2015. The structured investment contracts included embedded derivative instruments which were not closely related to the host contracts. The Corporation designated the entire contract as financial asset at FVTPL on initial recognition. b. At the end of the reporting period, outstanding forward exchange contracts that did not meet the criteria of hedge accounting were as follows:

Contract Amount Currency Maturity Date (In Thousands)

December 31, 2016

Sell forward exchange contracts US$ to NT$ 2017.01.03-2017.05.11 US$ 158,000

December 31, 2015

Sell forward exchange contracts US$ to NT$ 2016.01.04-2016.05.06 US$ 130,000 c. At the end of the reporting period, outstanding currency-swap contracts that did not meet the criteria of hedge accounting were as follows:

Contract Amount Currency Maturity Date (In Thousands)

December 31, 2016

Sell forward exchange contracts US$ to NT$ 2017.01.03-2017.01.24 US$ 11,000 Buy forward exchange contracts US$ to NT$ 2017.03.27 US$ 10,000

December 31, 2015

Sell forward exchange contracts US$ to NT$ 2016.01.07-2016.02.24 US$ 48,000

The Corporation entered into foreign exchange forward contracts and currency-swap contracts during the years ended December 31, 2016 and 2015 to manage exposures due to exchange rate fluctuations of foreign currency denominated assets and liabilities.

133 Vanguard International Semiconductor Corporation

8. AVAILABLE-FOR-SALE FINANCIAL ASSETS

December 31 2016 2015

Current

Foreign corporate bonds $ 64,386 $ -

Non-current

Listed stocks $ 43,648 $ 88,731 Domestic bonds 460,033 -

$ 503,681 $ 88,731

The Corporation recognized impairment loss of $120,000 thousand in 2016.

9. HELD-TO-MATURITY FINANCIAL ASSETS - CURRENT

December 31 2016 2015

Foreign investments Volkswagen Int’l Finance N.V. bonds $ - $ 49,655 China Construction Bank Asia Co bonds - 44,928 China Minmetals Corp bonds - 44,919

$ - $ 139,502

10. DERIVATIVE FINANCIAL INSTRUMENTS FOR HEDGING

December 31 2016 2015 Fair Value Fair Value Hedge Hedge

Derivative financial liabilities for hedging - current

Currency-swap contracts $ - $ 7,020

a. Fair value hedge

The Corporation used forward exchange contracts and currency-swap contracts to hedge risks on exchange rate fluctuations of foreign-currency denominated accounts receivable. The forward exchange contracts and currency-swap contracts had the same term as the respective financial assets; the management believed the forward exchange contracts and currency-swap contracts were highly effective hedge instruments.

134 Vanguard International Semiconductor Corporation

The outstanding currency-swap contracts at the end of the reporting period were as follows:

Contract Amount Currency Maturity Date (In Thousands)

December 31, 2015

Sell forward exchange contracts US$ to NT$ 2016.01.19-2016.02.19 US$ 20,000

11. FINANCIAL ASSETS CARRIED AT COST - NON-CURRENT

December 31 2016 2015

Unlisted stocks $ 85,327 $ 62,716

Classification of financial assets Available-for-sale financial assets $ 85,327 $ 62,716

The management believed that the fair value of the aforementioned unlisted equity investments held by the Corporation cannot be reliably measured due to the range of reasonable fair value estimates was significant and the probabilities of the various estimates cannot be reasonably assessed. Therefore, the unlisted stocks were measured at cost less impairment at the end of reporting period.

The Corporation sold its interest in Image Match Design Inc. with carrying amount of $10,000 thousand in August 2016 and recognized a gain of $14,925 thousand.

12. NOTES AND ACCOUNTS RECEIVABLE, NET

December 31 2016 2015

Notes and accounts receivable $ 3,350,334 $ 2,521,500 Allowance for doubtful accounts (1,987) (1,987)

Notes and accounts receivable, net $ 3,348,347 $ 2,519,513

The average credit period on sales of goods was 30 to 45 days after month closing. No interest was charged on notes and accounts receivables. In determining the recoverability of a trade receivable, the Corporation considered any changes in the credit quality of the trade receivable since the date credit was initially granted to the end of the reporting period. Allowance for doubtful accounts was based on estimated irrecoverable amounts determined by reference to past default experience of the counterparts and an analysis of their current financial position.

For the accounts receivable balance that were past due at the end of the reporting period, the Corporation had not recognized an allowance for doubtful accounts since there had not been a significant change in the credit quality of its customers and the amounts were still considered recoverable.

135 Vanguard International Semiconductor Corporation

The aging analyses of notes and accounts receivable were as follows:

December 31 Past Due Days 2016 2015

Not past due and not impaired 0 days $ 3,290,278 $ 2,470,291 Past due but not impaired Less than 60 days 24,548 44,432 61-90 days 35,479 6,162 More than 90 days 29 615 60,056 51,209

$ 3,350,334 $ 2,521,500

The above aging analyses were based on the past due dates.

Movements of the allowance for doubtful accounts were as follows:

Years Ended December 31 2016 2015

Balance, beginning of year $ 1,987 $ 1,987 Add: Provision - -

Balance, end of year $ 1,987 $ 1,987

The Corporation had no impairment loss recognized on the accounts receivable during the years ended December 31, 2016 and 2015.

13. INVENTORIES

December 31 2016 2015

Finished goods $ 202,723 $ 314,299 Work in process 1,212,579 1,181,419 Raw materials 431,448 377,668 Supplies and spare parts 353,025 377,225

$ 2,199,775 $ 2,250,611

The write-downs of inventories included in the cost of revenue were as below:

Years Ended December 31 2016 2015

Provision of inventory valuation and obsolescence losses $ 16,449 $ 69,547

For the years ended December 31, 2016 and 2015, cost of revenue included unallocated manufacturing overheads amounted to $130,382 thousand and $703,284 thousand, respectively.

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14. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

December 31 2016 2015

Investments in subsidiaries $ 2,722,779 $ 301,019 Investments in associates 208,993 51,439

$ 2,931,772 $ 352,458

a. Investments in subsidiaries

December 31 2016 2015

Unlisted stocks VIS Associates Inc. $ 2,722,779 $ 301,019

Proportion of Ownership and Voting Rights December 31 2016 2015

VIS Associates Inc. 100% 100%

The investment in subsidiary accounted for using equity method and the share of profit or loss and other comprehensive income of the investment for the years ended December 31, 2016 and 2015 were based on the subsidiariy’s financial statements audited by the auditors for the same years.

b. Investments in associates

December 31 2016 2015

Associates that are not individually material

CMSC, Inc. $ 61,440 $ 51,439 Quora Technology, Inc. 147,553 -

$ 208,993 $ 51,439

Refer to Table 5 “Information on Investees” for the nature of activities, principal place of business and country of incorporation of the associates.

Aggregate information of associates that are not individually material

Years Ended December 31 2016 2015

The Corporation’s share of (Loss) profit from continuing operations $ (11,162) $ 949 Other comprehensive (loss) income (11) 3

Total comprehensive (loss) income for the year $ (11,173) $ 952

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In March 2016, the Corporation subscribed 5,000 thousand shares of preferred stocks of Quora Technology, Inc. in cash amounting to $166,175 thousand. The Corporation’s percentage of ownership in Quora Technology Inc. was 31.04% and exercised significant influence over Quora Technology, Inc. As of December 31, 2016, the Corporation’s percentage of ownership in Quora Technology Inc. was 32.76%.

The investments in associates accounted for using equity method and the share of profit or loss and other comprehensive (loss) income of those investments were calculated based on the unaudited financial statements. Management believes there is no material impact on its parent company only financial statement.

15. PROPERTY, PLANT AND EQUIPMENT

Advance Payments and Machinery and Other Construction Buildings Equipment Equipment in Progress Total

Cost

Balance, January 1, 2015 $ 14,608,573 $ 54,611,302 $ 386,147 $ 1,084,408 $ 70,690,430 Additions 397,617 1,761,332 8,295 (874,691 ) 1,292,553 Disposal - (42,993 ) (3,060 ) - (46,053 ) Reclassified - 6,302 660 - 6,962

Balance, December 31, 2015 $ 15,006,190 $ 56,335,943 $ 392,042 $ 209,717 $ 71,943,892

Accumulated depreciation

Balance, January 1, 2015 $ 11,477,893 $ 50,696,476 $ 349,040 $ - $ 62,523,409 Depreciation 621,831 1,669,656 12,380 - 2,303,867 Disposal - (42,993 ) (3,060 ) - (46,053 )

Balance, December 31, 2015 $ 12,099,724 $ 52,323,139 $ 358,360 $ - $ 64,781,223

Accumulated impairment

Balance, January 1, 2015 and December 31, 2015 $ - $ 183,521 $ - $ - $ 183,521

Carrying amounts, December 31, 2015 $ 2,906,466 $ 3,829,283 $ 33,682 $ 209,717 $ 6,979,148

Cost

Balance, January 1, 2016 $ 15,006,190 $ 56,335,943 $ 392,042 $ 209,717 $ 71,943,892 Additions 79,335 984,319 1,653 273,637 1,338,944 Disposal (5,028 ) (16,688 ) (328 ) - (22,044 ) Reclassified - - 385 - 385

Balance, December 31, 2016 $ 15,080,497 $ 57,303,574 $ 393,752 $ 483,354 $ 73,261,177

Accumulated depreciation

Balance, January 1, 2016 $ 12,099,724 $ 52,323,139 $ 358,360 $ - $ 64,781,223 Depreciation 606,511 1,414,817 10,581 - 2,031,909 Disposal (1,089 ) (16,688 ) (328 ) - (18,105 )

Balance, December 31, 2016 $ 12,705,146 $ 53,721,268 $ 368,613 $ - $ 66,795,027

Accumulated impairment

Balance, January 1, 2016 and December 31, 2016 $ - $ 183,521 $ - $ - $ 183,521

Carrying amounts, December 31, 2016 $ 2,375,351 $ 3,398,785 $ 25,139 $ 483,354 $ 6,282,629

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The above items of property, plant and equipment were depreciated on a straight-line basis over the estimated useful lives as follows:

Buildings Main plants 20 years Mechanical and electrical power equipment 5 to 10 years Clean rooms 10 years Machinery and equipment 3 to 5 years Other equipment 3 to 5 years

16. INTANGIBLE ASSETS

Years Ended December 31 2016 2015

Computer software

Cost Balance, January 1 $ 779,436 $ 760,644 Additions 10,132 26,731 Disposal (200) (977) Reclassified to property, plant and equipment (385) (6,962) Balance, December 31 788,983 779,436 Accumulated amortization Balance, January 1 737,840 723,470 Amortization 21,061 15,347 Disposal (200) (977) Balance, December 31 758,701 737,840

Carrying amount, end of year $ 30,282 $ 41,596

Intangible assets were amortized on a straight-line basis over the estimated useful lives as follows:

Computer software 3 to 5 years

17. OTHER ASSETS

December 31 2016 2015

Pledged time deposit $ 303,704 $ 303,552 Other financial assets 96,597 - Others 2,724 2,597

$ 403,025 $ 306,149

Current $ 99,321 $ 2,597 Non-current 303,704 303,552

$ 403,025 $ 306,149

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18. OTHER PAYABLES

December 31 2016 2015

Bonus $ 727,872 $ 497,608 Maintenance 506,275 381,115 Utilities 124,321 145,776 Others 775,033 693,558

$ 2,133,501 $ 1,718,057

19. OTHER CURRENT LIABILITIES

December 31 2016 2015

Advance receipts $ 109,809 $ 81,073 Others 4,942 372

$ 114,751 $ 81,445

20. PROVISIONS - CURRENT

December 31 2016 2015

Sales returns and allowances $ 236,336 $ 136,576

The provision of sales returns and allowances was estimated based on historical experience, management’s judgments and any other known factors that would affect the returns and allowances. The provision was recognized as a reduction of revenue in the periods of the related products sold.

21. RETIREMENT BENEFIT PLANS

a. Defined contribution plans

The Corporation adopted a pension plan under the Labor Pension Act (the “LPA”), which is a state-managed defined contribution plan. Under the LPA, the Corporation makes monthly contributions to employees’ individual pension accounts at 6% of monthly salaries and wages.

b. Defined benefit plans

The Corporation adopted the defined benefit plan under the Labor Standards Law and the “Pension Plan of Senior Management” of the Corporation. Pension benefits are calculated on the basis of the length of service and average monthly salaries of the 6 months before retirement. The Corporation contributes amounts equal to 2% of total monthly salaries and wages to a pension fund administered by the pension fund monitoring committee. Pension contributions are deposited in the Bank of Taiwan in the committee’s name. Before the end of each year, the Corporation assesses the balance in the pension fund. If the amount of the balance in the pension fund is inadequate to pay retirement benefits for employees who conform to retirement requirements in the next year, the Corporation is required to fund the difference in one appropriation that should be made before the end of March of the next year.

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The pension fund is managed by the Bureau of Labor Funds, Ministry of Labor (“the Bureau”); the Corporation has no right to influence the investment policy and strategy.

The amounts included in the parent company only balance sheets in respect of the Corporation’s defined benefit plans were as follows:

December 31 2016 2015

Present value of defined benefit obligation $ 1,034,785 $ 970,547 Fair value of plan assets (326,432) (339,555)

Net defined benefit liability $ 708,353 $ 630,992

Movements in net defined benefit liability were as follows:

Present Value of Defined Net Defined Benefit Fair Value of Benefit Obligation Plan Assets Liability

Balance at January 1, 2015 $ 953,437 $ (340,331) $ 613,106 Service cost Current service cost 24,247 - 24,247 Interest expense (income) 21,306 (7,683) 13,623 Recognized in profit or loss 45,553 (7,683) 37,870 Remeasurement Return on plan assets (excluding amounts included in net interest) - (1,272) (1,272) Actuarial loss - changes in financial assumptions 46,228 - 46,228 Actuarial gain - experience adjustments (28,375) - (28,375) Recognized in other comprehensive income 17,853 (1,272) 16,581 Contributions from the employer - (14,485) (14,485) Benefits paid (46,296) 24,216 (22,080) Balance at December 31, 2015 970,547 (339,555) 630,992 Service cost Current service cost 7,419 - 7,419 Interest expense (income) 18,364 (6,518) 11,846 Recognized in profit or loss 25,783 (6,518) 19,265 Remeasurement Return on plan assets (excluding amounts included in net interest) - 4,157 4,157 Actuarial loss - changes in financial assumptions 54,189 - 54,189 Actuarial loss - experience adjustments 13,917 - 13,917 Recognized in other comprehensive income 68,106 4,157 72,263 Contributions from the employer - (14,167) (14,167) Benefits paid (29,651) 29,651 -

Balance at December 31, 2016 $ 1,034,785 $ (326,432) $ 708,353

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Through the defined benefit plans under the Labor Standards Law, the Corporation is exposed to the following risks:

1) Investment risk: The plan assets are invested in domestic/foreign equity and debt securities, bank deposits, etc. The investment is conducted at the discretion of the Bureau or under the mandated management. However, in accordance with relevant regulations, the return generated by plan assets should not be below the interest rate for a 2-year time deposit with local banks.

2) Interest risk: A decrease in the government bond interest rate will increase the present value of the defined benefit obligation; however, this will be partially offset by an increase in the return on the debt investments of the plan assets.

3) Salary risk: The present value of the defined benefit obligation is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the present value of the defined benefit obligation.

The actuarial valuations of the present value of the defined benefit obligation were carried out by qualified actuaries. The significant assumptions used for the purposes of the actuarial valuations were as follows:

December 31 2016 2015

Discount rates 1.50% 1.90% Expected rates of salary increase 3.50% 3.50%

If possible reasonable change in each of the significant actuarial assumptions will occur and all other assumptions will remain constant, the present value of the defined benefit obligation would increase (decrease) as follows:

December 31 2016 2015

Discount rates 0.50% increase $ (67,148) $ (68,251) 0.50% decrease $ 73,416 $ 67,741

Expected rates of salary increase 0.50% increase $ 71,595 $ 66,260 0.50% decrease $ (66,229) $ (67,605)

The sensitivity analysis presented above may not be representative of the actual change in the present value of the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

December 31 2016 2015

The expected contributions to the plan for the next year $ 14,663 $ 14,992

The average duration of the defined benefit obligation 13.7 years 14.9 years

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Maturity analyses of pension benefit were as follows:

December 31 2016 2015

Maturity analysis of undiscounted pension benefit No later than 1 year $ 13,754 $ 8,044 Later than 1 year and not later than 5 years 102,104 123,406 Later than 5 years 1,174,944 1,189,049

$ 1,290,802 $ 1,320,499

22. EQUITY

a. Capital stock

Common stock

December 31 2016 2015

Authorized shares (in thousands) 3,300,000 3,300,000 Authorized capital $ 33,000,000 $ 33,000,000 Issued and fully paid shares (in thousands) 1,638,982 1,638,982 Issued capital $ 16,389,823 $ 16,389,823

The authorized shares include 300,000 thousand shares reserved for the exercise of employee stock options.

b. Capital Surplus

December 31 2016 2015

May be used to offset a deficit, distributed by cash, or transferred to capital

Arising from issuance of common stock $ 544,884 $ 544,884

May be used to offset a deficit only

Arising from employee stock options (transferred and inactive) 285,845 285,845 Arising from share of changes in equities of subsidiaries, associates and joint ventures 31,865 24,394

$ 862,594 $ 855,123

The capital surplus from stocks issued in excess of par may be used to offset a deficit; in addition, when the Corporation has no deficit, such capital surplus may be distributed in cash or transferred to capital, which are limited to a certain percentage of the Corporation’s paid-in capital.

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c. Retained earnings and dividend policy

In accordance with the amendments to the Company Act in May 2015, the recipients of dividends and bonuses are limited to shareholders and do not include employees. The shareholders held their regular meeting on June 7, 2016 and, in that meeting, had resolved amendments to the Corporation’s Articles of Incorporation (the “Articles”), particularly the amendment to the policy on dividend distribution and the addition of the policy on distribution of employees’ compensation and remuneration to directors.

Under the dividend policy as set forth in the amended Articles, where the Corporation made profit in a fiscal year, the profit shall be first utilized for paying taxes, offsetting losses of previous years, setting aside as legal reserve 10% of the remaining profit, setting aside or reversing special reserve in accordance with the laws and regulations, and then any remaining profit together with any undistributed retained earnings shall be used by the Corporation’s board of directors as the basis for proposing a distribution plan, which should be resolved in the shareholders’ meeting for distribution of dividends and bonus to shareholders. For the policies on distribution of employees’ compensation and remuneration to directors before and after amendment, please refer to b. Employee benefits expense in Note 24.

The Corporation’s Articles also stipulate that all profits may be distributed after taking into consideration to financial, business and operational factors. Dividends are in cash and/or in the form of stock. Since the Corporation’s operation is at the steady growth stage, the cash dividend paid (in any given year) should be at least 60% of the dividends of the current year’s appropriation. If there is no profit for distribution, or the profit is far less than the profit actually distributed by the Corporation in the previous year or other reasons so require, all or part of the capital surplus may be distributed in accordance with relevant laws or regulations of the authorities in charge.

Appropriation of earnings to legal reserve shall be made until the legal reserve equals the Corporation’s paid-in capital. Legal reserve may be used to offset deficit. If the Corporation has no deficit and the legal reserve has exceeded 25% of the Corporation’s paid-in capital, the excess may be transferred to capital or distributed in cash.

The Corporation appropriates or reverses a special reserve in accordance with Rule No. 1010012865 and Rule No. 1010047490 issued by the FSC and the directive titled “Questions and Answers for Special Reserves Appropriated Following Adoption of IFRSs”. Distributions can be made out of any subsequent reversal of the debit to other equity items.

Except for non-ROC resident shareholders, other shareholders receiving the dividends are allowed a tax credit equal to their proportionate share of the income tax paid by the Corporation.

The appropriations of earnings for 2015 and 2014 having been approved in the shareholders’ meetings on June 7, 2016 and June 8, 2015, respectively, were as follows:

Appropriations of Earnings Dividends Per Share (NT$) 2015 2014 2015 2014

Provision of legal reserve $ 415,758 $ 543,789 $ - $ - Provision of special reserve 45,305 16,806 - - Cash dividends 4,261,354 4,259,353 2.60 2.60

$ 4,722,417 $ 4,819,948

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The appropriation of earnings for 2016 had been proposed by the Corporation’s board of directors on February 21, 2017. The appropriation and dividends per share were as follows:

Appropriation Dividend Per of Earnings Share (NT$)

Provision of legal reserve $ 553,793 $ - Reversal of special reserve (77,854) - Cash dividend 4,916,947 3.00

The appropriation of earnings for 2016 are subject to the resolution of the shareholders’ meeting to be held on June 16, 2017. d. Other equity

1) Exchange differences on translation of foreign operations

Years Ended December 31 2016 2015

Balance, beginning of year $ (41,010) $ (50,082) Exchange differences arising from translation of foreign operations 2,496 10,992 Share of exchange differences of subsidiaries and associates accounted for using equity method 448 (1,920)

Balance, end of year $ (38,066) $ (41,010)

2) Unrealized gain (loss) on available-for-sale financial assets

Years Ended December 31 2016 2015

Balance, beginning of year $ (74,801) $ (20,494) Unrealized gain (loss) arising from available-for-sale financial assets 74,911 (54,307)

Balance, end of year $ 110 $ (74,801)

Unrealized gains or losses on available-for-sale financial assets represent the cumulative gains or losses arising from the revaluation of available-for-sale financial assets that have been recognized in other comprehensive income netting the amounts reclassified to profit or loss when those assets have been disposed of or are determined to be impaired.

