Financial Statements 2006
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Cosmos Bank, Taiwan Financial Statements for the Years Ended December 31, 2006 and 2005 and Independent Auditors’ Report INDEPENDENT AUDITORS’ REPORT The Board of Directors and Stockholders Cosmos Bank, Taiwan We have audited the accompanying balance sheets of Cosmos Bank, Taiwan as of December 31, 2006 and 2005, and the related statements of income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits. Except as stated in the next paragraph, we conducted our audits in accordance with the Rules Governing the Audit of Financial Statements of Financial Institutions by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As stated in Note 15 to the financial statements, the Bank signed individual contracts with asset management companies between 2002 and 2006 to sell nonperforming loans. Based on the Law Governing Mergers of Financial Institutions, the losses on these sales were amortized using the straight-line method over 60 months. The unamortized balance was recorded as deferred loss on the sale of nonperforming loans. Had these losses not been deferred, the carrying values of the losses as of December 31, 2006 and 2005 would have decreased by NT$32,712,701 thousand and NT$18,749,041 thousand, respectively, and retained earnings would have decreased by NT$24,534,526 thousand and NT$14,061,781 thousand, respectively. In addition, the loss after tax would have increased by $10,478,372 thousand in 2006 and the income after tax would have decreased by NT$1,830,036 thousand in 2005. In our opinion, except for the effects of the deferred loss on the sale of the nonperforming loans mentioned in the third paragraph, the financial statements referred to above present fairly in all material respects, the financial position of Cosmos Bank, Taiwan as of December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended, in conformity with the Requations Governing the Preparation of Financial Reports by Public Banks, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China. - 1 - As stated in the third paragraph, the effect on the stockholders’ equity would