3) Cash flow hedges

Years Ended December 31 2016 2015

Balance, beginning of year $ - $ 70 Loss arising from changes in fair value of hedging instruments Currency-swap contracts - (70)

Balance, end of year $ - $ -

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The cash flow hedges represent the cumulative gains or losses arising from changes in fair value of the hedging instruments entered into as cash flow hedges. The cumulative gains or losses will be reclassified to profit or loss only when the hedge transaction affects the profit or loss, or used for adjusting the recognition of the non-financial hedged item.

e. Treasury stock (Shares in Thousands)

Number of Shares, Addition Reduction Number of Beginning of During the During the Shares, End of Purpose of Treasury Stock Year Year Year Year

Year ended December 31, 2015

Transfer to employees 770 - (770) -

The Corporation held a meeting of the Board of Directors and approved a share buyback plan to repurchase the Corporation’s common shares up to 76,160 thousand shares from the GreTai Securities Market during the period from December 16, 2011 to February 15, 2012 with buyback prices in the range from NT$8 to NT$15. The Corporation had repurchased 44,525 thousand shares.

The Corporation held a meeting of the Board of Directors and approved a share buyback plan to repurchase the Corporation’s common shares up to 31,635 thousand shares from the GreTai Securities Market during the period from February 20, 2012 to April 19, 2012 with buyback prices in the range from NT$10 to NT$16. The Corporation had repurchased 31,635 thousand common shares.

Under the Securities and Exchange Act of the R.O.C., the Corporation shall neither pledge treasury stocks nor exercise rights to receive dividends and to vote.

Treasury stocks were granted on March 1, 2012, and determined the fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $12.70 Exercise price (NT$) 11.49 Expected volatility 30.12%-31.53% Expected life 2 years Risk-free interest rate 0.8012%

Treasury stocks were granted on April 25, 2012, and determined the fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $13.35 Exercise price (NT$) 12.83 Expected volatility 29.46%-29.72% Expected life 2 years Risk-free interest rate 0.8442%

Treasury stocks were granted on August 2, 2013, and determined the fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $31.00 Exercise price (NT$) 12.83 Expected volatility 42.85% Expected life 1 year Risk-free interest rate 0.6952%

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Treasury stocks were granted on November 1, 2013, and determined the fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $32.35 Exercise price (NT$) 12.83 Expected volatility 43.26% Expected life 0.4822 Year Risk-free interest rate 0.641%

Treasury stocks were granted on May 30, 2014, and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $46.50 Exercise price (NT$) 11.49-12.83 Expected volatility 45.90% Expected life 0.2027 year Risk-free interest rate 0.5329%

Treasury stocks were granted on December 1, 2014, and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $47.30 Exercise price (NT$) 12.83 Expected volatility 32.44% Expected life 0.0356 year Risk-free interest rate 0.4798%

Treasury stocks were granted on March 9, 2015 and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $53.60 Exercise price (NT$) 12.83 Expected volatility 32.425% Expected life 0.0301 year Risk-free interest rate 0.5885%

Expected volatility was based on the historical stock price volatility over the same period as the expected life of each treasury stocks at the date of grant. The yield of 2-year government bond was used as the risk-free interest rate.

Compensation cost recognized was $26,278 thousand for the year ended December 31, 2015.

23. REVENUE

Revenue of the Corporation for the years ended December 31, 2016 and 2015 were analyzed as follows:

Years Ended December 31 2016 2015

Wafer foundry $ 25,469,353 $ 23,010,405 Other revenue 359,281 309,316

$ 25,828,634 $ 23,319,721

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The Corporation designated certain foreign sales as hedged items to hedge the risk of cash flow. Losses on the hedging instrument amounting to $10,692 thousand and $8,596 thousand that were determined to be an effective hedge were recognized as decrease of revenue for the years ended December 31, 2016 and 2015, respectively.

24. OTHER ITEMS IN THE STATEMENTS OF COMPREHENSIVE INCOME

a. Depreciation and amortization

Years Ended December 31 2016 2015

Property, plant and equipment $ 2,031,909 $ 2,303,867 Intangible assets 21,061 15,347

$ 2,052,970 $ 2,319,214

Classification of deprecation - by function Cost of revenue $ 1,980,762 $ 2,254,409 Operating expenses 51,147 49,458

$ 2,031,909 $ 2,303,867

Classification of amortization - by function Cost of revenue $ 10,643 $ 7,470 Operating expenses 10,418 7,877

$ 21,061 $ 15,347

b. Employee benefits expense

1) Employees’ compensation and remuneration to directors for 2016 and 2015

Years Ended December 31 2016 2015

Post-employment benefits (see Note 21) Defined contribution plans $ 196,218 $ 190,102 Defined benefit plans 19,265 37,870 215,483 227,972 Share-based payments (see Note 22) Equity-settled - 26,278 Other employee benefits 6,278,225 5,589,510

Total employee benefits expense $ 6,493,708 $ 5,843,760

Employee benefits expense summarized by function Cost of revenue $ 5,141,284 $ 4,762,693 Operating expenses 1,352,424 1,081,067

$ 6,493,708 $ 5,843,760

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In compliance with the Company Act as amended in May 2015 and the amendments to the Articles as resolved by the shareholders’ meeting on June 2016, the Corporation should distribute no less than 10% of the current year’s profit as employees’ compensation in the form of stock or in cash as resolved by the board of directors. The employees include those of subsidiaries meeting some conditions agreed by the board of directors. The Corporation should also distribute no higher than 1% of the current year’s profit as remuneration to directors. However, the Corporation’s accumulated losses shall have been covered. For the years ended December 31, 2016 and 2015, the employees’ compensation were $831,803 thousand and $623,638 thousand, respectively. For the years ended December 31, 2016 and 2015, the remuneration to directors were $14,100 thousand and $13,588 thousand, respectively. The above calculated were at a certain percentage of the base income.

If there is a change in the proposed amounts after the annual parent company only financial statements are authorized for issue, the differences are recorded as a change in accounting estimate.

The appropriations of employees’ compensation and remuneration to directors for 2016 and 2015 were resolved by the board of directors on February 21, 2017 and January 27, 2016, respectively. The amounts of the employees’ compensation and remuneration to directors are disclosed on the table below. After the amendments to the Articles resolving in the shareholder’s meeting on June 7, 2016, the appropriations of the employees’ compensation and remuneration to directors for 2015 were reported in the shareholders’ meeting.

Years Ended December 31 2016 2015 Cash Stock Cash Stock Bonus Bonus

Employees’ compensation $ 831,803 $ - $ 623,638 $ - Remuneration to directors 14,100 - 13,384 -

The differences between the amounts of the remuneration to directors resolved by the board of directors on January 27, 2016 and the amounts recognized in the parent company only financial statements for the year ended December 31, 2015 were adjusted to profit and loss in 2016.

Information on the employees’ compensation and remuneration to directors resolved by the Corporation’s board of directors in 2017 and 2016 is available at the Market Observation Post System website of the Taiwan Stock Exchange.

2) Bonus to employees and remuneration to directors for 2014

The bonus to employees and remuneration to directors for 2014 which have been approved in the shareholders’ meeting on June 8, 2015 were as follows:

Year Ended December 31, 2014 Cash Stock

Bonus to employees $ 815,683 $ - Remuneration to directors 34,800 -

There was no difference between the amounts of the bonus to employees and the remuneration to directors approved in the shareholders’ meeting on June 8, 2015 and the amounts recognized in the parent company only financial statements for the year ended December 31, 2014.

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Information on the bonus to employees and remuneration to directors resolved by the shareholders in their meeting in 2015 is available at the Market Observation Post System website of the Taiwan Stock Exchange.

25. INCOME TAXES

a. Major components of tax expenses recognized in profit or loss:

Years Ended December 31 2016 2015

Current tax In respect of the current year $ 867,379 $ 820,624 Adjustments for prior years’ tax (158,696) (1,914) 708,683 818,710 Deferred income tax In respect of the current year 16,919 (38,233)

Income tax expenses recognized in profit or loss $ 725,602 $ 780,477

A reconciliation of accounting profit and income tax expenses were as follow:

Years Ended December 31 2016 2015

Income before income tax $ 6,263,527 $ 4,938,060

Income tax expense calculated at the statutory rate (17%) $ 1,064,800 $ 839,470 Additional items in determining taxable income 4,996 2,037 Tax-exempt income (206,770) (130,535) Income tax on unappropriated earnings - 56,913 The origination and reversal of temporary differences 21,272 14,506 Adjustments for prior years’ tax (158,696) (1,914)

Income tax expense recognized in profit or loss $ 725,602 $ 780,477

The applicable tax rate used by the Corporation is 17%.

As the status of 2017 appropriations of earnings is uncertain, the potential income tax consequences of 2016 unappropriated earnings are not reliably determinable.

b. Current tax liabilities

December 31 2016 2015

Current tax liabilities Income tax payable $ 604,591 $ 497,129

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c. Deferred income tax assets and liabilities

The movements of deferred income tax assets and liabilities were as follows:

For the year ended December 31, 2016

Balance, Beginning of Balance, End of Deferred Income Tax Assets Year Movements Year

Temporary differences $ 1,690 $ (1,690) $ -

Balance, Beginning of Balance, End of Deferred Income Tax Liabilities Year Movements Year

Temporary differences $ 67,494 $ 15,229 $ 82,723

For the year ended December 31, 2015

Balance, Beginning of Balance, End of Deferred Income Tax Assets Year Movements Year

Temporary differences $ 154 $ 1,536 $ 1,690

Balance, Beginning of Balance, End of Deferred Income Tax Liabilities Year Movements Year

Temporary differences $ 104,192 $ (36,698) $ 67,494 d. Items for which no deferred income tax assets have been recognized

December 31 2016 2015

Deductible temporary differences $ 207,756 $ 205,460 e. Unrecognized deferred income tax liabilities associated with investments

As of December 31, 2016 and 2015, there were no taxable temporary differences associated with investment in subsidiaries for which no deferred income tax liabilities have been recognized. f. Integrated income tax

December 31 2016 2015

Balance of the Imputation Credit Account- the Corporation $ 775,454 $ 930,217

The expected and actual creditable ratios for distributing the earnings of 2016 and 2015 were 14.42% and 16.10%, respectively.

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Under the Income Tax Law, for distribution of earnings generated after January 1, 1998, the imputation credit allocated to ROC resident shareholders of the Corporation is calculated based on the creditable ratio as of the date of dividend distribution. The actual imputation credit allocated to shareholders of the Corporation is based on the balance of the Imputation Credit Account as of the date of dividend distribution. Therefore, the expected creditable ratio for the 2016 earnings may differ from the actual creditable ratio to be used in allocating imputation credit to the shareholders.

The unappropriated retained earnings as of December 31, 2016 and 2015 did not contain the unappropriated earnings generated before January 1, 1998.

g. Income tax exemption with respect to the issuance of shares

The Corporation was granted a 5-year income tax exemption period with respect to the issuance of shares from the appropriation for year 2005. The income tax exemption period is from January 1, 2012 to December 31, 2016.

h. Income tax assessments

Income tax returns through 2014 had been examined and cleared by the tax authorities.

26. EARNINGS PER SHARE

Unit: NT$ Per Share

Years Ended December 31 2016 2015

Basic earnings per share $ 3.38 $ 2.54 Diluted earnings per share $ 3.35 $ 2.50

The earnings and weighted average number of common shares used in the computation of earnings per share were as follows:

Earnings

Years Ended December 31 2016 2015

Earnings used in computation of basic earnings per share $ 5,537,925 $ 4,157,583 Effect of dilutive potential common stocks: Employees’ compensation - -

Earnings used in the computation of diluted earnings per share $ 5,537,925 $ 4,157,583

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Shares

Years Ended December 31 2016 2015

Weighted average number of common stocks used in the computation of basic earnings per share 1,638,982 1,638,792 Effect of dilutive potential common stocks: Employees’ compensation 15,914 23,466

Weighted average number of common stocks used in the computation of diluted earnings per share 1,654,896 1,662,258

Since the Corporation is allowed to settle the compensation paid to employees by cash or shares, the Corporation assumed that the entire amount of compensation will be settled in shares and the resulting potential shares were included in the weighted average number of shares outstanding used in the computation of diluted earnings per share as the shares had dilutive effect. Such dilutive effect of the potential shares is included in the computation of diluted earnings per share until the shareholders resolve the number of shares to be distributed to employees at their meeting in the following year.

27. OPERATING LEASE ARRANGEMENTS

The Corporation as lessee

The Corporation leases the sites of its manufacturing plant and parking lot from the Hsinchu Science-Based Industrial Park Administration and a certain individual under renewable operating lease agreements expiring on various dates from March 2019, December 2027, December 2029 and December 2034. The rental pay to Hsinchu Science-Based Industrial Park Administration can be adjusted according to the lease contract, and the lease is renewable upon expiration.

The future minimum lease payments of non-cancellable operating leases commitments are as follows:

December 31 2016 2015

Not later than 1 year $ 77,120 $ 77,091 Later than 1 year and not later than 5 years 313,513 306,685 Later than 5 years 595,023 658,714

$ 985,656 $ 1,042,490

The lease payments recognized as expenses were as follows:

Years Ended December 31 2016 2015

Minimum lease payment $ 77,426 $ 76,725

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28. CAPITAL MANAGEMENT

The Corporation manages its capital in a manner to ensure its ability to continue as a going concern while maximizing the return to shareholders. The Corporation’s overall strategy has no significant variations.

The capital structure of the Corporation consists of net debt (loans offset by cash and cash equivalents) and equity (i.e. capital stock, capital surplus, retained earnings and other equity).

The Corporation is not subject to any externally imposed capital requirements.

29. FINANCIAL INSTRUMENTS

a. Fair value of financial instruments that are not measured at fair value

Financial assets and liabilities with material difference between carrying value and fair value

Except as detailed in the following table, the management considered that the carrying amounts of financial assets and financial liabilities recognized in the parent company only financial statements approximate their fair values or their fair values could not be reliably measured.

December 31 2016 2015 Carrying Fair Value Carrying Fair Value Amount Level 1 Level 2 Amount Level 1 Level 2

Financial assets

Held-to-maturity financial assets $ - $ - $ - $ 139,502 $ 138,834 $ - Other current assets Structured time deposit 96,597 - 96,509 - - -

b. Fair value of financial instruments that are measured at fair value on a recurring basis

1) Fair value hierarchy

The fair value hierarchies of financial assets and liabilities measured at fair value on a recurring basic were as follows:

December 31, 2016 Level 1 Level 2 Level 3 Total

Financial assets at FVTPL Derivative financial instruments $ - $ 1,428,086 $ - $ 1,428,086

Available-for-sale financial assets Domestic listed stocks - equity investment $ 13,648 $ 30,000 $ - $ 43,648 Bond investments 524,419 - - 524,419

$ 538,067 $ 30,000 $ - $ 568,067

Financial liabilities at FVTPL Derivative financial instruments $ - $ 43,029 $ - $ 43,029

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December 31, 2015

Level 1 Level 2 Level 3 Total

Financial assets at FVTPL Derivative financial instruments $ - $ 1,097,895 $ - $ 1,097,895

Available-for-sale financial assets Domestic listed stocks - equity investment $ 16,731 $ 72,000 $ - $ 88,731

Financial liabilities at FVTPL Derivative financial instruments $ - $ 35,494 $ - $ 35,494

There were no transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended December 31, 2016 and 2015, respectively.

There were no acquisition or disposal of financial assets measured by Level 3 of the fair value hierarchy for the years ended December 31, 2016 and 2015, respectively.

2) Valuation techniques and assumptions applied to Level 2 of fair value hierarchy

The fair values of financial assets and financial liabilities are determined as follows:

a) For those instruments such as derivative financial instruments with no quoted market prices, their fair values are determined by using valuation techniques incorporating estimates and assumptions consistent with those generally used by other market participants in their estimates of fair values.

Fair values of forward exchange contacts and currency-swap contracts are determined by using valuation techniques based on forward rates for each contract. The Reuter’s quotation system is mainly used as reference for the forward rates.

b) For the private placement shares issued by listed companies with no quoted market prices, the fair value is determined by using valuation techniques incorporating estimates and assumptions consistent with those generally used by other market participants in their estimates of fair values.

The Corporation uses “Black-Scholes model” to determine the fair value.

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c. Categories of financial instruments

December 31 2016 2015 Financial assets

Fair value through profit or loss (FVTPL) Held for trading $ 3,555 $ 3,514 Designated as at FVTPL 1,424,531 1,094,381 Held-to-maturity financial assets - 139,502 Loans and receivables (Note 1) 21,247,694 21,196,211 Available-for-sale financial assets (Note 2) 653,394 151,447

Financial liabilities

Fair value through profit or loss (FVTPL) Held for trading 43,029 28,474 Derivative instruments in designated hedge accounting - 7,020 Measured at amortized cost (Note 3) 4,469,288 3,507,203

Note 1: The balances included loans and receivables measured at amortized cost, which comprise cash and cash equivalents, notes and accounts receivable, other receivables, and other financial assets.

Note 2: The balances included the carrying amount of available-for-sale financial assets measured at cost.

Note 3: The balances included financial liabilities measured at amortized cost, which comprise accounts payable and other payables.

d. Objectives and policies of financial risk management

The Corporation’s major financial instruments include equity and bond investments, accounts receivable and accounts payable. The Corporation’s corporate finance function provides services to the business, coordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Corporation through internal risk reports which analyze exposures by degree and magnitude of risks. These risks include market risk (including foreign currency risk, interest rate risk and other price risk), credit risk and liquidity risk.

The Corporation seeks to minimize the effects of these risks by using derivative financial instruments to hedge risk exposures. The use of financial derivatives is governed by the Corporation’s policies approved by the board of directors, which provided written principles on foreign exchange risk, interest rate risk, credit risk, the use of derivative and non-derivative financial instruments, and the investment of excess liquidity. The compliance with policies and the control of exposure limits are continuously reviewed by the internal auditors on a continuous basis. The Corporation does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

The corporate finance function reports quarterly to the Corporation’s board of directors and audit committee for their independent monitorship to risks and policy implementation.

1) Market risk

The Corporation’s activities are exposed to the financial risks primarily arising from the changes in foreign currency exchange rates (see (a) below), interest rates (see (b) below) and other prices (see (c) below). The Corporation enters into a variety of derivative financial instruments including forward exchange and currency-swap contracts to manage its exposure to foreign currency risk.

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There has been no change to the Corporation’s exposure to market risks or the manner in which these risks are managed and measured. a) Foreign currency risk

The Corporation’s operating activities are partially denominated in foreign currencies and apply the natural hedge. The purpose of the Corporation’s management of the foreign currency risk is to hedge the risk instead of making a profit.

The strategy of foreign currency risk management is to review the net position exposed to foreign currency risk and manage the risk of the net position. The Corporation selects the instruments to hedge currency exposure by considering the hedge cost and hedge period. The Corporation currently utilizes derivative financial instruments, primarily buy/sell forward exchange contracts, to hedge its currency exposure.

The Corporation uses forward exchange contracts to eliminate currency exposure. It is the Corporation’s policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item for maximizing the hedge effectiveness.

Investing in foreign operations is for strategic purposes; it is not hedged by the Corporation.

Sensitivity analysis

The Corporation is mainly exposed to the exchange rate fluctuation of USD and RMB.

The following table details the Corporation’s sensitivity to a 5% increase and decrease in the New Taiwan dollars (the functional currency) against the relevant foreign currencies. The sensitivity analysis includes only outstanding foreign currency denominated monetary items (including cash and cash equivalents, financial assets, accounts receivable, other receivables, accounts payable, and other payables) and the hedge contracts, for which their translation at period end is adjusted for a 5% change in foreign currency rates. The following table indicates the influences which the New Taiwan dollars strengthen 5% against the relevant currency.

Impact on USD Items Years Ended December 31 2016 2015

(Loss) gain $ (73,706) $ 32,480

Impact on RMB Items Years Ended December 31 2016 2015

Loss $ - $ (20,857) b) Interest rate risk

The Corporation’s financial assets are exposed to interest rate risk both at fixed and floating interest rates.

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The carrying amounts of the Corporation’s financial assets with exposure to interest rates at the end of the reporting period were as follows:

December 31 2016 2015

Fair value interest rate risk Financial assets $ 17,259,371 $ 16,195,737 Cash flow interest rate risk Financial assets 1,837,503 3,039,873

Sensitivity analysis

The sensitivity analyses below are determined based on the Corporation’s exposure to interest rates for non-derivative instruments at the end of the reporting period. For floating rate assets, the analysis is prepared assuming the amount of the asset at the end of the reporting date is outstanding during the reporting period.

If the market interest rate increases/decreases by 0.1% and all other variables remain constant, the pre-tax profit of the Corporation for the years ended on December 31, 2016 and 2015 will increase/decrease $1,838 thousand and $3,040 thousand, respectively, resulting from the exposure of the net assets with floating rates.

c) Other price risk

The Corporation is exposed to price risk arising from its investments in available-for-sale stocks and bonds. Investments are held for strategic rather than trading purposes. The Corporation does not actively trade these investments. The Corporation’s security price risk is mainly concentrated on equity and bond instruments operating in electronic industry quoted in the Taiwan Stock Exchange and GreTai Securities Market.

Sensitivity analysis

The sensitivity analyses below were determined based on the exposure to security price risks at the end of the reporting period.

If available-for-sale stocks and bonds prices had been 5% higher/lower, the other comprehensive income for the years ended December 31, 2016 and 2015 would have increased/decreased by $28,403 thousand and $4,437 thousand, respectively, as a result of the changes in fair value of available-for-sale financial investments in stocks and bonds.

2) Credit risk

Credit risk refers to the risk that a counterpart will default on its contractual obligations and result in financial loss to the Corporation. As of the end of the reporting period, the Corporation may have a financial loss due to the default on obligation from counterparts, and the maximum exposure to credit risk is the carrying amount of the respective recognized financial assets as stated in the parent company only balance sheets.

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In order to mitigate credit risk, the Corporation has made the policy of credit management to ensure that appropriate action is taken to recover overdue receivables. In addition, the Corporation reviews the recoverable amount of each receivable debt at the end of the reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the Corporation considers the credit risk is significantly reduced.

The credit risk on operating funds and derivatives is limited as the counterparts are creditworthy banks.

The Corporation’s accounts receivable outstanding arose from trading with its customers spreading across diverse industries and geographical areas. The balances are monitored on an ongoing basis by evaluating the customers’ financial conditions.

The Corporation’s credit concentration risk was related to the 5 largest customers. Besides the 5 largest customers, credit concentration risks related to other customers do not exceed 10% of total gross accounts receivables at any time during the period. The 5 largest customers are creditworthy counterparts, therefore, the Corporation believes the concentration of credit risk is insignificant for the remaining accounts receivable.

3) Liquidity risk

The Corporation manages liquidity risk by monitoring and maintaining adequate reserves of cash and cash equivalents to fund the Corporation’s operations and mitigate the effects of fluctuations in cash flows.

The following tables detail the Corporation’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities from the earliest date on which the Corporation can be required to pay. The tables include both interest and principal cash flows.

December 31, 2016

Less Than More Than 1 Year 1 Year

Non-derivative financial liabilities

Non-interest bearing $ 4,469,288 $ -

December 31, 2015

Less Than More Than 1 Year 1 Year

Non-derivative financial liabilities

Non-interest bearing $ 3,507,203 $ -

The following tables detail the Corporation’s liquidity analysis for its derivative financial instruments. The tables were based on the undiscounted net inflows and outflows from those derivatives with gross settlement.

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December 31, 2016

Less Than More Than 1 Year 1 Year Gross settled

Forward exchange contracts Inflows $ 5,721,697 $ - Outflows (5,761,171) -

$ (39,474) $ -

December 31, 2015

Less Than More Than 1 Year 1 Year Gross settled

Forward exchange contracts Inflows $ 6,481,230 $ - Outflows (6,513,210) -

$ (31,980) $ -

30. TRANSACTIONS WITH RELATED PARTIES

a. Operating transactions

Revenue from Sales of Goods Purchases Years Ended December 31 Years Ended December 31 2016 2015 2016 2015

Investors that have significant influence over the Corporation $ 6,702,249 $ 7,100,082 $ 700 $ 259 Associates $ 23,844 $ 19,847 $ - $ - Key management personnel $ 37,666 $ 43,155 $ - $ - Substantial related parties $ 32,654 $ 32,208 $ - $ -

Research and Development Manufacturing Expenses Expenses Years Ended December 31 Years Ended December 31 2016 2015 2016 2015

Investors that have significant influence over the Corporation $ 418,307 $ 358,179 $ 931 $ 1,673

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Marketing Expenses Rental Revenue Years Ended December 31 Years Ended December 31 2016 2015 2016 2015

Subsidiaries $ 92,555 $ 62,280 $ - $ - Investors that have significant influence over the Corporation 2,200 1,369 2,467 3,453

$ 94,755 $ 63,649 $ 2,467 $ 3,453

Nonoperating Income and Gains Years Ended December 31 2016 2015

Investors that have significant influence over the Corporation $ 15,600 $ 20,720 Key management personnel 630 940

$ 16,230 $ 21,660

The following balances were outstanding at the end of the reporting period:

Receivables from Related Parties December 31 2016 2015

Investors that have significant influence over the Corporation $ 586,847 $ 519,735 Key management personnel 14,469 8,134 Associates 4,817 2,059 Substantial related parties 7,081 4,007

$ 613,214 $ 533,935

Other Receivables from Related Parties December 31 2016 2015

Investors that have significant influence over the Corporation $ 560 $ 12,362 Key management personnel 264 2,722

$ 824 $ 15,084

Other Payables to Related Parties December 31 2016 2015

Investors that have significant influence over the Corporation $ 85,535 $ 67,754 Subsidiaries 9,560 4,886 Substantial related parties 135 -

$ 95,230 $ 72,640

161 Vanguard International Semiconductor Corporation

Guarantee Deposits (Other Non-current Liabilities) December 31 2016 2015

Investors that have significant influence over the Corporation $ - $ 1,362

The terms of sales and purchases transactions with related parties were not significantly different from those with third parties. However, for other related-party transactions, license fees, research and development expenses, there were no similar transactions in the market; thus, transaction terms were determined in accordance with related contracts.

The Corporation leased certain plant and offices to related parties. The lease terms and prices were determined in accordance with mutual agreements. Related parties paid the rental monthly.

Guarantee deposits of related parties were for lease.

b. Compensation of key management personnel

Years Ended December 31 2016 2015

Short-term employee benefits $ 137,890 $ 119,539 Post-employment benefits 2,420 18,276

$ 140,310 $ 137,815

The remuneration to directors and other key management personnel were determined by the Compensation Committee in accordance with the individual performance and the market trends.

31. ASSETS PLEDGED AS COLLATERAL OR FOR SECURITY

The following assets had been pledged as collateral for the guarantee of customs duty and lease of the manufacturing plant from the Hsinchu Science-Based Industrial Park Administration:

December 31 2016 2015

Pledged time deposits (presented under other non-current assets) $ 303,704 $ 303,552

32. SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNIZED COMMITMENTS

The significant commitments of the Corporation as of December 31, 2016 were as follows:

The Corporation entered into a “Manufacturing, License, and Technology Transfer Agreement” with Taiwan Semiconductor Manufacturing Company Ltd. beginning January 1, 2004 to pay fees according to the net sales of certain products and reserve a portion of its production capacity.

162 Vanguard International Semiconductor Corporation

33. SIGNIFICANT ASSETS AND LABILITIES DENOMINATED IN FOREIGN CURRENCIES

The following information was aggregated by the foreign currencies other than functional currencies of the Corporation and the exchange rates between foreign currencies and respective functional currencies were disclosed. The significant assets and liabilities denominated in foreign currencies were as follows:

December 31 2016 2015 Foreign Foreign Currencies Exchange Rate Currencies Exchange Rate

Financial assets

Monetary items USD $ 231,802 32.199 $ 197,748 32.895 EUR 226 34.30 137 36.14 JPY 82,646 0.2780 108,309 0.2745 RMB - - 83,513 4.995 Non-monetary items USD 90,144 32.199 9,151 32.895

Financial liabilities

Monetary items USD 27,020 32.199 19,495 32.895 EUR 907 34.30 852 36.14 JPY 205,024 0.2780 171,160 0.2745

The significant unrealized foreign exchange gains (losses) were as follows:

Years Ended December 31 2016 2015 Net Foreign Net Foreign Foreign Exchange Gain Exchange Gain Currencies Exchange Rate (Loss) Exchange Rate (Loss)

USD 32.278 (USD:NTD) $ 40,939 31.675 (USD:NTD) $ (90,757) EUR 35.91 (EUR:NTD) 1,014 35.61 (EUR:NTD) (855) JPY 0.2986 (JPY:NTD) 495 0.2648 (JPY:NTD) (950) RMB 4.865 (RMB:NTD) 7,092 5.043 (RMB:NTD) (25,465)

$ 49,540 $ (118,027)

34. SEPARATELY DISCLOSED ITEMS

Information on significant transactions and information on investees:

a. Financing provided to others: None.

b. Endorsements/guarantees provided: None.

c. Marketable securities held (excluding investment in subsidiaries, associates and joint ventures): Table 1 (attached)

163 Vanguard International Semiconductor Corporation

d. Marketable securities acquired and disposed of at costs or prices of at least NT$300 million or 20% of the paid-in capital: Table 2 (attached)

e. Acquisition of individual real estate at costs of at least NT$300 million or 20% of the paid-in capital: None.

f. Disposal of individual real estate at prices of at least NT$300 million or 20% of the paid-in capital: None.

g. Total purchases from or sales to related parties amounting to at least NT$100 million or 20% of the paid-in capital: Table 3 (attached)

h. Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Table 4 (attached)

i. Trading in derivative instruments: Note 7.

j. Information on investees: Table 5 (attached)

k. Information on investment in Mainland China: None.

164 TABLE 1

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

MARKETABLE SECURITIES HELD DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

December 31, 2016 Shares Units Holding Company Name Marketable Security Type and Name (Note1) Relationship with the Securities Issuer Financial Statement Account Market Value or Note (Thousands Carrying Value % of Ownership Net Asset Value Thousands Units)

Structured investments Vanguard International TWM credit linked structured investment notes - Financial assets at fair value through profit or loss - current - $ 100,069 - $ 100,069 Note 4 Semiconductor Corporation SKFH credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 110,119 - 110,119 Note 4 Gigasolar credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 10,019 - 10,019 Note 4 WPG credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 30,061 - 30,061 Note 4 Tong Hsing credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 54,803 - 54,803 Note 4 Mega credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 20,019 - 20,019 Note 4 Competition Team Tech. Ltd. U.S. dollar Bonds - Financial assets at fair value through profit or loss - current - 227,884 - 227,884 Note 4 TSMC U.S. dollar Bonds - Financial assets at fair value through profit or loss - current - 162,517 - 162,517 Note 4 Cathay United Bank interest linked structured investment notes - Financial assets at fair value through profit or loss - current - 96,613 - 96,613 Note 4 Yuanta interest linked principal guarantee notes - Financial assets at fair value through profit or loss - current - 451,293 - 451,293 Note 4 KGI interest linked principal guarantee notes - Financial assets at fair value through profit or loss - current - 161,134 - 161,134 Note 4 Bonds ADSEMI Corporation Bonds - Available-for-sale financial assets - current - 64,386 - 64,386 Note 2 Shanghai Commercial & Saving Bank 2012 2nd Subordinated Financial - Available-for-sale financial assets - noncurrent - 101,519 - 101,519 Note 2 Debentures MEGA Bank 2014 1st Subordinated Financial Debentures - Available-for-sale financial assets - noncurrent - 102,531 - 102,531 Note 2 MEGA Bank 2014 2nd Subordinated Financial Debentures - Available-for-sale financial assets - noncurrent - 153,565 - 153,565 Note 2 Taiwan Cooperative Bank 2014 1st Subordinated Financial Debentures - Available-for-sale financial assets - noncurrent - 102,418 - 102,418 Note 2 Stocks

165 Champion Microelectronic Corp. Investee Available-for-sale financial assets - noncurrent 375 13,648 1 13,648 Note 2 Advanced Microelectronic Products Inc. Investee Available-for-sale financial assets - noncurrent 30,000 30,000 10 30,000 Note 4 United Industrial Gases Co., Ltd. Investee Financial assets carried at cost - noncurrent 4,246 38,717 2 38,717 Note 3 Image Match Design Inc. Investee Financial assets carried at cost - noncurrent 1,400 14,000 5 14,000 Note 3 AnDAPT Inc. Investee Financial assets carried at cost - noncurrent 1,000 32,610 7 32,610 Note 3

Note 1: Marketable securities mentioned in the table include stocks, bonds, beneficiary certificate and the derivative securities from aforementioned items.

Note 2: The market value was based on stock closing price as of December 31, 2016.

Note 3: The market value was based on the book value as of December 31, 2016.

Note 4: The fair value was based on valuation techniques.

Note 5: As of December 31, 2016, all the securities were not pledged or restricted.

Note 6: With respect to the information of subsidiaries, associates and joint ventures, please see TABLE 5. Semiconductor Corporation Vanguard International Semiconductor Corporation Vanguard International

TABLE 2

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$300 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Type and Name of Beginning Balance Acquisition Disposal Ending Balance Financial Statement Company Name Marketable Counterparty Relationship Shares/Units Shares/Units Shares/Units Gain (Loss) on Shares/Units Account Amount Amount Amount Cost Amount Securities (Thousands) (Thousands) (Thousands) Disposal (Thousands)

Structured Vanguard International investments Semiconductor Yuanta interest linked Financial assets at fair - - - $ - - $ 444,845 - $ - $ - $ - - $ 451,293 Corporation principal guarantee value through profit notes or loss - current Societe Generale Financial assets at fair - - - - - 315,460 - 315,460 315,460 - - - Bank U.S. dollar value through profit Bonds or loss - current 166 TABLE 3

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars)

Notes/Accounts Payable or Transaction Detail Abnormal Transaction Company Name Related Party Nature of Relationship Receivable Note Purchases/Sales Amount % to Total Payment Term Unit Price Payment Term Ending Balance % to Total

Vanguard International Taiwan Semiconductor Major shareholder Sales $ 6,702,249 26 30 days after $ - - $ 586,847 15 - Semiconductor Corporation Manufacturing closing Company Ltd. 167 Semiconductor Corporation Vanguard International Semiconductor Corporation Vanguard International

TABLE 4

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars)

Overdue Amount Received in Allowance for Company Name Related Party Nature of Relationship Ending Balance Turnover Rate Amount Action Taken Subsequent Period Bad Debts

Vanguard International Semiconductor Corporation Taiwan Semiconductor Major shareholder $ 586,847 12.11 $ - - $ 586,847 $ - Manufacturing Company Ltd. 168 TABLE 5

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

INFORMATION ON INVESTEES FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Investment Amount Balance as of December 31, 2016 Net Gain Investment December 31, December 31, Carrying (Loss) of the Gain (Loss) 2016 2015 Value Investee Recognized Investor Company Investee Company Location Main Businesses and Products Shares (In Percentage of Note (Foreign (Foreign (Foreign (Foreign (Foreign Thousands) Ownership Currencies in Currencies in Currencies in Currencies in Currencies in Thousands) Thousands) Thousands) Thousands) Thousands)

Vanguard International VIS Associates Inc. British Virgin Islands Investments $ 2,596,782 $ 195,492 81 100 $ 2,722,779 $ 12,596 $ 12,596 Subsidiary Semiconductor Corporation CMSC, Inc. Hsinchu City, Taiwan Integrated circuit design services and related 112,650 112,650 9,902 25 61,440 40,143 10,012 Investment accounted businesses for using equity method Quora Technology, Inc. Delaware, USA Semiconductor research and development related 166,175 - 5,000 33 147,553 (65,798) (21,174) Investment accounted businesses ( USD 5,000) ( USD 4,583) ( USD (2,038)) ( USD (656)) for using equity method 169 Semiconductor Corporation Vanguard International Vanguard International Semiconductor Corporation

DECLARATION OF CONSOLIDATION OF FINANCIAL STATEMENTS OF AFFILIATES

The companies required to be included in the consolidated financial statements of affiliates in accordance with the “Criteria Governing Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises” for the year ended December 31, 2016 are all the same as the companies required to be included in the consolidated financial statements of parent and subsidiary companies as provided in International Financial Reporting Standard NO.10 “Consolidated Financial Statements”. Relevant information that should be disclosed in the consolidated financial statements of affiliates has all been disclosed in the consolidated financial statements of parent and subsidiary companies. Hence, we do not prepare a separate set of consolidated financial statements of affiliates.

Very truly yours,

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION

By

LEUH FANG Chairman

February 21, 2017

170 Vanguard International Semiconductor Corporation

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders Vanguard International Semiconductor Corporation

Opinion

We have audited the accompanying consolidated financial statements of Vanguard International Semiconductor Corporation and its subsidiaries (the Group), which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2016 and 2015, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China.

Basis for Opinion

We conducted our audits in accordance with the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with The Norm of Professional Ethics for Certified Public Accountant of the Republic of China, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2016. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

The key audit matters of the consolidated financial statements of the Group for the year ended December 31, 2016, are described as follows:

Timing of revenue recognition

1. The sales revenue of the Group is material to the Group. Please refer to Note 24. The major types of transactions together with their timing of recognition are as follows:

1) Revenue generated from domestic shipment with the transaction term of ex-works accounted for approximately 58% of total revenue and is recognized as sales revenue at point of ex-factory. Revenue generated from domestic shipment with the transaction term of delivered-at-place accounted for 27% of

171 Vanguard International Semiconductor Corporation

total revenue and is also recognized at point of ex-factory due to its nature of the goods delivering and receiving are at the same day.

2) Revenue generated from oversea shipment accounted for 15% of the total revenue depending on the trade terms where the revenue is recognized when the risk of goods is transferred to customers.

2. Revenues generated from either domestic or foreign shipments whose trade terms denote that the revenues are recognized at point of ex-factory consist of 98% of total revenue. The recognition process of revenue thereof is to have sales personnel verify the shipment on the computer system, and the system automatically recognizes the sale revenue and issues invoice. When the customers or their designated forwarders come to withdraw the goods, warehouse personnel will have them sign off on handheld devices and transmit the information to the shipping system. The system automatically checks the shipment on a daily basis. For goods that are not withdrawn, the system will notify sales personnel for confirmation and delete the shipping list where the sales revenue will be reversed automatically and the invoice cancelled.

3. Since the above process consists of manual controls, risk exists that revenue before or after the end of the reporting period being unrecognized in the appropriate period due to human errors.

4. We reviewed the revenue recognition policy of the Group, assessed the reasonableness of the revenue recognition, conducted on-site observation and recorded the details of the last shipment of the year ended 2016. We also traced all of the shipping records at December 31, 2016 against relevant supporting documents and accounting records to verify the accuracy of the timing of sales revenue recognition as well as the monetary amount, and evaluated whether the risk and rewards of goods are transferred.

Timing of capitalization of property, plant and equipment

1. The annual capital expenditure of the Group relating to property, plant and equipment is significant to its consolidated financial statements. Because of the significance of such expenditure, delaying in capitalization thereof may lead to the consolidated financial statements not fairly presented. Please refer to Note 16.

2. We reviewed the capital expenditure policy of the Group on property, plant and equipment, assessed the reasonableness of the timing of capitalization, and conducted procedures as follows:

1) Selecting samples of newly acquired items from the lists of Advance Payments and Construction in Progress of the year to verify whether they are included in the un-capitalized list of the current month.

2) Selecting samples from those that are transferred from Advance Payments and Construction in Progress to Property, Plant and Equipment of the year to verify whether such items are not included in the un-capitalized list of the current month.

3) Selecting samples from the un-capitalized list at the year end and perform on-site count to observe whether such items were not ready for their intended use.

4) Selecting samples of items that were not capitalized over three months from the un-capitalized list to examine whether the reasons of such items not capitalized explained by applicants or users were approved by supervisors.

Other Matter

We have also audited the parent company only financial statements of Vanguard International Semiconductor Corporation as of and for the years ended December 31, 2016 and 2015 on which we have issued an unmodified opinion.

172 Vanguard International Semiconductor Corporation

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance, including the audit committee, are responsible for overseeing the Group’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the auditing standards generally accepted in the Republic of China will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with the auditing standards generally accepted in the Republic of China, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

1. Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

4. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.

5. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

173 Vanguard International Semiconductor Corporation

6. Obtain sufficient and appropriate audit evidence regarding the financial information of entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements for the year ended December 31, 2016 and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partners on the audit resulting in this independent auditors’ report are Yu-Feng Huang and Cheng-Chih Lin.

Deloitte & Touche Taipei, Taiwan Republic of China

February 21, 2017

Notice to Readers

The accompanying consolidated financial statements are intended only to present the consolidated financial position, financial performance and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such consolidated financial statements are those generally applied in the Republic of China.

For the convenience of readers, the independent auditors’ report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent auditors’ report and consolidated financial statements shall prevail.

174 VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

2016 2015 2016 2015 ASSETS Amount % Amount % LIABILITIES AND EQUITY Amount % Amount %

CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents (Notes 4 and 6) $ 17,564,903 50 $ 17,950,847 56 Financial liabilities at fair value through profit or loss - Financial assets at fair value through profit or loss - current current (Notes 4, 7 and 30) $ 43,029 - $ 28,474 - (Notes 4, 7 and 30) 1,428,086 4 1,097,895 3 Derivative financial liabilities for hedging - current (Notes 4, 10 Available-for-sale financial assets - current (Notes 4, 8 and 30) 64,386 - - - and 30) - - 7,020 - Held-to-maturity financial assets - current (Notes 4, 5, 9 and 30) - - 139,502 - Notes and accounts payable 1,130,381 3 878,126 3 Notes and accounts receivable, net (Notes 4, 5 and 12) 3,348,347 10 2,519,513 8 Accrued profit sharing to employees and remuneration to directors Receivables from related parties (Notes 4, 5 and 31) 613,214 2 533,935 2 (Note 25) 845,903 3 637,226 2 Other receivables (Note 4) 152,654 - 127,125 - Payables to contractors and equipment suppliers 264,273 1 201,154 1 Other receivables from related parties (Notes 4 and 31) 824 - 15,084 - Other payables (Note 19) 2,151,482 6 1,727,097 5 Inventories (Notes 4, 5 and 13) 2,199,775 6 2,250,611 7 Other payables to related parties (Note 31) 85,670 - 67,754 - Prepaid expenses 191,347 1 163,541 1 Current income tax liabilities (Notes 4 and 26) 604,714 2 497,129 2 Other current assets (Notes 4, 18 and 30) 99,385 - 2,696 - Provisions - current (Notes 4, 5 and 21) 236,336 1 136,576 - Other current liabilities (Note 20) 114,884 - 81,445 - Total current assets 25,662,921 73 24,800,749 77 Total current liabilities 5,476,672 16 4,262,001 13 NON-CURRENT ASSETS Available-for-sale financial assets - non-current (Notes 4, 8 and NON-CURRENT LIABILITIES 30) 503,681 2 88,731 - Deferred income tax liabilities (Notes 4 and 26) 82,723 - 67,494 - Held-to-maturity financial assets - non-current (Notes 4, 5, 9 and Net defined benefit liabilities - non-current (Notes 4, 5 and 22) 708,353 2 630,992 2 30) 1,888,367 5 - - Other non-current liabilities (Note 31) 13,031 - 14,125 -

175 Financial assets carried at cost - non-current (Notes 4 and 11) 85,327 - 82,497 - Investments accounted for using equity method (Notes 4 and 15) 208,993 1 77,861 - Total non-current liabilities 804,107 2 712,611 2 Property, plant and equipment (Notes 4 and 16) 6,284,081 18 6,979,397 22 Intangible assets (Notes 4 and 17) 30,282 - 41,596 - Total liabilities 6,280,779 18 4,974,612 15 Deferred income tax assets (Notes 4, 5 and 26) 8,050 - 5,411 - Refundable deposits 4,636 - 4,447 - EQUITY (Notes 4 and 23) Other non-current assets (Notes 4, 18 and 32) 303,704 1 303,552 1 Capital stock Common stock 16,389,823 47 16,389,823 50 Total non-current assets 9,317,121 27 7,583,492 23 Capital surplus 862,594 2 855,123 3 Retained earnings Legal reserve 3,506,771 10 3,091,013 10 Special reserve 115,811 - 70,506 - Unappropriated earnings 7,862,220 23 7,118,975 22 Total retained earnings 11,484,802 33 10,280,494 32 Other equity (37,956) - (115,811) -

Total equity 28,699,263 82 27,409,629 85

TOTAL ASSETS $ 34,980,042 100 $ 32,384,241 100 TOTAL LIABILITIES AND EQUITY $ 34,980,042 100 $ 32,384,241 100

The accompanying notes are an integral part of the consolidated financial statements. Semiconductor Corporation Vanguard International Vanguard International Semiconductor Corporation

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)

2016 2015 Amount % Amount %

NET REVENUE (Notes 4, 5, 21, 24 and 31) $ 25,828,634 100 $ 23,319,721 100

COST OF REVENUE (Notes 4, 13, 25 and 31) 16,904,482 65 16,422,455 70

GROSS PROFIT 8,924,152 35 6,897,266 30

OPERATING EXPENSES (Notes 4, 25 and 31) Marketing 274,542 1 202,581 1 General and administrative 993,201 4 842,438 4 Research and development 1,555,504 6 1,240,265 5

Total operating expenses 2,823,247 11 2,285,284 10

OPERATING INCOME 6,100,905 24 4,611,982 20

NONOPERATING INCOME AND EXPENSES (Note 4) Interest income 170,492 1 197,218 1 Dividend income 24,003 - 21,004 - Other income (Note 31) 83,450 - 71,834 - Gain on disposal of property, plant and equipment 2,634 - 28 - Gain (loss) on financial assets and liabilities at fair value through profit or loss 195,683 1 (146,066) (1) (Loss) gain on disposal of investment (Notes 11 and 15) (76) - 22,354 - Net foreign exchange (loss) gain (188,002) (1) 171,002 1 Impairment loss on financial assets (Notes 8 and 11) (120,000) (1) (7,900) - Share of losses of associates and joint ventures (Note 15) (8,995) - (2,945) -

Total nonoperating income and expenses 159,189 - 326,529 1

INCOME BEFORE INCOME TAX 6,260,094 24 4,938,511 21

INCOME TAX EXPENSE (Notes 4 and 26) (722,169) (3) (780,928) (3)

NET INCOME 5,537,925 21 4,157,583 18 (Continued)

176 Vanguard International Semiconductor Corporation

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)

2016 2015 Amount % Amount %

OTHER COMPREHENSIVE INCOME (Notes 4 and 23) Items that will not be reclassified subsequently to profit or loss: Remeasurement of defined benefit plans (Note 22) $ (72,263) - $ (16,581) - Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations 2,496 - 9,567 - Unrealized gain (loss) on available-for-sale financial assets 74,911 - (54,307) - Cash flow hedges - - (70) - Share of other comprehensive income (loss) of associates and joint ventures (Note 15) 448 - (495) -

Total other comprehensive income (loss) 5,592 - (61,886) -

TOTAL COMPREHENSIVE INCOME $ 5,543,517 21 $ 4,095,697 18

NET INCOME ATTRIBUTABLE TO Owner of the Corporation $ 5,537,925 21 $ 4,157,583 18 Non-controlling interests - - - -

$ 5,537,925 21 $ 4,157,583 18

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO Owner of the Corporation $ 5,543,517 21 $ 4,095,697 18 Non-controlling interests - - - -

$ 5,543,517 21 $ 4,095,697 18

EARNINGS PER SHARE (Note 27) Basic $3.38 $ 2.54 Diluted $3.35 $ 2.50

The accompanying notes are an integral part of the consolidated financial statements. (Concluded)

177 Semiconductor Corporation Vanguard International VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

Other Equity Exchange Differences on Unrealized Retained Earnings Translation of (Losses) Gains on Unappropriated Foreign Available-for-sale Capital Stock Capital Surplus Legal Reserve Special Reserve Earnings Operations Financial Assets Cash Flow Hedges Treasury Stock Total Equity

BALANCE, JANUARY 1, 2015 $ 16,389,823 $ 838,029 $ 2,547,224 $ 53,700 $ 7,797,921 $ (50,082) $ (20,494) $ 70 $ (9,875) $ 27,546,316

Appropriation of prior year's earnings Legal reserve - - 543,789 - (543,789) - - - - - Special reserve - - - 16,806 (16,806) - - - - - Cash dividends - 26% - - - - (4,259,353) - - - - (4,259,353)

Changes in capital surplus from investment in associates and joint ventures accounted for using equity method - 4,120 ------4,120

Net income for the year ended December 31, 2015 - - - - 4,157,583 - - - - 4,157,583

Other comprehensive income for the year ended December 31, 2015 - - - - (16,581) 9,072 (54,307) (70) - (61,886)

Total comprehensive income for the year ended December 31, 2015 - - - - 4,141,002 9,072 (54,307) (70) - 4,095,697 178 Disposal of investments accounted for using equity method (Note 15) - (18,398) ------(18,398)

Share-based payment transaction - 31,372 ------9,875 41,247

BALANCE, DECEMBER 31, 2015 16,389,823 855,123 3,091,013 70,506 7,118,975 (41,010) (74,801) - - 27,409,629

Appropriation of prior year's earnings Legal reserve - - 415,758 - (415,758) - - - - - Special reserve - - - 45,305 (45,305) - - - - - Cash dividends - 26% - - - - (4,261,354) - - - - (4,261,354)

Changes in capital surplus from investment in associates and joint ventures accounted for using equity method - 7,680 ------7,680

Net income for the year ended December 31, 2016 - - - - 5,537,925 - - - - 5,537,925

Other comprehensive income for the year ended December 31, 2016 - - - - (72,263) 2,944 74,911 - - 5,592

Total comprehensive income for the year ended December 31, 2016 - - - - 5,465,662 2,944 74,911 - - 5,543,517

Disposal of investments accounted for using equity method (Note 15) - (209) ------(209)

BALANCE, DECEMBER 31, 2016 $ 16,389,823 $ 862,594 $ 3,506,771 $ 115,811 $ 7,862,220 $ (38,066) $ 110 $ - $ - $ 28,699,263

The accompanying notes are an integral part of the consolidated financial statements. Vanguard International Semiconductor Corporation

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

2016 2015

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax $ 6,260,094 $ 4,938,511 Adjustments for: Depreciation 2,032,173 2,303,949 Amortization 21,061 15,347 Net (gain) loss on financial assets and liabilities at fair value through profit or loss (4,096) 1,118 Interest income (170,492) (197,218) Dividend income (24,003) (21,004) Share-based payment - 31,374 Share of loss of associates and joint ventures 8,995 2,945 Gain on disposal of property, plant and equipment (2,634) (28) Loss (gain) on disposal of investments 76 (22,354) Impairment loss on financial assets 120,000 7,900 Net loss on foreign currency exchange 6,527 6,968 Changes in operating assets and liabilities: Financial assets held for trading 1,276 504,866 Notes and accounts receivable (828,834) 741,931 Receivable from related parties (79,279) 195,236 Other receivables (15,209) 12,907 Other receivables from related parties 14,260 3,431 Inventories 50,836 247,789 Prepaid expenses (27,833) (49,291) Other current assets (92) 99 Financial liabilities held for trading 14,555 (62,110) Derivative financial liabilities for hedging (7,020) (8,186) Notes and accounts payable 252,255 (281,940) Other payables 424,385 7,580 Other payables to related parties 17,916 (40,781) Provisions 99,760 25,670 Other current liabilities 33,439 (6,275) Net defined benefit liabilities 5,098 1,305 Accrued profit sharing to employees and remuneration to directors 208,677 (213,257) Cash generated from operations 8,411,891 8,146,482 Interest received 163,401 198,568 Income tax paid (602,057) (1,162,614)

Net cash provided by operating activities 7,973,235 7,182,436 (Continued)

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VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

2016 2015

CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of financial assets designated as fair value through profit or loss $ (1,909,981) $ (1,342,920) Proceeds from disposal of financial assets designated as fair value through profit or loss 1,582,610 549,963 Acquisitions of available-for-sale financial assets (525,947) - Acquisitions of held-to-maturity financial assets (2,133,864) (141,305) Proceeds from disposal of held-to-maturity financial assets 399,090 - Acquisitions of financial assets measured at cost (32,610) - Proceeds from disposal of financial assets measured at cost 38,187 - Acquisitions of investment accounted for using equity method (166,175) - Proceeds from disposal of investment accounted for using equity method 19,633 - Acquisitions of property, plant and equipment (1,279,436) (1,501,118) Proceeds from disposal of property, plant and equipment 6,573 28 (Increase) decrease in refundable deposits (189) 793 Acquisitions of intangible assets (10,132) (26,731) (Increase) decrease in other financial assets (102,331) 383,748 Dividends received 24,003 21,004

Net cash used in investing activities (4,090,569) (2,056,538)

CASH FLOWS FROM FINANCING ACTIVITIES Decrease in other non-current liabilities (1,094) (85,232) Cash dividends (4,261,354) (4,259,353) Treasury stock transferred to employees - 9,873

Net cash used in financing activities (4,262,448) (4,334,712)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (6,162) 9,926

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (385,944) 801,112

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 17,950,847 17,149,735

CASH AND CASH EQUIVALENTS, END OF YEAR $ 17,564,903 $ 17,950,847

The accompanying notes are an integral part of the consolidated financial statements. (Concluded)

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VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

1. ORGANIZATION

Vanguard International Semiconductor Corporation (the “Corporation”) was incorporated in Hsinchu Science-based Industrial Park in December 1994 and commenced business in January 1995. The Corporation engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks.

The Corporation’s shares have been traded over the counter on the Republic of China (ROC) GreTai Securities Market since March 25, 1998.

The functional currency of the Corporation is New Taiwan dollars. The consolidated financial statements are presented in New Taiwan dollars.

2. APPROVAL OF FINANCIAL STATEMENTS

The consolidated financial statements were approved and authorized for issue by the Board of Directors on February 21, 2017.

3. APPLICATION OF NEW REVISED STANDARDS, AMENDMENTS AND INTERPRETATIONS

a. Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC) endorsed by the FSC for application starting from 2017

Rule No. 1050050021 and Rule No. 1050026834 issued by the FSC stipulated that starting January 1, 2017, the Group should apply the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRS, IAS, IFRIC and SIC (collectively, the “IFRSs”) issued by the IASB and endorsed by the FSC for application starting from 2017.

New, Amended or Revised Standards and Interpretations Effective Date (the “New IFRSs”) Announced by IASB (Note 1)

Annual Improvements to IFRSs 2010-2012 Cycle July 1, 2014 (Note 2) Annual Improvements to IFRSs 2011-2013 Cycle July 1, 2014 Annual Improvements to IFRSs 2012-2014 Cycle January 1, 2016 (Note 3) Amendments to IFRS 10, IFRS 12 and IAS 28“'Investment Entities: January 1, 2016 Applying the Consolidation Exception” Amendment to IFRS 11 “Accounting for Acquisitions of Interests in January 1, 2016 Joint Operations” IFRS 14 “Regulatory Deferral Accounts” January 1, 2016 Amendment to IAS 1 “Disclosure Initiative” January 1, 2016 (Continued)

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New, Amended or Revised Standards and Interpretations Effective Date (the “New IFRSs”) Announced by IASB (Note 1)

Amendments to IAS 16 and IAS 38 “Clarification of Acceptable January 1, 2016 Methods of Depreciation and Amortization” Amendments to IAS 16 and IAS 41 “Agriculture: Bearer Plants” January 1, 2016 Amendment to IAS 19 “Defined Benefit Plans: Employee July 1, 2014 Contributions” Amendment to IAS 27 “Equity Method in Separate Financial January 1, 2016 Statements” Amendment to IAS 36 “Impairment of Assets: Recoverable Amount January 1, 2014 Disclosures for Non-financial Assets” Amendment to IAS 39 “Novation of Derivatives and Continuation of January 1, 2014 Hedge Accounting” IFRIC 21 “Levies” January 1, 2014 (Concluded)

Note 1: Unless stated otherwise, the above new or amended IFRSs are effective for annual periods beginning on or after their respective effective dates.

Note 2: The amendment to IFRS 2 applies to share-based payment transactions with grant date on or after July 1, 2014; the amendment to IFRS 3 applies to business combinations with acquisition date on or after July 1, 2014; the amendment to IFRS 13 is effective immediately; the remaining amendments are effective for annual periods beginning on or after July 1, 2014.

Note 3: The amendment to IFRS 5 is applied prospectively to changes in a method of disposal that occur in annual periods beginning on or after January 1, 2016; the remaining amendments are effective for annual periods beginning on or after January 1, 2016.

The initial application in 2017 of the above IFRSs and related amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers would not have any material impact on the Group’s accounting policies, except for the following:

1) Amendment to IFRS 8 “Operating Segments”

IFRS 8 was amended by the Annual Improvements to IFRSs: 2010-2012 Cycle to require disclosure of the judgments made by management in applying the aggregation criteria to operating segments, including a description of the operating segments aggregated and the economic indicators assessed in determining whether the operating segments have “similar economic characteristics”. The amendment also clarifies that a reconciliation of the total of the reportable segments’ assets to the entity’s assets should only be provided if the segments’ assets are regularly provided to the chief operating decision-maker. The application of the amendment in 2017 is expected to have no impact.

2) Amendments to IFRS 13 “Fair Value Measurement”

The basis for conclusions of IFRS 13 was amended by the Annual Improvements to IFRSs: 2010-2012 Cycle to clarify that when the amendment becomes effective in 2017, the short-term receivables and payables with no stated interest rate will be measured at their invoice amounts without discounting, if the effect of not discounting is immaterial. Otherwise, the material effect of discounting will be adjusted retrospectively. The application of the amendment in 2017 is expected to have no impact.

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3) Amendment to IAS 24 “Related Party Disclosures”

IAS 24 was amended by the Annual Improvements to IFRSs: 2010-2012 Cycle to clarify that a management entity providing key management personnel services to the Group is a related party of the Group. Consequently, the Group is required to disclose as related party transactions the amounts incurred for the service paid or payable to the management entity for the provision of key management personnel services. However, disclosure of the components of such compensation is not required. The application of the amendment in 2017 is expected to have no impact.

4) Amendment to IAS 36 “Impairment of Assets”

The amendment “Disclosures for Non-financial Assets” clarifies that the recoverable amount of an asset or a cash-generating unit is disclosed only when an impairment loss on the asset has been recognized or reversed during the period. Furthermore, if the recoverable amount of an item of property, plant and equipment for which impairment loss has been recognized or reversed is fair value less costs of disposal, the Group is required to disclose the fair value hierarchy. If the fair value measurements are categorized within Level 2/Level 3, the valuation technique and key assumptions used to measure the fair value are disclosed. The discount rate used is disclosed if such fair value less costs of disposal is measured by using present value technique. The amendment will be applied retrospectively.

5) Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers

The amendments include additions of several accounting items and requirements for disclosures of impairment of non-financial assets as a consequence of the IFRSs endorsed by the FSC for application starting from 2017. In addition, as a result of the post implementation review of IFRSs in Taiwan, the amendments also include emphasis on certain recognition and measurement considerations and add requirements for disclosures of related party transactions and goodwill.

The amendments stipulate that other companies or institutions of which the chairman of the board of directors or president serves as the chairman of the board of directors or the president, or is the spouse or second immediate family of the chairman of the board of directors or president of the Group are deemed to have a substantive related party relationship, unless it can be demonstrated that no control, joint control, or significant influence exists. Furthermore, the amendments require the disclosure of the names of the related parties and the relationship with whom the Group has significant transaction. If the transaction or balance with a specific related party is 10% or more of the Group’s respective total transaction or balance, such transaction should be separately disclosed by the name of each related party.

The amendments also require additional disclosure if there is a significant difference between the actual operation after business combination and the expected benefit on acquisition date.

The disclosures of related party transactions will be enhanced when the above amendments are retrospectively applied in 2017.

Except for the above impacts, as of the date the consolidated financial statements were authorized for issue, the Group continues assessing other possible impacts that application of the aforementioned amendments and the related amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers will have on the Group’s financial position and financial performance, and will disclose these other impacts when the assessment is completed. b. New IFRSs in issue but not yet endorsed by the FSC

The Group has not applied the following IFRSs issued by the IASB but not yet endorsed by the FSC.

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The FSC announced that amendments to IFRS 4 (only the overlay approach can be applied), IFRS 9 and IFRS 15 will take effect starting January 1, 2018. As of the date the consolidated financial statements were authorized for issue, the FSC has not announced the effective dates of other new IFRSs.

Effective Date New IFRSs Announced by IASB (Note 1)

Annual Improvements to IFRSs 2014-2016 Cycle Note 2 Amendment to IFRS 2 “Classification and Measurement of January 1, 2018 Share-based Payment Transactions” Amendment to IFRS 4 “Applying IFRS 9 Financial Instruments with January 1, 2018 IFRS 4 Insurance Contracts” IFRS 9 “Financial Instruments” January 1, 2018 Amendments to IFRS 9 and IFRS 7 “Mandatory Effective Date of January 1, 2018 IFRS 9 and Transition Disclosures” Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets To be determined by IASB between an Investor and its Associate or Joint Venture” IFRS 15 “Revenue from Contracts with Customers” January 1, 2018 Amendments to IFRS 15 “Clarifications to IFRS15 Revenue from January 1, 2018 Contracts with Customers” IFRS 16 “Leases” January 1, 2019 Amendment to IAS 7 “Disclosure Initiative” January 1, 2017 ‡†‡–•–‘ ͳʹ“‡ ‘‰‹–‹‘‘ˆ‡ˆ‡””‡†ƒš••‡–•ˆ‘” January 1, 2017 ”‡ƒŽ‹œ‡†‘••‡•” Amendments to IAS 40 “Transfers of investment property” January 1, 2018 IFRIC 22 “Foreign Currency Transactions and Advance January 1, 2018 Consideration”

Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on or after their respective effective dates.

Note 2: The amendment to IFRS 12 is retrospectively applied for annual periods beginning on or after January 1, 2017; the amendment to IAS 28 is retrospectively applied for annual periods beginning on or after January 1, 2018.

1) IFRS 9 “Financial Instruments”

Recognition and measurement of financial assets

With regards to financial assets, all recognized financial assets that are within the scope of IAS 39 “Financial Instruments: Recognition and Measurement” are subsequently measured at amortized cost or fair value. Under IFRS 9, the requirement for the classification of financial assets is stated below.

For the Group’s debt instruments that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, their classification and measurement are as follows:

a) For debt instruments, if they are held within a business model whose objective is to collect the contractual cash flows, the financial assets are measured at amortized cost and are assessed for impairment continuously with impairment loss recognized in profit or loss, if any. Interest revenue is recognized in profit or loss by using the effective interest method;

184 Vanguard International Semiconductor Corporation

b) For debt instruments, if they are held within a business model whose objective is achieved by both the collecting of contractual cash flows and the selling of financial assets, the financial assets are measured at fair value through other comprehensive income (FVTOCI) and are assessed for impairment. Interest revenue is recognized in profit or loss by using the effective interest method, and other gain or loss shall be recognized in other comprehensive income, except for impairment gains or losses and foreign exchange gains and losses. When the debt instruments are derecognized or reclassified, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss.

Except for above, all other financial assets are measured at fair value through profit or loss. However, the Group may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss. No subsequent impairment assessment is required, and the cumulative gains or losses previously recognized in other comprehensive income cannot be reclassified from equity to profit or loss.

Impairment of financial assets

IFRS 9 requires that impairment loss on financial assets is recognized by using the “Expected Credit Losses Model”. The credit loss allowance is required for financial assets measured at amortized cost, financial assets mandatorily measured at FVTOCI, lease receivables, contract assets arising from IFRS 15 “Revenue from Contracts with Customers”, certain written loan commitments and financial guarantee contracts. A loss allowance for the 12-month expected credit losses is required for a financial asset if its credit risk has not increased significantly since initial recognition. A loss allowance for full lifetime expected credit losses is required for a financial asset if its credit risk has increased significantly since initial recognition and is not low. However, a loss allowance for full lifetime expected credit losses is required for trade receivables that do not constitute a financing transaction.

For purchased or originated credit-impaired financial assets, the Group takes into account the expected credit losses on initial recognition in calculating the credit-adjusted effective interest rate. Subsequently, any changes in expected losses are recognized as a loss allowance with a corresponding gain or loss recognized in profit or loss.

Hedge accounting

The main changes in hedge accounting amended the application requirements for hedge accounting to better reflect the entity’s risk management activities. Compared with IAS 39, the main changes include: (1) enhancing types of transactions eligible for hedge accounting, specifically broadening the risk eligible for hedge accounting of non-financial items; (2) changing the way hedging derivative instruments are accounted for to reduce profit or loss volatility; and (3) replacing retrospective effectiveness assessment with the principle of economic relationship between the hedging instrument and the hedged item.

Transition

Financial instruments that have been derecognized prior to the effective date of IFRS 9 cannot be reversed to apply IFRS 9 when it becomes effective. Under IFRS 9, the requirements for classification, measurement and impairment of financial assets are applied retrospectively with the difference between the previous carrying amount and the carrying amount at the date of initial application recognized in the current period and restatement of prior periods is not required. The requirements for general hedge accounting shall be applied prospectively and the accounting for hedging options shall be applied retrospectively.

185 Vanguard International Semiconductor Corporation

2) Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture”

The amendments stipulated that, when an entity sells or contributes assets that constitute a business (as defined in IFRS 3) to an associate or joint venture, the gain or loss resulting from the transaction is recognized in full. Also, when an entity loses control of a subsidiary that contains a business but retains significant influence or joint control, the gain or loss resulting from the transaction is recognized in full.

Conversely, when an entity sells or contributes assets that do not constitute a business to an associate or joint venture, the gain or loss resulting from the transaction is recognized only to the extent of the unrelated investors’ interest in the associate or joint venture, i.e. the entity’s share of the gain or loss is eliminated. Also, when an entity loses control of a subsidiary that does not contain a business but retains significant influence or joint control in an associate or a joint venture, the gain or loss resulting from the transaction is recognized only to the extent of the unrelated investors’ interest in the associate or joint venture, i.e. the entity’s share of the gain or loss is eliminated.

3) IFRS 15 “Revenue from Contracts with Customers” and related amendment

IFRS 15 establishes principles for recognizing revenue that apply to all contracts with customers, and will supersedes IAS 18 “Revenue”, IAS 11 “Construction Contracts” and a number of revenue-related interpretations.

When applying IFRS 15, an entity shall recognize revenue by applying the following steps:

z Identify the contract with the customer; z Identify the performance obligations in the contract; z Determine the transaction price; z Allocate the transaction price to the performance obligations in the contract; and z Recognize revenue when the entity satisfies a performance obligation.

In identifying performance obligations, IFRS 15 and related amendment require that a good or service is distinct if it is capable of being distinct (for example, the Group regularly sells it separately) and the promise to transfer it is distinct within the context of the contract (i.e. the nature of the promise in the contract is to transfer each of those goods or services individually rather than to transfer combined items).

When IFRS 15 and related amendment are effective, an entity may elect to apply this Standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this Standard recognized at the date of initial application.

4) IFRS 16 “Leases”

IFRS 16 sets out the accounting standards for leases that will supersede IAS 17 and a number of related interpretations.

Under IFRS 16, if the Group is a lessee, it shall recognize right-of-use assets and lease liabilities for all leases on the consolidated balance sheets except for low-value and short-term leases. The Group may elect to apply the accounting method similar to the accounting for operating lease under IAS 17 to the low-value and short-term leases. On the consolidated statements of comprehensive income, the Group should present the depreciation expense charged on the right-of-use asset separately from interest expense accrued on the lease liability; interest is computed by using effective interest method. On the consolidated statements of cash flows, cash payments for the principal portion of the lease liability are classified within financing activities; cash payments for interest portion are classified within operating activities.

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The application of IFRS 16 is not expected to have a material impact on the accounting of the Group as lessor.

When IFRS 16 becomes effective, the Group may elect to apply this Standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the initial application of this Standard recognized at the date of initial application.

5) Amendments to IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses”

The amendment clarifies that the difference between the carrying amount of the debt instrument measured at fair value and its tax base gives rise to a temporary difference, even though there are unrealized losses on that asset, irrespective of whether the Group expects to recover the carrying amount of the debt instrument by sale or by holding it and collecting contractual cash flows.

In addition, in determining whether to recognize a deferred tax asset, the Group should assess a deductible temporary difference in combination with all of its other deductible temporary differences, unless the tax law restricts the utilization of losses to deduction against income of a specific type, in which case, a deductible temporary difference is assessed in combination only with other deductible temporary differences of the appropriate type. The amendment also stipulates that, when determining whether to recognize a deferred tax asset, the estimate of probable future taxable profit may include some of the Group’s assets for more than their carrying amount if there is sufficient evidence that it is probable that the Group will achieve this, and that the estimate for future taxable profit should exclude tax deductions resulting from the reversal of deductible temporary differences.

6) IFRIC 22 ȸForeign Currency Transactions and Advance Consideration”

IAS 21 stipulated that a foreign currency transaction shall be recorded on initial recognition in the functional currency by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. IFRIC 22 further explains that the date of the transaction is the date on which an entity recognizes a non-monetary asset or non-monetary liability from payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the entity shall determine the date of the transaction for each payment or receipt of advance consideration.

The Group shall apply IFRIC 22 either retrospectively or prospectively to all assets, expenses and income in the scope of the Interpretation initially recognized on or after (a) the beginning of the reporting period in which the entity first applies IFRIC 22, or (b) the beginning of a prior reporting period presented as comparative information in the financial statements of the reporting period in which the entity first applies IFRIC 22

Except for the above impact, as of the date the consolidated financial statements were authorized for issue, the Group is continuously assessing the possible impact that the application of other standards and interpretations will have on the Group’s financial position and financial performance, and will disclose the relevant impact when the assessment is completed.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICY

a. Statement of compliance

The consolidated financial statements have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and IFRSs endorsed by the FSC.

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b. Basis of preparation

The consolidated financial statements have been prepared on the historical cost basis except for financial instruments which are measured at fair values.

The fair value measurements, where are grouped into Levels 1 to 3 based on the degree to which the fair value measurement inputs are observable and base on the significance of the inputs to the fair value measurement in its entirety, are described as follows:

1) Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

2) Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

3) Level 3 inputs are unobservable inputs for the asset or liability.

c. Classification of current and non-current assets and liabilities

Current assets include:

1) Assets held primarily for the purpose of trading;

2) Assets expected to be realized within 12 months after the reporting period; and

3) Cash and cash equivalents unless the asset is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.

Current liabilities include:

1) Liabilities held primarily for the purpose of trading;

2) Liabilities due to be settled within 12 months after the reporting period; and

3) Liabilities for which the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting period.

Assets and liabilities that are not classified as current are classified as non-current.

d. Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Corporation and the entities controlled by the Corporation (its subsidiaries).

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those used by the Corporation.

All intra-group transactions, balances, income and expenses are eliminated in full upon consolidation.

See Note 14 and Table 6 for the detail information of the subsidiaries.

e. Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions.

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At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items arising from settlement or translation are recognized in profit or loss in the period in which they arise except for exchange differences on transactions entered into in order to hedge certain foreign currency risks.

Non-monetary items measured at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Exchange differences arising from the retranslation of non-monetary items are included in profit or loss for the period except for exchange differences arising from the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which case, the exchange differences are also recognized directly in other comprehensive income.

Non-monetary items that are measured at historical cost in a foreign currency are not retranslated.

For the purpose of presenting consolidated financial statements, the functional currencies of the Corporation and the Group entities (including subsidiaries, associates, joint ventures and branches in other countries that use currency different from the currency of the Corporation) are translated into the presentation currency - New Taiwan dollars as follows: Assets and liabilities are translated at the exchange rates prevailing at the end of the reporting period; income and expense items are translated at the average exchange rates for the period. The resulting currency translation differences are recognized in other comprehensive income.

A disposal of the Group’s entire interest in a foreign operation all of the exchange differences accumulated in equity in respect of that operation are reclassified to profit or loss. f. Inventories

Inventories consist of raw materials, supplies and spare parts, work-in-process and finished goods and are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and cost necessary to make the sale. Inventories are recorded at the weighted-average cost on the balance sheet date. g. Investment in associates

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture.

The Corporation uses the equity method to account for its investments in associates.

Under the equity method, investment in an associate is initially recognized at cost and adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income of the associate. The Group also recognized the changes in the share of equity of associates.

When the Group subscribes for additional new shares of the associate at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of the Group’s proportionate interest in the associate. The Group records such a difference as an adjustment to investments with the corresponding amount charged or credited to capital surplus - changes in the Group’s share of the equity of associates. If the Group’s ownership interest is reduced due to the additional subscription of the new shares of associate, the proportionate amount of the gains or losses previously recognized in other comprehensive income in relation to that associate is reclassified to profit or loss on the same basis as would be required if the investee had directly disposed of the related assets or liabilities. When the adjustment should be debited to capital surplus, but the capital surplus recognized from investments accounted for by the equity method is insufficient, the shortage is debited to retained earnings.

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The entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its recoverable amount with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.

The Group discontinues the use of the equity method from the date on which its investment ceases to be an associate. Any retained investment is measured at fair value at that date and the fair value is regarded as its fair value on initial recognition as a financial asset. The difference between the previous carrying amount of the associate attributable to the retained interest and its fair value is included in the determination of the gain or loss on disposal of the associate. The Group accounts for all amounts previously recognized in other comprehensive income in relation to that associate and the joint venture on the same basis as would be required if that associate had directly disposed of the related assets or liabilities.

When a group entity transacts with its associate, profits and losses resulting from the transactions with the associate are recognized in the Group’ consolidated financial statements only to the extent that interests in the associate that are not related to the Group.

h. Property, plant, and equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and accumulated impairment loss.

Depreciation on property, plant, and equipment is recognized using the straight-line method. Each significant part is depreciated separately. The estimated useful lives, residual values and depreciation method are reviewed at the end of each year, with the effect of any changes in estimates accounted for on a prospective basis.

On derecognition of an item of property, plant and equipment, the difference between the disposal proceeds and the carrying amount of the asset is recognized in profit or loss.

i. Intangible assets

1) Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are initially measured at cost and subsequently measured at cost less accumulated amortization and accumulated impairment loss. Amortization is recognized on a straight-line basis. The estimated useful life, residual value, and amortization method are reviewed at the end of each year, with the effect of any changes in estimates accounted for on a prospective basis.

2) Internally-generated intangible assets - research and development expenditure

Expenditure on research activities is recognized as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from the development phase of an internal project is recognized if, and only if, all of the following have been demonstrated:

a) The technical feasibility of completing the intangible asset so that it will be available for use or sale;

b) The intention to complete the intangible asset and use or sell it;

c) The ability to use or sell the intangible asset;

d) How the intangible asset will generate probable future economic benefits;

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e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

f) The ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognized for internally-generated intangible assets is the aggregate of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Subsequent to initial recognition, they are measured on the same basis as intangible assets that are acquired separately.

3) Derecognition of intangible assets

On derecognition of an intangible asset, the difference between the net disposal proceeds and the carrying amount of the asset is recognized in profit or loss. j. Impairment of tangible and intangible assets other than goodwill

At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets, excluding goodwill, to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

The recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount, with the resulting impairment loss recognized in profit or loss.

When an impairment loss subsequently is reversed, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but only to the extent of the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized in profit or loss. k. Financial instruments

Financial assets and financial liabilities are recognized when the Group becomes a party to the contractual provisions of the instruments.

Financial assets and financial liabilities are initially recognized at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets

All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis.

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1) Measurement category

Financial assets are classified into the following categories: Financial assets at fair value through profit or loss, held-to-maturity financial assets, available-for-sale financial assets and loans and receivables.

a) Financial assets at fair value through profit or loss

Financial assets are classified as at fair value through profit or loss when the financial asset is either held for trading or it is designated as at fair value through profit or loss.

A financial asset may be designated as at fair value through profit or loss upon initial recognition if:

i) Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

ii) The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and evaluated performance on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

iii) The contract contains one or more embedded derivatives so that the entire hybrid (combined) contract can be designated as at fair value through profit or loss.

Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset. Fair value is determined in the manner described in Note 30.

b) Held-to-maturity financial assets

The corporate bonds which the Group invests in and has positive intent and ability to hold to maturity are classified as held-to-maturity financial assets.

Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method less any impairment.

c) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as loans and receivables, held-to-maturity financial assets or financial assets at fair value through profit or loss.

Available-for-sale financial assets are measured at fair value. Changes in the carrying amounts of available-for-sale monetary financial assets relating to changes in foreign currency exchange rates, interest income calculated using the effective interest method and dividends on available-for-sale equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognized in other comprehensive income and will be reclassified to profit or loss when the investment is disposed of or is determined to be impaired.

Dividends on available-for-sale equity instruments are recognized in profit or loss when the Group’s right to receive the dividends is established.

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Available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment loss at the end of each reporting period and are presented in a separate line item as financial assets carried at cost. If, in a subsequent period, the fair value of the financial assets can be reliably measured, the financial assets are remeasured at fair value. The difference between carrying amount and fair value is recognized in other comprehensive income on financial assets. Any impairment losses are recognized in profit and loss.

d) Loans and receivables

Loans and receivables (including cash and cash equivalent, accounts receivable, other receivables, and other financial assets) are measured at amortized cost using the effective interest method, less any impairment, except for short-term receivables when the effect of discounting is immaterial.

Cash equivalent includes time deposits and repurchase bonds, which are highly liquid, readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. These cash equivalents are held for the purpose of meeting short-term cash commitments.

2) Impairment of financial assets

Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

Objective evidence of impairment could include: significant financial difficulty of the debtor; or it becoming probable that the debtor will enter bankruptcy or financial reorganization.; or a default or delinquency in interest or principal payments; or extension of the maturity date; or significant financial difficulty of the final issuer or debtor; or disappearance of an active market for that financial asset because of the issuer’s financial difficulties or other reasons.

Accounts receivable that are assessed as not impaired individually are further assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of accounts receivable could include the Group’s past experience in the collection of payments, an increase in the number of delayed payments, as well as observable changes in national or local economic conditions that correlate with defaults on receivables.

For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the financial assets at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

For available-for-sale equity investments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

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For all other financial assets, objective evidence of impairment could include:

a) Significant financial difficulty of the issuer or counterparty; or

b) Breach of contract, such as a default or delinquency in interest or principal payments; or

c) It is becoming probable that the borrower will enter bankruptcy or financial re-organization; or

d) The disappearance of an active market for that financial asset because of financial difficulties.

When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the period.

In respect of available-for-sale equity securities, impairment loss previously recognized in profit or loss is not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income. In respect of available-for-sale debt securities, the impairment loss is subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.

For financial assets that are carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. When trade receivables are considered uncollectible, they are written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss except for uncollectible trade receivables that are written off against the allowance account.

3) Derecognition of financial assets

The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income is recognized in profit or loss.

Equity instruments

Equity instruments issued by a group entity are classified as equity in accordance with the substance of the contractual arrangements and the definitions of an equity instrument.

Equity instruments issued by a group entity are recognized at the proceeds received, net of direct issue costs.

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Financial liabilities

1) Subsequent measurement

Except the following situation, all the financial liabilities are measured at amortized cost using the effective interest method.

Financial liabilities at fair value through profit or loss

Financial liabilities are classified as at fair value through profit or loss when the financial liability is either held for trading or is designated as at fair value through profit or loss.

Financial liabilities held for trading are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any interest or dividend paid for the financial liability. Fair value is determined in the manner described in Note 30.

2) Derecognition of financial liabilities

The difference between the carrying amount of the financial liability derecognized and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss.

Derivative financial instruments

The Group enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risks, including foreign exchange forward contracts and currency-swap contracts.

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. When the fair value of derivative financial instruments is positive, the derivative is recognized as a financial asset; when the fair value of derivative financial instruments is negative, the derivative is recognized as a financial liability.

Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the contracts are not measured at fair value through profit or loss. l. Hedge accounting

The Group designates certain hedging instruments, which include derivatives in respect of foreign currency risk, as both fair value hedges and cash flow hedges. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges.

1) Fair value hedges

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in profit or loss in the line item relating to the hedged item.

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Hedge accounting is discontinued prospectively when the Group revokes the designated hedging relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when the hedging instrument no longer meets the criteria for hedge accounting.

2) Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss.

The associated gains or losses that were recognized in other comprehensive income are reclassified from equity to profit or loss as a reclassification adjustment in the same period when the hedged items affect profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the associated gains and losses that were recognized in other comprehensive income are removed from equity and included in the initial cost of the non-financial asset or non-financial liability.

Hedge accounting is discontinued prospectively when the Group revokes the designated hedging relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when the hedging instrument no longer meets the criteria for hedge accounting. The cumulative gain or loss on the hedging instrument that has been previously recognized in other comprehensive income from the period when the hedge was effective remains separately in equity until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in profit or loss.

m. Provisions

Provisions are measured at the best estimate of the discounted cash flows of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation.

n. Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Sales returns are recognized at the time of sale according to the reliable estimate of future returns based on past experience and other relevant factors.

1) Sale of goods

Revenue from the sale of goods is recognized when all the following conditions are satisfied:

a) The Group has transferred to the buyer the significant risks and rewards of ownership of the goods;

b) The Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

c) The amount of revenue can be measured reliably;

d) It is probable that the economic benefits associated with the transaction will flow to the Group; and

e) The costs incurred or to be incurred in respect of the transaction can be measured reliably.

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The Group does not recognize sales revenue on materials delivered to subcontractors because this delivery does not involve a transfer of risks and rewards of materials ownership.

2) Dividend and interest income

Dividend income from investments is recognized when the shareholder’s right to receive payment has been established provided that it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably.

Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. Interest income is accrued on a time basis by reference to the principal outstanding and at the applicable effective interest rate. o. Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

1) The Group as lessor

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Contingent rents are recognized as income in the period in which they are incurred.

2) The Group as lessee

Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Contingent rents are recognized as an expense in the period in which they are incurred. p. Employee benefits

1) Short-term employee benefits

Liabilities recognized in respect of short-term employee benefits are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service.

2) Retirement benefits

Payments to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions.

Defined benefit costs (including service cost, net interest and remeasurement) under defined benefit retirement benefit plans are determined using the projected unit credit method. Service cost (including current service cost) and net interest on the net defined benefit liability are recognized as employee benefits expense in the period they occur. Remeasurement, comprising actuarial gains and losses and the return on plan assets (excluding interest), is recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss.

Net defined benefit liability represents the actual deficit in the Group’s defined benefit plan.

3) Termination benefits

A liability for a termination benefit is recognized at the earlier of when the Group can no longer withdraw the offer of the termination benefit and when the Group recognizes any related restructuring costs.

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q. Share-based payment arrangements

Employee stock options granted to employee

The fair value at the grant date of the employee share options is expensed on a straight-line basis over the vesting period, based on the Group’s best estimates of the number of shares or options that are expected to ultimately vest, with a corresponding increase in capital surplus - employee stock options. It is recognized as an expense in full at the grate date if vesting immediately.

At the end of each reporting period, the Group revises its estimate of the number of employee share options expected to vest.

r. Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

1) Current tax

According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as income tax in the year the shareholders approve to retain the earnings.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

2) Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences and loss carryforwards. Deferred tax assets are generally recognized for all deductible temporary differences probable that taxable profits will be available against which those deductible temporary differences and loss carryforwards can be utilized.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. A previously unrecognized deferred tax asset is also reviewed at the end of each reporting period and recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

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3) Current and deferred tax for the year

Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred taxes are also recognized in other comprehensive income or directly in equity, respectively.

s. Treasury stocks

Repurchase of the Group’s own equity instruments (treasury stocks) is recognized and deducted directly from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments.

5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Group’s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

a. Revenue recognition

The Group recognizes revenue when the conditions described in Note 4 (n) are satisfied. The Group also records a provision for estimated future returns and other allowances in the same period the related revenue is recorded. Provision for estimated sales returns and other allowances is generally made and adjusted at a specific percentage based on historical experience and any known factors that would significantly affect the allowance, and our management periodically reviews the adequacy of the percentage used.

As of December 31, 2016 and 2015, the Group recognized provisions for estimated sales returns and other allowances of $236,336 thousand and $136,576 thousand, respectively.

b. Held-to-maturity financial assets

Management has reviewed the Group’s held-to-maturity financial assets in light of its capital maintenance and liquidity requirements and has confirmed the Group’s positive intention and ability to hold those assets to maturity.

c. Income taxes

As of December 31, 2016 and 2015, the carrying amount of the deferred tax assets in relation to unused tax losses was $25,920 thousand and $28,515 thousand, respectively. As of December 31, 2016 and 2015, no deferred tax asset has been recognized on the tax losses of $20,543 thousand and $26,046 thousand, respectively, due to the unpredictability of future profit streams. The realizability of the deferred tax asset mainly depends on whether sufficient future profits or taxable temporary differences will be available. In cases where the actual future profits generated are less than expected, a material reversal of deferred tax assets may arise, which would be recognized in profit or loss for the period in which such reversal takes place.

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d. Estimated impairment of accounts receivable

When there is objective evidence of impairment loss, the Group takes into consideration the estimation of future cash flows. The amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. Where the actual future cash flows are less than expected, a material impairment loss may arise.

e. Write-down of inventory

The net realizable value of inventory is the estimated selling price in the ordinary course of business less the estimated costs of completion and disposal. The estimation of net realizable value was based on current market conditions and the historical experience with product sales of a similar nature. Changes in market conditions may have a material impact on the estimation of the net realizable value.

f. Recognition and measurement of defined benefit plans

The net defined benefit liabilities and the resulting defined benefit costs under the defined benefit pension plans are calculated using the projected unit credit method. Actuarial assumptions comprise the discount rate, rate of employee turnover, future salary increase, etc. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of expenses and liabilities.

6. CASH AND CASH EQUIVALENTS

December 31 2016 2015

Deposits in bank $ 16,023,446 $ 16,764,202 Cash equivalents Bonds acquired under resale agreements 1,541,457 1,186,645

$ 17,564,903 $ 17,950,847

The market rate intervals of cash and cash equivalents at the end of the reporting period were as follows:

December 31 2016 2015

Bank deposits 0%-1.70% 0%-4.10% Bonds acquired under resale agreements 0.42%-1.50% 0.35%-5.10%

7. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

December 31 2016 2015

Financial assets designated as at FVTPL

Credit linked notes (a) $ 715,491 $ 1,094,381 Interest rate linked notes (a) 612,427 - Exchange linked notes (a) 96,613 - 1,424,531 1,094,381 (Continued)

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December 31 2016 2015

Financial assets held for trading

Derivative financial assets (not designated as hedging instruments) Forward exchange contracts (b) $ 1,098 $ 3,514 Currency-swap contracts (c) 2,457 - 3,555 3,514

Financial assets at FVTPL-current $ 1,428,086 $ 1,097,895

Financial liabilities held for trading

Derivative financial liabilities (not designated as hedging instruments) Forward exchange contracts (b) $ 42,073 $ 15,720 Currency-swap contracts (c) 956 12,754

Financial liabilities at FVTPL-current $ 43,029 $ 28,474 (Concluded) a. The Group entered into structured investment contracts with a bank in 2016 and 2015. The structured investment contracts included embedded derivative instruments which were not closely related to the host contracts. The Group designated the entire contract as financial asset at FVTPL on initial recognition. b. At the end of the reporting period, outstanding forward exchange contracts that did not meet the criteria of hedge accounting were as follows: Contract Amount Currency Maturity Date (In Thousands)

December 31, 2016

Sell forward exchange contracts US$ to NT$ 2017.01.03-2017.05.11 US$ 158,000

December 31, 2015

Sell forward exchange contracts US$ to NT$ 2016.01.04-2016.05.06 US$ 130,000 c. At the end of the reporting period, outstanding currency-swap contracts that did not meet the criteria of hedge accounting were as follows: Contract Amount Currency Maturity Date (In Thousands)

December 31, 2016

Sell forward exchange contracts US$ to NT$ 2017.01.03-2017.01.24 US$ 11,000 Buy forward exchange contracts US$ to NT$ 2017.03.27 US$ 10,000

December 31, 2015

Sell forward exchange contracts US$ to NT$ 2016.01.07-2016.02.24 US$ 48,000

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The Group entered into foreign exchange forward contracts and currency-swap contracts during the years ended December 31, 2016 and 2015 to manage exposures due to exchange rate fluctuations of foreign currency denominated assets and liabilities.

8. AVAILABLE-FOR-SALE FINANCIAL ASSETS

December 31 2016 2015

Current

Foreign corporate bonds $ 64,386 $ -

Non-current

Listed stocks $ 43,648 $ 88,731 Domestic bonds 460,033 -

$ 503,681 $ 88,731

The Group recognized impairment loss of $120,000 thousand in 2016.

9. HELD-TO-MATURITY FINANCIAL ASSETS

December 31 2016 2015

Current

Foreign investments Volkswagen Int’l Finance N.V. bonds $ - $ 49,655 China Construction Bank Asia Co bonds - 44,928 China Minmetals Corp bonds - 44,919

$ - $ 139,502

Non-current

Foreign investments SUMIBK bonds $ 227,370 $ - QNB Finance Ltd. bonds 258,714 - Standard Chartered PLC bonds 280,144 - Bank of China Limited, Luxembourg Branch bonds 151,427 - Industrial and Commercial Bank of China Limited, Sydney Branch bonds 67,769 - China Construction Bank (Asia) Co., Ltd. bonds 149,993 - TSMC Global Ltd. bonds 257,351 - Mizuho Bank Ltd. bonds 258,683 - Bank of China (Hong Kong) Limited bonds 173,056 - Horsepower Finance Ltd. bonds 63,860 -

$ 1,888,367 $ -

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10. DERIVATIVE FINANCIAL INSTRUMENTS FOR HEDGING

December 31 2016 2015 Fair Value Fair Value Hedge Hedge

Derivative financial liabilities for hedging - current

Currency-swap contracts $ - $ 7,020

a. Fair value hedge

The Group used forward exchange contracts and currency-swap contracts to hedge risks on exchange rate fluctuations of foreign-currency denominated accounts receivable. The forward exchange contracts and currency-swap contracts had the same term as the respective financial assets; the management believed the forward exchange contracts and currency-swap contracts were highly effective hedge instruments.

The outstanding currency-swap contracts at the end of the reporting period were as follows:

Contract Amount Currency Maturity Date (In Thousands)

December 31, 2015

Sell forward exchange contracts US$ to NT$ 2016.01.19-2016.02.19 US$ 20,000

11. FINANCIAL ASSETS CARRIED AT COST - NON-CURRENT

December 31 2016 2015

Unlisted stocks $ 85,327 $ 82,497

Classification of financial assets Available-for-sale financial assets $ 85,327 $ 82,497

The management believed that the fair value of the aforementioned unlisted equity investments held by the Group cannot be reliably measured due to the range of reasonable fair value estimates was significant and the probabilities of the various estimates cannot be reasonably assessed. Therefore, the unlisted stocks were measured at cost less impairment at the end of the reporting period.

The Group sold its interest in Image Match Design Inc. with carrying amount of $10,000 thousand in August 2016 and recognized a gain of $14,925 thousand. The Group recognized $7,900 thousand of impairment loss in 2015 due to investee’s capital reduction to offset a deficit.

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12. NOTES AND ACCOUNTS RECEIVABLE, NET

December 31 2016 2015

Notes and accounts receivable $ 3,350,334 $ 2,521,500 Allowance for doubtful accounts (1,987) (1,987)

Notes and accounts receivable, net $ 3,348,347 $ 2,519,513

The average credit period on sales of goods was 30 to 45 days after month closing. No interest was charged on notes and accounts receivable. In determining the recoverability of a trade receivable, the Group considered any changes in the credit quality of the trade receivable since the date credit was initially granted to the end of the reporting period. Allowance for doubtful accounts was based on estimated irrecoverable amounts determined by reference to past default experience of the counterparts and an analysis of their current financial position.

For the accounts receivable balance that were past due at the end of the reporting period, the Group had not recognized an allowance for doubtful accounts since there had not been a significant change in the credit quality of its customers and the amounts were still considered recoverable.

The aging analyses of notes and accounts receivable were as follows:

December 31 Past Due Days 2016 2015

Not past due and not impaired 0 days $ 3,290,278 $ 2,470,291 Past due but not impaired Less than 60 days 24,548 44,432 61-90 days 35,479 6,162 More than 90 days 29 615 60,056 51,209

$ 3,350,334 $ 2,521,500

The above aging analyses were based on the past due dates.

Movements of the allowance for doubtful accounts were as follows:

Years Ended December 31 2016 2015

Balance, beginning of year $ 1,987 $ 1,987 Add: Provision - -

Balance, end of year $ 1,987 $ 1,987

The Group had no impairment loss recognized on the accounts receivable during the years ended December 31, 2016 and 2015.

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13. INVENTORIES

December 31 2016 2015

Finished goods $ 202,723 $ 314,299 Work in process 1,212,579 1,181,419 Raw materials 431,448 377,668 Supplies and spare parts 353,025 377,225

$ 2,199,775 $ 2,250,611

The write-downs of inventories included in the cost of revenue were as below:

Years Ended December 31 2016 2015

Provision of inventory valuation and obsolescence losses $ 16,449 $ 69,547

For the years ended December 31, 2016 and 2015, cost of revenue included unallocated manufacturing overheads amounted of $130,382 thousand, and $703,284 thousand, respectively.

14. SUBSIDIARIES

Subsidiaries included in the consolidated financial statements

Proportion of Ownership December 31 Investor Investee Nature of Business 2016 2015

Vanguard International VIS Associates Inc. Investments 100% 100% Semiconductor Corporation VIS Associates Inc. Specialty TechFarm, Inc. Investments - 100% VIS Associates Inc. VIS Investment Holding, Inc. Investments 100% 100% VIS Investment Holding, Inc. VIS Micro, Inc. Marketing service 100% 100%

Specialty TechFarm, Inc. completed liquidation in April 2016.

15. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

Investments in associates

December 31 2016 2015

Associates individually immaterial

CMSC, Inc. $ 61,440 $ 51,439 Quora Technology, Inc. 147,553 - SkyTraq Technology, Inc. - 26,422

$ 208,993 $ 77,861

Refer to Table 6 “Information on Investees” for the nature of business, principal place of business and country of incorporation of the associates.

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Aggregate information of associates that are not individually material

Years Ended December 31 2016 2015

The Group’s share of: Loss from continuing operations $ (8,995) $ (2,945) Other comprehensive income (loss) 448 (495)

Total comprehensive loss for the year $ (8,547) $ (3,440)

The Group sold all of its interest in SkyTraq Technology Inc. in February 2016. This transaction resulted in the recognition of a loss of $9,326 thousand.

In March 2016, the Group subscribed 5,000 thousand shares of preferred stocks of Quora Technology, Inc. in cash amounting to $166,175 thousand. The Group’s percentage of ownership in Quora Technology Inc. was 31.04% and exercised significant influence over Quora Technology, Inc. As of December 31, 2016, the Group’s percentage of ownership in Quora Technology Inc. was 32.76%.

INNO-TECH Co., Ltd., which was originally accounted for using equity method, conducted the election of directors and supervisors in June 2015 with the result that the Group no longer exercises significant influence. The 13% interest held by the Group with a fair value of US$353 thousand was changed to be treated as a financial asset carried at cost. For the year ended December 31, 2015, due to the above transaction, the Group recognized $22,354 thousand of gain on disposal of investment which include write-off the exchange differences on translation of foreign operations and retained capital surplus and the difference of fair value.

The investments in associates accounted for using the equity method, the share of net profit or loss and the share of other comprehensive (loss) income from investments were calculated based on the unaudited financial statements. The Group’s management considered the use of unaudited financial statements of the investees did not have material impact on its consolidated financial statements.

16. PROPERTY, PLANT AND EQUIPMENT

Advance Payments and Machinery and Other Construction Buildings Equipment Equipment in Progress Total

Cost

Balance, January 1, 2015 $ 14,608,573 $ 54,611,302 $ 388,191 $ 1,084,408 $ 70,692,474 Additions 397,617 1,761,332 8,349 (874,691) 1,292,607 Disposal - (42,993) (3,366) - (46,359) Reclassified - 6,302 660 - 6,962 Translation adjustments - - 73 - 73

Balance, December 31, 2015 $ 15,006,190 $ 56,335,943 $ 393,907 $ 209,717 $ 71,945,757

Accumulated depreciation

Balance, January 1, 2015 $ 11,477,893 $ 50,696,476 $ 350,817 $ - $ 62,525,186 Depreciation 621,831 1,669,656 12,462 - 2,303,949 Disposal - (42,993) (3,366) - (46,359) Translation adjustments - - 63 - 63

Balance, December 31, 2015 $ 12,099,724 $ 52,323,139 $ 359,976 $ - $ 64,782,839 (Continued)

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Advance Payments and Machinery and Other Construction Buildings Equipment Equipment in Progress Total

Accumulated impairment

Balance, January 1, 2015 and December 31, 2015 $ - $ 183,521 $ - $ - $ 183,521

Carrying amounts on December 31, 2015 $ 2,906,466 $ 3,829,283 $ 33,931 $ 209,717 $ 6,979,397

Cost

Balance, January 1, 2016 $ 15,006,190 $ 56,335,943 $ 393,907 $ 209,717 $ 71,945,757 Additions 79,335 984,319 3,129 273,637 1,340,420 Disposal (5,028) (16,688) (390) - (22,106) Reclassified - - 385 - 385 Translation adjustments - - (43) - (43)

Balance, December 31, 2016 $ 15,080,497 $ 57,303,574 $ 396,988 $ 483,354 $ 73,264,413

Accumulated depreciation

Balance, January 1, 2016 $ 12,099,724 $ 52,323,139 $ 359,976 $ - $ 64,782,839 Depreciation 606,511 1,414,817 10,845 - 2,032,173 Disposal (1,089) (16,688) (390) - (18,167) Translation adjustments - - (34) - (34)

Balance, December 31, 2016 $ 12,705,146 $ 53,721,268 $ 370,397 $ - $ 66,796,811

Accumulated impairment

Balance, January 1, 2016 and December 31, 2016 $ - $ 183,521 $ - $ - $ 183,521

Carrying amounts on December 31, 2016 $ 2,375,351 $ 3,398,785 $ 26,591 $ 483,354 $ 6,284,081 (Concluded)

The above items of property, plant and equipment were depreciated on a straight-line basis over the estimated useful lives as follows:

Buildings Main plants 20 years Mechanical and electrical power equipment 5 to 10 years Clean rooms 10 years Machinery and equipment 3 to 5 years Other equipment 3 to 7 years

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17. INTANGIBLE ASSETS

Years Ended December 31 2016 2015

Computer software

Cost Balance, January 1 $ 779,436 $ 760,644 Additions 10,132 26,731 Disposal (200) (977) Reclassified to property, plant and equipment (385) (6,962) Balance, December 31 788,983 779,436

Accumulated amortization Balance, January 1 737,840 723,470 Amortization 21,061 15,347 Disposal (200) (977) Balance, December 31 758,701 737,840

Carrying amount, end of year $ 30,282 $ 41,596

Intangible assets were amortized on a straight-line basis over the estimated useful lives as follows:

Computer software 3 to 5 years

18. OTHER ASSETS

December 31 2016 2015

Pledged time deposit $ 303,704 $ 303,552 Other financial assets 96,597 - Others 2,788 2,696

$ 403,089 $ 306,248

Current $ 99,385 $ 2,696 Non-current 303,704 303,552

$ 403,089 $ 306,248

19. OTHER PAYABLES

December 31 2016 2015

Bonus $ 742,580 $ 503,849 Maintenance 506,275 381,115 Utilities 124,321 145,776 Others 778,306 696,357

$ 2,151,482 $ 1,727,097

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20. OTHER CURRENT LIABILITIES

December 31 2016 2015

Advance receipts $ 109,809 $ 81,073 Others 5,075 372

$ 114,884 $ 81,445

21. PROVISIONS - CURRENT

December 31 2016 2015

Sales returns and allowances $ 236,336 $ 136,576

The provision of sales returns and allowances was estimated based on historical experience, management’s judgments and any other known factors that would affect the returns and allowances. The provision was recognized as a reduction of revenue in the periods of the related products sold.

22. RETIREMENT BENEFIT PLANS

a. Defined contribution plans

The Corporation adopted a pension plan under the Labor Pension Act (the “LPA”), which is a state-managed defined contribution plan. Under the LPA, the Corporation makes monthly contributions to employees’ individual pension accounts at 6% of monthly salaries and wages. Besides, VIS Micro is required by local regulations to make monthly contributions at certain percentage of the basic salary of their employees.

b. Defined benefit plans

The Corporation adopted the defined benefit plan under the Labor Standards Law and the “Pension Plan of Senior Management” of the Corporation. Pension benefits are calculated on the basis of the length of service and average monthly salaries of the 6 months before retirement. The Corporation contributes amounts equal to 2% of total monthly salaries and wages to a pension fund administered by the pension fund monitoring committee. Pension contributions are deposited in the Bank of Taiwan in the committee’s name. Before the end of each year, the Corporation assesses the balance in the pension fund. If the amount of the balance in the pension fund is inadequate to pay retirement benefits for employees who conform to retirement requirements in the next year, the Corporation is required to fund the difference in one appropriation that should be made before the end of March of the next year. The pension fund is managed by the Bureau of Labor Funds, Ministry of Labor (“the Bureau”); the Corporation has no right to influence the investment policy and strategy.

The amounts included in the consolidated balance sheets in respect of the Group’s defined benefit plans were as follows: December 31 2016 2015

Present value of defined benefit obligation $ 1,034,785 $ 970,547 Fair value of plan assets (326,432) (339,555)

Net defined benefit liability $ 708,353 $ 630,992

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Movements in net defined benefit liability were as follows:

Present Value of Defined Net Defined Benefit Fair Value of Benefit Obligation Plan Assets Liability

Balance at January 1, 2015 $ 953,437 $ (340,331) $ 613,106 Service cost Current service cost 24,247 - 24,247 Interest expense (income) 21,306 (7,683) 13,623 Recognized in profit or loss 45,553 (7,683) 37,870 Remeasurement Return on plan assets (excluding amounts included in net interest) - (1,272) (1,272) Actuarial loss - changes in financial assumptions 46,228 - 46,228 Actuarial gain - experience adjustments (28,375) - (28,375) Recognized in other comprehensive income 17,853 (1,272) 16,581 Contributions from the employer - (14,485) (14,485) Benefits paid (46,296) 24,216 (22,080) Balance at December 31, 2015 970,547 (339,555) 630,992 Service cost Current service cost 7,419 - 7,419 Interest expense (income) 18,364 (6,518) 11,846 Recognized in profit or loss 25,783 (6,518) 19,265 Remeasurement Return on plan assets (excluding amounts included in net interest) - 4,157 4,157 Actuarial loss - changes in financial assumptions 54,189 - 54,189 Actuarial loss - experience adjustments 13,917 - 13,917 Recognized in other comprehensive income 68,106 4,157 72,263 Contributions from the employer - (14,167) (14,167) Benefits paid (29,651) 29,651 -

Balance at December 31, 2016 $ 1,034,785 $ (326,432) $ 708,353

Through the defined benefit plans under the Labor Standards Law, the Group is exposed to the following risks:

1) Investment risk: The plan assets are invested in domestic/foreign equity and debt securities, bank deposits, etc. The investment is conducted at the discretion of the Bureau or under the mandated management. However, in accordance with relevant regulations, the return generated by plan assets should not be below the interest rate for a 2-year time deposit with local banks.

2) Interest risk: A decrease in the government bond interest rate will increase the present value of the defined benefit obligation; however, this will be partially offset by an increase in the return on the debt investments of the plan assets.

3) Salary risk: The present value of the defined benefit obligation is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the present value of the defined benefit obligation.

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The actuarial valuations of the present value of the defined benefit obligation were carried out by qualified actuaries. The principal assumptions used for the purposes of the actuarial valuations were as follows:

December 31 2016 2015

Discount rates 1.50% 1.90% Expected rates of salary increase 3.50% 3.50%

If possible reasonable change in each of the significant actuarial assumptions will occur and all other assumptions will remain constant, the present value of the defined benefit obligation would increase (decrease) as follows:

December 31 2016 2015

Discount rates 0.50% increase $ (67,148) $ (68,251) 0.50% decrease $ 73,416 $ 67,741

Expected rates of salary increase 0.50% increase $ 71,595 $ 66,260 0.50% decrease $ (66,229) $ (67,605)

The sensitivity analysis presented above may not be representative of the actual change in the present value of the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

December 31 2016 2015

The expected contributions to the plan for the next year $ 14,663 $ 14,992

The average duration of the defined benefit obligation 13.7 years 14.9 years

Maturity analyses of pension benefit were as follows:

December 31 2016 2015

Maturity analysis of undiscounted pension benefit No later than 1 year $ 13,754 $ 8,044 Later than 1 year and not later than 5 years 102,104 123,406 Later than 5 years 1,174,944 1,189,049

$ 1,290,802 $ 1,320,499

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23. EQUITY

a. Capital stock

Common stock

December 31 2016 2015

Authorized shares (in thousands) 3,300,000 3,300,000 Authorized capital $ 33,000,000 $ 33,000,000 Issued and fully paid shares (in thousands) 1,638,982 1,638,982

Issued capital $ 16,389,823 $ 16,389,823

The authorized shares include 300,000 thousand shares reserved for the exercise of employee stock options.

b. Capital Surplus

December 31 2016 2015

May be used to offset a deficit, distributed by cash, or transferred to capital

Arising from issuance of common stock $ 544,884 $ 544,884

May be used to offset a deficit only

Arising from employee stock options (transferred and inactive) 285,845 285,845 Arising from share of changes in equities of subsidiaries, associates and joint ventures 31,865 24,394

$ 862,594 $ 855,123

The capital surplus from stock issued in excess of par may be used to offset a deficit; in addition, when the Group has no deficit, such capital surplus may be distributed in cash or stock transferred to capital, which are limited to a certain percentage of the Group’s paid-in capital.

c. Retained earnings and dividend policy

In accordance with the amendments to the Company Act in May 2015, the recipients of dividends and bonuses are limited to shareholders and do not include employees. The shareholders held their regular meeting on June 7, 2016 and, in that meeting, had resolved amendments to the Corporation’s Articles of Incorporation (the “Articles”), particularly the amendment to the policy on dividend distribution and the addition of the policy on distribution of employees’ compensation and remuneration to directors.

Under the dividend policy as set forth in the amended Articles, where the Corporation made profit in a fiscal year, the profit shall be first utilized for paying taxes, offsetting losses of previous years, setting aside as legal reserve 10% of the remaining profit, setting aside or reversing special reserve in accordance with the laws and regulations, and then any remaining profit together with any undistributed retained earnings shall be used by the Corporation’s board of directors as the basis for proposing a distribution plan, which should be resolved in the shareholders’ meeting for distribution of dividends and bonus to shareholders. For the policies on distribution of employees’ compensation and

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remuneration to directors before and after amendment, please refer to b. Employee benefits expense in Note 25.

The Corporation’s Articles also stipulate that all profits may be distributed after taking into consideration to financial, business and operational factors. Dividends are in cash and/or in the form of stock. Since the Corporation’s operation is at the steady growth stage, the cash dividend paid (in any given year) should be at least 60% of the dividends of the current year’s appropriation. If there is no profit for distribution, or the profit is far less than the profit actually distributed by the Corporation in the previous year or other reasons so require, all or part of the capital surplus may be distributed in accordance with relevant laws or regulations of the authorities in charge.

Appropriation of earnings to legal reserve shall be made until the legal reserve equals the Corporation’s paid-in capital. Legal reserve may be used to offset deficit. If the Corporation has no deficit and the legal reserve has exceeded 25% of the Corporation’s paid-in capital, the excess may be transferred to capital or distributed in cash.

The Corporation appropriates or reverses a special reserve in accordance with Rule No. 1010012865 and Rule No. 1010047490 issued by the FSC and the directive titled “Questions and Answers for Special Reserves Appropriated Following Adoption of IFRSs”. Distributions can be made out of any subsequent reversal of the debit to other equity items.

Except for non-ROC resident shareholders, other shareholders receiving the dividends are allowed a tax credit equal to their proportionate share of the income tax paid by the Corporation.

The appropriations of earnings for 2015 and 2014 have been approved in the shareholders’ meeting on June 7, 2016 and June 8, 2015, respectively, were as follows:

Appropriations of Earnings Dividends Per Share (NT$) 2015 2014 2015 2014

Provision of legal reserve $ 415,758 $ 543,789 $ - $ - Provision of special reserve 45,305 16,806 - - Cash dividends 4,261,354 4,259,353 2.60 2.60

$ 4,722,417 $ 4,819,948

The appropriation of earnings for 2016 had been proposed by the Corporation’s board of directors on February 21, 2017. The appropriation and dividends per share were as follows:

Appropriation Dividend Per of Earnings Share (NT$)

Provision of legal reserve $ 553,793 $ - Reversal of special reserve (77,854) - Cash dividend 4,916,947 3.00

The appropriation of earnings for 2016 are subject to the resolution of the shareholders’ meeting to be held on June 16, 2017.

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d. Other equity

1) Exchange differences on translation of foreign operations

Years Ended December 31 2016 2015

Balance, beginning of year $ (41,010) $ (50,082) Exchange differences arising from translation of foreign operations 2,496 11,078 Share of exchange differences of associates accounted for using equity method (237) (495) Disposal of foreign associate 685 (1,511)

Balance, end of year $ (38,066) $ (41,010)

2) Unrealized gain (loss) on available-for-sale financial assets

Years Ended December 31 2016 2015

Balance, beginning of year $ (74,801) $ (20,494) Unrealized gain (loss) arising from available-for-sale financial assets 74,911 (54,307)

Balance, end of year $ 110 $ (74,801)

Unrealized gains or losses on available-for-sale financial assets represent the cumulative gains or losses arising from the revaluation of available-for-sale financial assets that have been recognized in other comprehensive income netting the amounts reclassified to profit or loss when those assets have been disposed of or are determined to be impaired.

3) Cash flow hedges

Years Ended December 31 2016 2015

Balance, beginning of year $ - $ 70 Loss arising from changes in fair value of hedging instruments Currency-swap contracts - (70)

Balance, end of year $ - $ -

The cash flow hedges represent the cumulative gains or losses arising from changes in fair value of the hedging instruments entered into as cash flow hedges. The cumulative gains or losses will be reclassified to profit or loss only when the hedge transaction affects the profit or loss, or used for adjusting the recognition of the non-financial hedged item.

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e. Treasury stock

(Shares in Thousands)

Number of Shares, Addition Reduction Number of Beginning of During the During the Shares, End of Purpose of Treasury Stock Year Year Year Year

Year ended December 31, 2015

Transfer to employees 770 - (770) -

The Corporation held a meeting of the Board of Directors and approved a share buyback plan to repurchase the Corporation’s common shares up to 76,160 thousand shares from the GreTai Securities Market during the period from December 16, 2011 to February 15, 2012 with buyback prices in the range from NT$8 to NT$15. The Corporation had repurchased 44,525 thousand shares.

The Corporation held a meeting of the Board of Directors and approved a share buyback plan to repurchase the Corporation’s common shares up to 31,635 thousand shares from the GreTai Securities Market during the period from February 20, 2012 to April 19, 2012 with buyback prices in the range from NT$10 to NT$16. The Corporation had repurchased 31,635 thousand common shares.

Under the Securities and Exchange Act of the R.O.C., the Corporation shall neither pledge its treasury stock nor exercise rights to receive dividends and vote.

Treasury stocks were granted on March 1, 2012, and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $ 12.70 Exercise price (NT$) 11.49 Expected volatility 30.12%-31.53% Expected life 2 years Risk-free interest rate 0.8012%

Treasury stocks were granted on April 25, 2012, and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $ 13.35 Exercise price (NT$) 12.83 Expected volatility 29.46%-29.72% Expected life 2 years Risk-free interest rate 0.8442%

Treasury stocks were granted on August 2, 2013, and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $ 31 Exercise price (NT$) 12.83 Expected volatility 42.85% Expected life 1 year Risk-free interest rate 0.6952%

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Treasury stocks were granted on November 1, 2013, and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $ 32.35 Exercise price (NT$) 12.83 Expected volatility 43.26% Expected life 0.4822 year Risk-free interest rate 0.641%

Treasury stocks were granted on May 30, 2014, and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $ 46.5 Exercise price (NT$) 11.49-12.83 Expected volatility 45.9% Expected life 0.2027 year Risk-free interest rate 0.5329%

Treasury stocks were granted on December 1, 2014, and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $ 47.3 Exercise price (NT$) 12.83 Expected volatility 32.44% Expected life 0.0356 year Risk-free interest rate 0.4798%

Treasury stocks were granted on March 9, 2015 and determined their fair value by using the binomial option pricing model. The valuation assumptions were as follows:

Stock price on grant date (NT$) $ 53.6 Exercise price (NT$) 12.83 Expected volatility 32.425% Expected life 0.0301 year Risk-free interest rate 0.5885%

Expected volatility was based on the historical stock price volatility over the same period as the expected life of each treasury stocks at the date of grant. The yield of 2-year government bond was used as the risk-free interest rate.

Compensation cost recognized was $31,374 thousand for the year ended December 31, 2015.

24. REVENUE

Revenue of the Group for the years ended December 31, 2016 and 2015 were analyzed as follow: Years Ended December 31 2016 2015

Wafer foundry $ 25,469,353 $ 23,010,405 Other revenue 359,281 309,316

$ 25,828,634 $ 23,319,721

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The Group designated certain foreign sales as hedged items to hedge the risk of cash flow. Losses on the hedging instrument amounting to $10,692 thousand and $8,596 thousand that were determined to be an effective hedge were recognized as decrease of revenue for the years ended December 31, 2016 and 2015, respectively.

25. OTHER ITEMS IN THE STATEMENTS OF COMPREHENSIVE INCOME

a. Depreciation and amortization

Years Ended December 31 2016 2015

Property, plant and equipment $ 2,032,173 $ 2,303,949 Intangible assets 21,061 15,347

$ 2,053,234 $ 2,319,296

Classification of deprecation - by function Cost of revenue $ 1,980,762 $ 2,254,409 Operating expenses 51,411 49,540

$ 2,032,173 $ 2,303,949

Classification of amortization - by function Cost of revenue $ 10,643 $ 7,470 Operating expenses 10,418 7,877

$ 21,061 $ 15,347

b. Employee benefits expense

1) Employees’ compensation and remuneration to directors for 2016 and 2015

Years Ended December 31 2016 2015

Post-employment benefits (see Note 22) Defined contribution plans $ 197,904 $ 191,106 Defined benefit plans 19,265 37,870 217,169 228,976 Share-based payments (see Note 23) Equity-settled - 31,374 Other employee benefits 6,354,084 5,635,591

Total employee benefits expense $ 6,571,253 $ 5,895,941

Employee benefits expense summarized by function Cost of revenue $ 5,141,284 $ 4,762,693 Operating expenses 1,429,969 1,133,248

$ 6,571,253 $ 5,895,941

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In compliance with the Company Act as amended in May 2015 and the amendments to the Articles as resolved by the shareholders’ meeting on June 2016, the Corporation should distribute no less than 10% of the current year’s profit as employees’ compensation in the form of stock or in cash as resolved by the board of directors. The employees include those of subsidiaries meeting some conditions agreed by the board of directors. The Corporation should also distribute no higher than 1% of the current year’s profit as remuneration to directors. However, the Corporation’s accumulated losses shall have been covered. For the years ended December 31, 2016 and 2015, the employees’ compensation were $831,803 thousand and $623,638 thousand, respectively. For the years ended December 31, 2016 and 2015, the remuneration to directors were $14,100 thousand and $13,588 thousand, respectively. The above calculated were at a certain percentage of the base income.

If there is a change in the proposed amounts after the annual consolidated financial statements are authorized for issue, the differences are recorded as a change in accounting estimate.

The appropriations of employees’ compensation and remuneration to directors for 2016 and 2015 were resolved by the board of directors on February 21, 2017 and January 27, 2016, respectively. The amounts of the employees’ compensation and remuneration to directors are disclosed on the table below. After the amendments to the Articles resolving in the shareholder’s meeting on June 7, 2016, the appropriations of the employees’ compensation and remuneration to directors for 2015 were reported in the shareholders’ meeting.

Years Ended December 31 2016 2015 Cash Stock Cash Bonus Stock Bonus

Employee s’ compensation $ 831,803 $ - $ 623,638 $ - Remuneration to directors 14,100 - 13,384 -

The differences between the amounts of the remuneration to directors resolved by the board of directors on January 27, 2016 and the amounts recognized in consolidated financial statements for the year ended December 31, 2015 were adjusted to profit and loss in 2016.

Information on the employees’ compensation and remuneration to directors resolved by the Corporation’s board of directors in 2017 and 2016 is available at the Market Observation Post System website of the Taiwan Stock Exchange.

2) Bonus to employees and remuneration to directors for 2014

The bonus to employees and remuneration to directors for 2014 which have been approved in the shareholders’ meeting on June 8, 2015 were as follows:

Year Ended December 31, 2014 Cash Stock

Bonus to employees $ 815,683 $ - Remuneration to directors 34,800 -

There was no difference between the amounts of the bonus to employees and the remuneration to directors approved in the shareholders’ meeting on June 8, 2015 and the amounts recognized in the consolidated financial statements for the year ended December 31, 2014.

Information on the bonus to employees and remuneration to directors resolved by the shareholders in their meeting in 2015 is available at the Market Observation Post System website of the Taiwan Stock Exchange.

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26. INCOME TAXES

a. Major components of tax expenses recognized in profit or loss:

Years Ended December 31 2016 2015

Current tax In respect of the current year $ 868,365 $ 821,251 Adjustments for prior years’ tax (158,696) (1,914) Other (90) 146 709,579 819,483 Deferred income tax In respect of the current year 12,590 (38,555)

Income tax expenses recognized in profit or loss $ 722,169 $ 780,928

A reconciliation of accounting profit and income tax expenses were as follow:

Years Ended December 31 2016 2015

Income before income tax $ 6,260,094 $ 4,938,511

Income tax expense calculated at the statutory rate $ 1,065,124 $ 839,311 Additional items in determining taxable income 6,997 3,678 Tax-exempt income (206,770) (130,535) Income tax on unappropriated earnings - 56,913 The origination and reversal of temporary differences 18,571 13,329 Effect of tax on loss carryforward (2,967) - Adjustments for prior years’ tax (158,696) (1,914) Others (90) 146

Income tax expense recognized in profit or loss $ 722,169 $ 780,928

The Group applied a tax rate of 17% for entities subject to the Income Tax Law of the Republic of China; for other jurisdictions, the entities measures taxes by using the applicable tax rate for each individual jurisdiction.

As the status of 2017 appropriations of earnings is uncertain, the potential income tax consequences of 2016 unappropriated earnings are not reliably determinable.

b. Current tax liabilities

December 31 2016 2015

Current tax liabilities Income tax payable $ 604,714 $ 497,129

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c. Deferred income tax assets and liabilities

The movements of deferred income tax assets and liabilities were as follows:

For the year ended December 31, 2016

Balance, Beginning of Balance, End of Deferred Income Tax Assets Year Movements Year

Loss carryforwards $ 2,469 $ 2,908 $ 5,377 Temporary differences 2,942 (269) 2,673

$ 5,411 $ 2,639 $ 8,050

Balance, Beginning of Balance, End of Deferred Income Tax Liabilities Year Movements Year

Temporary differences $ 67,494 $ 15,229 $ 82,723

For the year ended December 31, 2015

Balance, Beginning of Balance, End of Deferred Income Tax Assets Year Movements Year

Loss carryforwards $ 2,372 $ 97 $ 2,469 Temporary differences 1,182 1,760 2,942

$ 3,554 $ 1,857 $ 5,411

Balance, Beginning of Balance, End of Deferred Income Tax Liabilities Year Movements Year

Temporary differences $ 104,192 $ (36,698) $ 67,494

d. Items for which no deferred income tax assets have been recognized

December 31 2016 2015

Loss carryforwards Expire in 2020 $ 18,298 $ 23,751 Expire in 2021 313 321 Expire in 2027 169 173 Expire in 2034 1,763 1,801

$ 20,543 $ 26,046

Deductible temporary differences $ 207,756 $ 205,460

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e. Unrecognized deferred income tax liabilities associated with investments

As of December 31, 2016 and 2015, there were no taxable temporary differences associated with investment in subsidiaries for which no deferred income tax liabilities have been recognized.

f. Integrated income tax

December 31 2016 2015

Balance of the Imputation Credit Account - the Corporation $ 775,454 $ 930,217

The expected and actual creditable ratios for distributing the earnings of 2016 and 2015 were 14.42% and 16.10%, respectively.

Under the Income Tax Law, for distribution of earnings generated after January 1, 1998, the imputation credits allocated to ROC resident shareholders of the Corporation is calculated based on the creditable ratio as of the date of dividend distribution. The actual imputation credit allocated to shareholders of the Corporation is based on the balance of the Imputation Credit Accounts as of the date of dividend distribution. Therefore, the expected creditable ratio for the 2016 earnings may differ from the actual creditable ratio to be used in allocating imputation credit to the shareholders.

The unappropriated retained earnings as of December 31, 2016 and 2015 did not contain the unappropriated earnings generated before January 1, 1998.

g. Income tax exemption with respect to the issuance of shares

The Corporation was granted a five-year income tax exemption period with respect to the issuance of shares from the appropriation for year 2005. The income tax exemption period is from January 1, 2012 to December 31, 2016.

h. Income tax assessments

Income tax returns through 2014 had been examined and cleared by the tax authorities.

27. EARNINGS PER SHARE

Unit: NT$ Per Share

Years Ended December 31 2016 2015

Basic earnings per share $ 3.38 $ 2.54 Diluted earnings per share $ 3.35 $ 2.50

221 Vanguard International Semiconductor Corporation

The earnings and weighted average number of common shares used in the computation of earnings per share were as follows:

Earnings

Years Ended December 31 2016 2015

Earnings used in computation of basic earnings per share $ 5,537,925 $ 4,157,583 Effect of dilutive potential common stocks: Employees’ compensation - -

Earnings used in the computation of diluted earnings per share $ 5,537,925 $ 4,157,583

Shares

Years Ended December 31 2016 2015

Weighted average number of common stocks used in the computation of basic earnings per share 1,638,982 1,638,792 Effect of dilutive potential common shares: Employees’ compensation 15,914 23,466

Weighted average number of common stocks used in the computation of diluted earnings per share 1,654,896 1,662,258

Since the Corporation is allowed to settle compensation paid to employees by cash or shares, the Corporation assumed that the entire amount of the compensation will be settled in shares and the resulting potential shares were included in the weighted average number of shares outstanding used in the computation of diluted earnings per share as the shares had dilutive effect. Such dilutive effect of the potential shares is included in the computation of diluted earnings per share until the shareholders resolve the number of shares to be distributed to employees at their meeting in the following year.

28. OPERATING LEASE ARRANGEMENTS

The Group as lessee

The Group leases the sites of its manufacturing plant and parking lot from the Hsinchu Science-Based Industrial Park Administration and a certain individual under renewable operating lease agreements expiring on various dates from March 2019, December 2027, December 2029 and December 2034. The rental pay to Hsinchu Science-Based Industrial Park Administration can be adjusted according to the lease contract, and the lease is renewable upon expiration.

The future minimum lease payments of non-cancellable operating lease commitments are as follows:

December 31 2016 2015

Not later than 1 year $ 77,120 $ 77,091 Later than 1 year and not later than 5 years 313,513 306,685 Later than 5 years 595,023 658,714

$ 985,656 $ 1,042,490

222 Vanguard International Semiconductor Corporation

The lease payments recognized as expenses were as follows:

Years Ended December 31 2016 2015

Minimum lease payment $ 77,426 $ 76,725

29. CAPITAL MANAGEMENT

The Group manages its capital in a manner to ensure its ability to continue as a going concern while maximizing the return to shareholders. The Group’s overall strategy has no significant variations.

The capital structure of the Group consists of net debt (loans offset by cash and cash equivalents) and equity (i.e. capital stock, capital reserves, retained earnings and other equity).

The Group is not subject to any externally imposed capital requirements.

30. FINANCIAL INSTRUMENTS

a. Fair value of financial instruments that are not measured at fair value

Financial assets and liabilities with material difference between carrying value and fair value

Except as detailed in the following table, the management considered that the carrying amounts of financial assets and financial liabilities recognized in the consolidated financial statements approximate their fair values or their fair could not be reliably measured.

December 31 2016 2015 Carrying Fair Value Carrying Fair Value Amount Level 1 Level 2 Amount Level 1 Level 2

Financial assets

Held-to-maturity financial assets $ 1,888,367 $ 1,874,119 $ - $ 139,502 $ 138,834 $ - Other current assets structured time deposit 96,597 - 96,509 - --

b. Fair value of financial instruments that are measured at fair value on a recurring basis

1) Fair value hierarchy

The fair value hierarchies of financial assets and liabilities measured at fair value on a recurring basic were as follows:

December 31, 2016

Level 1 Level 2 Level 3 Total

Financial assets at FVTPL Derivative financial instruments $ - $ 1,428,086 $ - $ 1,428,086 (Continued)

223 Vanguard International Semiconductor Corporation

Level 1 Level 2 Level 3 Total

Available-for-sale financial assets Domestic listed stocks - equity investment $ 13,648 $ 30,000 $ - $ 43,648 Bond investments 524,419 - - 524,419

$ 538,067 $ 30,000 $ - $ 568,067

Financial liabilities at FVTPL Derivative financial instruments $ - $ 43,029 $ - $ 43,029 (Concluded)

December 31, 2015

Level 1 Level 2 Level 3 Total

Financial assets at FVTPL Derivative financial instruments $ - $ 1,097,895 $ - $ 1,097,895

Available-for-sale financial assets Domestic listed stocks - equity investment $ 16,731 $ 72,000 $ - $ 88,731

Financial liabilities at FVTPL Derivative financial instruments $ - $ 35,494 $ - $ 35,494

There were no transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended December 31, 2016 and 2015, respectively.

There were no acquisition or disposal of financial assets measured by Level 3 of the fair value hierarchy for the years ended December 31, 2016 and 2015, respectively.

2) Valuation techniques and assumptions applied to Level 2 of fair value hierarchy

The fair values of financial assets and financial liabilities are determined as follows:

a) For those instruments such as derivative financial instruments with no quoted market prices, their fair values are determined by using valuation techniques incorporating estimates and assumptions consistent with those generally used by other market participants in their estimates of fair values.

Fair values of forward exchange contacts and currency-swap contracts are determined by using valuation techniques based on forward rates for each contract. The Reuter’s quotation system is mainly used as reference for the forward rates.

224 Vanguard International Semiconductor Corporation

b) For the private placement shares issued by listed companies with no quoted market prices, the fair value is determined by using valuation techniques incorporating estimates and assumptions consistent with those generally used by other market participants in their estimates of fair values.

The Group uses “Black-Scholes model” to determine the fair value. c. Categories of financial instruments

December 31 2016 2015

Financial assets

Fair value through profit or loss (FVTPL) Held for trading $ 3,555 $ 3,514 Designated as at FVTPL 1,424,531 1,094,381 Held-to-maturity financial assets 1,888,367 139,502 Loans and receivables (Note 1) 22,080,243 21,450,056 Available-for-sale financial assets (Note 2) 653,394 171,228

Financial liabilities

Fair value through profit or loss (FVTPL) Held for trading 43,029 28,474 Derivative instruments in designated hedge accounting - 7,020 Measured at amortized cost (Note 3) 4,477,709 3,511,357

Note 1: The balances included loans and receivables measured at amortized cost, which comprise cash and cash equivalents, notes and accounts receivables, other receivables, and other financial assets.

Note 2: The balances included the carrying amount of available-for-sale financial assets measured at cost.

Note 3: The balances included financial liabilities measured at amortized cost, which comprise accounts payables and other payables. d. Objectives and policies of financial risk management

The Group’s major financial instruments include equity and bond investments, accounts receivable and accounts payables. The Group’s corporate finance function provides services to the business, coordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyze exposures by degree and magnitude of risks. These risks include market risk (including foreign currency risk, interest rate risk and other price risk), credit risk and liquidity risk.

The Group seeks to minimize the effects of these risks by using derivative financial instruments to hedge risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the board of directors, which provided written principles on foreign exchange risk, interest rate risk, credit risk, the use of derivatives and non-derivative financial instruments, and the investment of excess liquidity. The compliance with policies and the control of exposure limits are continuously reviewed by the internal auditors on a continuous basis. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

225 Vanguard International Semiconductor Corporation

The corporate finance function reports quarterly to the Group’s board of directors and audit committee for their independent mentorship to risks and policy implementation.

1) Market risk

The Group’s activities are exposed to the financial risks primarily arising from the changes in foreign currency exchange rates (see (a) below), interest rates (see (b) below) and other prices (see (c) below). The Group enters into a variety of derivative financial instruments including forward exchange and currency - swap contracts to manage its exposure to foreign currency risk.

There has been no change to the Group’s exposure to market risks or the manner in which these risks are managed and measured.

a) Foreign currency risk

The Group’s operating activities are partially denominated in foreign currencies and apply natural hedge. The purpose of the Group’s management of the foreign currency risk is to hedge the risk instead of making a profit.

The strategy of foreign currency risk management is to review the net position exposed to foreign currency risk and manage the risk of the net position. The Group selects the instruments to hedge currency exposure by considering the hedge cost and hedge period. The Group currently utilizes derivative financial instruments, primarily buy/sell forward exchange contracts, to hedge its currency exposure.

The Group uses forward exchange contracts to eliminate currency exposure. It is the Group’s policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item for maximizing the hedge effectiveness.

Investing in foreign operations is for strategic purposes; it is not hedged by the Group.

Sensitivity analysis

The Group is mainly exposed to the exchange rate fluctuation of USD and RMB.

The following table details the Group’s sensitivity to a 5% increase and decrease in the New Taiwan dollars (the functional currency) against the relevant foreign currencies. The sensitivity analysis includes only outstanding foreign currency denominated monetary items (including cash and cash equivalents, financial assets, accounts receivable, other receivables, accounts payable, and other payables) and the hedge contracts, for which their translation at period end is adjusted for a 5% change in foreign currency rates. The following table indicates the influences which the New Taiwan dollars strengthen 5% against the relevant currency.

Impact on USD Items Years Ended December 31 2016 2015

(Loss) gain $ (74,184) $ 32,236

Impact on RMB Items Years Ended December 31 2016 2015

Loss $ - $ (29,058)

226 Vanguard International Semiconductor Corporation

b) Interest rate risk

The Group’s financial assets are exposed to interest rate risk both at fixed and floating interest rates.

The carrying amounts of the Group’s financial assets with exposure to interest rates at the end of the reporting period were as follows.

December 31 2016 2015

Fair value interest rate risk Financial assets $ 19,699,152 $ 16,421,582 Cash flow interest rate risk Financial assets 2,103,369 3,066,700

Sensitivity analysis

The sensitivity analyses below are determined based on the Group’s exposure to interest rates for non-derivative instruments at the end of the reporting period. For floating rate assets, the analysis is prepared assuming the amount of the asset at the end of the reporting date is outstanding during the reporting period.

If the market interest rate increases/decrease by 0.1% and all other variables remain constant, the pre-tax profit of the Group for the years ended on December 31, 2016 and 2015 will increase/decrease $2,103 thousand and $3,067 thousand, respectively, resulting from the exposure of the net assets with floating rates.

c) Other price risk

The Group is exposed to price risk arising from its investments in available-for-sale stocks and bonds. Investments are held for strategic rather than trading purposes. The Group does not actively trade these investments. The Group’s security price risk is mainly concentrated on equity and bond instruments operating in electronic industry quoted in the Taiwan Stock Exchange and GreTai Securities Market.

Sensitivity analysis

The sensitivity analyses below were determined based on the exposure to security price risks at the end of the reporting period.

If available-for sale stocks and bonds prices had been 5% higher/lower, the other comprehensive income for the years ended December 31, 2016 and 2015 would have increased/decreased by $28,403 thousand and $4,437 thousand, respectively, as a result of the changes in fair value of available-for-sale financial investments in stocks and bonds.

2) Credit risk

Credit risk refers to the risk that a counterpart will default on its contractual obligations and result in financial loss to the Group. As of the end of the reporting period, the Group may have a financial loss due to the default on obligation from counterparts, and the maximum exposure to credit risk is the carrying amount of the respective recognized financial assets as stated in the consolidated balance sheets.

227 Vanguard International Semiconductor Corporation

In order to mitigate credit risk, the Group has made the policy of credit management to ensure that appropriate action is taken to recover overdue receivables. In addition, the Group reviews the recoverable amount of each receivable debt at the end of the reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the Group considers the credit risk is significantly reduced.

The credit risk on operating funds and derivatives is limited as the counterparts are creditworthy banks.

The Group’s accounts receivable outstanding arose from trading with its customers spreading across diverse industries and geographical areas. The balances are monitored on an ongoing basis by evaluating the customer’s financial conditions.

The Group’s credit concentration risk was related to the 5 largest customers. Besides the 5 largest customers, credit concentration risks related to other customers do not exceed 10% of total gross accounts receivables at any time during the period. The 5 largest customers are creditworthy counterparts, therefore, the Group believes the concentration of credit risk is insignificant for the remaining accounts receivable.

3) Liquidity risk

The Group manages liquidity risk by monitoring and maintaining adequate reserves of cash and cash equivalents to fund the Group’s operations and mitigate the effects of fluctuations in cash flows.

The following tables detail the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities from the earliest date on which the Group can be required to pay. The tables include both interest and principal cash flows.

December 31, 2016

Less than More than 1 Year 1 Year

Non-derivative financial liabilities

Non-interest bearing $ 4,477,709 $-

December 31, 2015

Less than More than 1 Year 1 Year

Non-derivative financial liabilities

Non-interest bearing $ 3,511,357 $-

The following tables detail the Group’s liquidity analysis for its derivative financial instruments. The tables were based on the undiscounted net inflows and outflows from those derivatives with gross settlement.

228 Vanguard International Semiconductor Corporation

December 31, 2016

Less than More than 1 Year 1 Year

Gross settled

Forward exchange contracts Inflows $ 5,721,697 $ - Outflows (5,761,171) -

$ (39,474) $-

December 31, 2015

Less than More than 1 Year 1 Year

Gross settled

Forward exchange contracts Inflows $ 6,481,230 $ - Outflows (6,513,210) -

$ (31,980) $-

31. TRANSACTIONS WITH RELATED PARTIES

Intercompany balances and transactions between the Corporation and its subsidiaries, which are related parties of the Corporation, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties were disclosed below.

a. Operating transactions

Revenue from Sales of Goods Purchases Years Ended December 31 Years Ended December 31 2016 2015 2016 2015

Investors that have significant influence over the Group $ 6,702,249 $ 7,100,082 $ 700 $ 259 Associates $ 23,844 $ 19,847 $ - $ - Key management personnel $ 37,666 $ 43,155 $ - $ - Substantial related parties $ 32,654 $ 32,208 $ - $ -

Research and Development Manufacturing Expenses Expenses Years Ended December 31 Years Ended December 31 2016 2015 2016 2015

Investors that have significant influence over the Group $ 418,307 $ 358,179 $ 931 $ 1,673

229 Vanguard International Semiconductor Corporation

Marketing Expenses Years Ended December 31 2016 2015

Investors that have significant influence over the Group $ 2,200 $ 1,369

Nonoperating Rental Revenue Income and Gains Years Ended December 31 Years Ended December 31 2016 2015 2016 2015

Investors that have significant influence over the Group $ 2,467 $ 3,453 $ 15,600 $ 20,720 Key management personnel - - 630 940

$ 2,467 $ 3,453 $ 16,230 $ 21,660

The following balances were outstanding at the end of the reporting period:

Receivables from Related Parties December 31 2016 2015

Investors that have significant influence over the Group $ 586,847 $ 519,735 Key management personnel 14,469 8,134 Associates 4,817 2,059 Substantial related parties 7,081 4,007

$ 613,214 $ 533,935

Other Receivables from Related Parties December 31 2016 2015

Investors that have significant influence over the Group $ 560 $ 12,362 Key management personnel 264 2,722

$ 824 $ 15,084

Other Payables to Related Parties December 31 2016 2015

Investors that have significant influence over the Group $ 85,535 $ 67,754 Substantial related parties 135 -

$ 85,670 $ 67,754

230 Vanguard International Semiconductor Corporation

Guarantee Deposits (Other Non-current Liabilities) December 31 2016 2015

Investors that have significant influence over the Group $ - $ 1,362

The terms of sales and purchases transactions with related parties were not significantly different from those with third parties. However, for other related-party transactions, license fees, research and development expenses, there were no similar transactions in the market; thus, transaction terms were determined in accordance with related contracts.

The Group leased certain plant and offices to related parties. The lease terms and prices were determined in accordance with mutual agreements. Related parties paid the rental monthly.

Guarantee deposits of related parties were for lease.

b. Compensation of key management personnel

Years Ended December 31 2016 2015

Short-term employee benefits $ 142,246 $ 123,895 Post-employment benefits 2,420 18,276

$ 144,666 $ 142,171

The remuneration to directors and other key management personnel were determined by the Compensation Committee in accordance with the individual performance and the market trends.

32. ASSETS PLEDGED AS COLLATERAL OR FOR SECURITY

The following assets had been pledged as collateral for the guarantee of customs duty and lease of the manufacturing plant from the Hsinchu Science-Based Industrial Park Administration:

December 31 2016 2015

Pledged time deposits (presented under other non-current assets) $ 303,704 $ 303,552

33. SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNIZED COMMITMENTS

The significant commitments of the Group as of December 31, 2016 were as follows:

The Corporation entered into a “Manufacturing, License, and Technology Transfer Agreement” with Taiwan Semiconductor Manufacturing Company Ltd. beginning January 1, 2004 to pay fees according to the net sales of certain products and reserve a portion of its production capacity.

231 Vanguard International Semiconductor Corporation

34. SIGNIFICANT ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES

The following information was aggregated by the foreign currencies other than functional currencies of the group entities and the exchange rates between foreign currencies and respective functional currencies were disclosed. The significant assets and liabilities denominated in foreign currencies were as follows:

December 31 2016 2015 Foreign Foreign Currencies Exchange Rate Currencies Exchange Rate

Financial assets

Monetary items USD $ 316,305 32.199 $ 200,479 32.895 EUR 226 34.30 137 36.14 JPY 82,646 0.2780 108,309 0.2745 RMB - - 116,348 4.995 Non-monetary items USD 5,583 32.199 803 32.895

Financial liabilities

Monetary items USD 26,229 32.199 19,622 32.895 EUR 907 34.30 852 36.14 JPY 205,024 0.2780 171,160 0.2745

The significant unrealized foreign exchange gains (losses) were as follows:

Years Ended December 31 2016 2015 Net Foreign Net Foreign Foreign Exchange Gain Exchange Gain Currencies Exchange Rate (Loss) Exchange Rate (Loss)

USD 32.278 (USD:NTD) $ 40,939 31.675 (USD:NTD) $ (90,757) EUR 35.91 (EUR:NTD) 1,014 35.61 (EUR:NTD) (855) JPY 0.2986 (JPY:NTD) 495 0.2648 (JPY:NTD) (950) RMB 4.865 (RMB:NTD) 18,870 5.043 (RMB:NTD) (34,738)

$ 61,318 $ (127,300)

35. SEPARATELY DISCLOSED ITEMS

Information on significant transactions and information on investees:

a. Financing provided to others: None.

b. Endorsements/guarantees provided: None.

c. Marketable securities held (excluding investment in subsidiaries, associates and jointly ventures): Table 1 (attached)

d. Marketable securities acquired and disposed of at costs or prices of at least NT$300 million or 20% of the paid-in capital: Table 2 (attached)

232 Vanguard International Semiconductor Corporation

e. Acquisition of individual real estate at costs of at least NT$300 million or 20% of the paid-in capital: None.

f. Disposal of individual real estate at prices of at least NT$300 million or 20% of the paid-in capital: None.

g. Total purchases from or sales to related parties amounting to at least NT$100 million or 20% of the paid-in capital: Table 3 (attached)

h. Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Table 4 (attached)

i. Trading in derivative instruments: Note 7.

j. Intercompany relationships and significant intercompany transactions: Table 5 (attached)

k. Information on investees: Table 6 (attached)

l. Information on investment in Mainland China: None.

36. SEGMENT INFORMATION

a. For the purpose of resources allocation and performance assessment, the Group’s chief operating decision maker reviews operating results and financial information on a per plant basis. It focuses on the operating result of each of the plants operated under Vanguard International Semiconductor Corporation and its subsidiaries. Accordingly, each of the plants constitutes an operating segment of the Group. As each plant shares similar economic characteristics, produces similar products by using similar production process and all of products produced are distributed and sold to the same level of customers through a central sales function, the Group’s segments are aggregated into a single reportable segment.

The revenues, operating results and financial information on a plant by plant basis presented to the chief operating decision maker are consistent with the information in the consolidated financial statements. The segment revenues and operating results for the years ended December 31, 2016 and 2015 can be referred to the consolidated statements of comprehensive income for the years ended December 31, 2016 and 2015. The segment assets as of December 31, 2016 and 2015 can be referred to the consolidated balance sheets as of December 31, 2016 and 2015.

b. Revenue from major products and services

The following is an analysis of the Group’s revenue from its major products and services:

Years Ended December 31 2016 2015

Wafer foundry $ 25,469,353 $ 23,010,405 Others revenue 359,281 309,316

$ 25,828,634 $ 23,319,721

233 Vanguard International Semiconductor Corporation

c. Geographic information

Revenue Non-current Assets Years Ended December 31 December 31 2016 2015 2016 2015

Asia $ 23,656,799 $ 21,899,205 $ 6,282,629 $ 6,979,148 America 1,187,913 816,720 1,452 249 Eurpoe 978,862 602,560 - - Oceania 5,060 1,236 - -

$ 25,828,634 $ 23,319,721 $ 6,284,081 $ 6,979,397

Non-current assets exclude the investments accounted for by the equity method, financial instruments, intangible assets, deferred income tax assets, refundable deposits and other assets.

d. Major customers

Sales to customers amounting to at least 10% of total gross revenue:

Years Ended December 31 Customer 2016 2015

A $ 6,702,249 $ 7,100,082 B 5,290,430 4,577,103

234 TABLE 1

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

MARKETABLE SECURITIES HELD DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

December 31, 2016 Shares Units Holding Company Name Marketable Security Type and Name (Note1) Relationship with the Securities Issuer Financial Statement Account Market Value or Note (Thousands Carrying Value % of Ownership Net Asset Value Thousands Units)

Structured instruments Vanguard International TWM credit linked structured investment notes - Financial assets at fair value through profit or loss - current - $ 100,069 - $ 100,069 Note 4 Semiconductor Corporation SKFH credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 110,119 - 110,119 Note 4 Gigasolar credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 10,019 - 10,019 Note 4 WPG credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 30,061 - 30,061 Note 4 Tong Hsing credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 54,803 - 54,803 Note 4 Mega credit linked structured investment notes - Financial assets at fair value through profit or loss - current - 20,019 - 20,019 Note 4 Competition Team Tech. Ltd. U.S. dollar bonds - Financial assets at fair value through profit or loss - current - 227,884 - 227,884 Note 4 TSMC U.S. dollar bonds - Financial assets at fair value through profit or loss - current - 162,517 - 162,517 Note 4 Cathay United Bank interest linked structured investment notes - Financial assets at fair value through profit or loss - current - 96,613 - 96,613 Note 4 Yuanta interest linked principal guarantee notes - Financial assets at fair value through profit or loss - current - 451,293 - 451,293 Note 4 KGI interest linked principal guarantee notes - Financial assets at fair value through profit or loss - current - 161,134 - 161,134 Note 4 Bonds ADSEMI Corporation Bonds - Available-for-sale financial assets - current - 64,386 - 64,386 Note 2 Shanghai Commercial & Saving Bank 2012 2nd Subordinated Financial - Available-for-sale financial assets - noncurrent - 101,519 - 101,519 Note 2 Debentures MEGA Bank 2014 1st Subordinated Financial Debentures - Available-for-sale financial assets - noncurrent - 102,531 - 102,531 Note 2 MEGA Bank 2014 2nd Subordinated Financial Debentures - Available-for-sale financial assets - noncurrent - 153,565 - 153,565 Note 2 Taiwan Cooperative Bank 2014 1st Subordinated Financial Debentures - Available-for-sale financial assets - noncurrent - 102,418 - 102,418 Note 2 VIS Associates Inc. Sumitomo Mitsui Banking Corporation Bonds - Held-to-maturity financial assets - noncurrent - 227,370 - 224,739 Note 2

235 QNB Finance Ltd. bonds - Held-to-maturity financial assets - noncurrent - 258,714 - 258,769 Note 2 Standard Chartered PLC bonds - Held-to-maturity financial assets - noncurrent - 280,144 - 275,693 Note 2 Bank of China Limited, Luxembourg Branch bonds - Held-to-maturity financial assets - noncurrent - 151,427 - 149,837 Note 2 Industrial and Commercial Bank of China Limited, Sydney Branch bonds - Held-to-maturity financial assets - noncurrent - 67,769 - 67,462 Note 2 China Construction Bank (Asia) Co., Ltd. Bonds - Held-to-maturity financial assets - noncurrent - 149,993 - 147,808 Note 2 TSMC Global Ltd. Bonds - Held-to-maturity financial assets - noncurrent - 257,351 - 256,606 Note 2 Mizuho Bank Ltd. Bonds - Held-to-maturity financial assets - noncurrent - 258,683 - 257,801 Note 2 Bank of China (Hong Kong) Limited bonds - Held-to-maturity financial assets - noncurrent - 173,056 - 171,888 Note 2 Horsepower Finance Ltd. Bonds - Held-to-maturity financial assets - noncurrent - 63,860 - 63,516 Note 2 Stocks Vanguard International Champion Microelectronic Corp. Investee Available-for-sale financial assets - noncurrent 375 13,648 1 13,648 Note 2 Semiconductor Corporation Advanced Microelectronic Products Inc. Investee Available-for-sale financial assets - noncurrent 30,000 30,000 10 30,000 Note 4 United Industrial Gases Co., Ltd. Investee Financial assets carried at cost - noncurrent 4,246 38,717 2 38,717 Note 3 Image Match Design Inc. Investee Financial assets carried at cost - noncurrent 1,400 14,000 5 14,000 Note 3 AnDAPT Inc. Investee Financial assets carried at cost - noncurrent 1,000 32,610 7 32,610 Note 3

Note 1: Marketable securities mentioned in the table include stocks, bonds, beneficiary certificate and the derivative securities from aforementioned items.

Note 2: The market value was based on stock closing price as of December 31, 2016.

Note 3: The market value was based on the book value as of December 31, 2016.

Note 4: The fair value was based on valuation techniques.

Note 5: As of December 31, 2016, all the securities were not pledged or restricted.

Note 6: With respect to the information of subsidiaries, associates and joint ventures, please see TABLE 6. Semiconductor Corporation Vanguard International Semiconductor Corporation Vanguard International

TABLE 2

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$300 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Type and Name of Beginning Balance Acquisition Disposal Ending Balance Financial Statement Company Name Marketable Counterparty Relationship Shares/Units Shares/Units Shares/Units Gain (Loss) on Shares/Units Account Amount Amount Amount Cost Amount Securities (Thousands) (Thousands) (Thousands) Disposal (Thousands)

Structured Vanguard International investments Semiconductor Yuanta interest linked Financial assets at fair - - - $ - - $ 444,845 - $ - $ - $ - - $ 451,293 Corporation principal guarantee value through profit notes or loss - current Societe Generale Financial assets at fair - - - - - 315,460 - 315,460 315,460 - - - Bank U.S. dollar value through profit Bonds or loss - current 236 TABLE 3

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars)

Notes/Accounts Payable or Transaction Detail Abnormal Transaction Company Name Related Party Nature of Relationship Receivable Note Purchases/Sales Amount % to Total Payment Term Unit Price Payment Term Ending Balance % to Total

Vanguard International Taiwan Semiconductor Major shareholder Sales $ 6,702,249 26 30 days after $ - - $ 586,847 15 - Semiconductor Corporation Manufacturing closing Company Ltd. 237 Semiconductor Corporation Vanguard International Semiconductor Corporation Vanguard International

TABLE 4

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars)

Overdue Amount Received in Allowance for Company Name Related Party Nature of Relationship Ending Balance Turnover Rate Amount Action Taken Subsequent Period Bad Debts

Vanguard International Semiconductor Corporation Taiwan Semiconductor Major shareholder $ 586,847 12.11 $ - - $ 586,847 $ - Manufacturing Company Ltd. 238 TABLE 5

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

INTERCOMPANY RELATIONSHIPS AND SIGNIFICANT INTERCOMPANY TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars)

Intercompany Transactions Percentage of No. Company Name Company Name Nature of Relationship Terms Financial Statement Item Amount Consolidated Net Revenue (Note) or Total Assets

0 Vanguard International Semiconductor Corporation VIS Micro, Inc. Transaction from Marketing expenses $ 92,555 - 0.36% ultimate parent company to subsidiary Other payables to related parties 9,560 - 0.03%

Note: For intercompany transactions, the terms were based on related agreements. 239 Semiconductor Corporation Vanguard International Semiconductor Corporation Vanguard International

TABLE 6

VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

INFORMATION ON INVESTEES FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Investment Amount Balance as of December 31, 2016 Net Gain Investment December 31, December 31, Carrying (Loss) of the Gain (Loss) 2016 2015 Value Investee Recognized Investor Company Investee Company Location Main Businesses and Products Shares (In Percentage of Note (Foreign (Foreign (Foreign (Foreign (Foreign Thousands) Ownership Currencies in Currencies in Currencies in Currencies in Currencies in Thousands) Thousands) Thousands) Thousands) Thousands)

Vanguard International VIS Associates Inc. British Virgin Islands Investments $ 2,596,782 $ 195,492 81 100 $ 2,722,779 $ 12,596 $ 12,596 Subsidiary Semiconductor Corporation CMSC, Inc. Hsinchu City, Taiwan Integrated circuit design services and related 112,650 112,650 9,902 25 61,440 40,143 10,012 Investment accounted businesses for using equity method Quora Technology, Inc. Delaware, USA Semiconductor research and development related 166,175 - 5,000 33 147,553 (65,798) (21,174) Investment accounted businesses (US$ 5,000) (US$ 4,583) (US$ (2,038)) (US$ (656)) for using equity method VIS Associates Inc. VIS Investment Holding, Inc Delaware, USA Investments 201,244 201,244 63 100 70,848 8,014 8,014 Subsidiary (US$ 6,250) (US$ 6,250) (US$ 2,200) (US$ 247) (US$ 247) Specialty TechFarm, Inc. (Note 1) British Virgin Islands Investments - 328,950 - - - (13,853) (13,853) Subsidiary (US$ 10,000) (US$ (416)) (US$ (416)) VIS Investment Holding, Inc VIS Micro, Inc. California, USA Marketing services 6,440 6,440 200 100 57,454 3,464 3,464 Subsidiary (US$ 200) (US$ 200) (US$ 1,784) (US$ 106) (US$ 106) Specialty TechFarm, Inc. SkyTraq Technology, Inc. British Virgin Islands Integrated circuit design services and related - 49,343 ---8,4512,167 Investment accounted

240 (Note 2) businesses (US$ 1,500) (US$ 262) (US$ 67) for using equity method

Note 1: Completed liquidation in April 2016.

Note 2: Disposed in February 2016. Vanguard International Semiconductor Corporation

Leuh Fang , Chairman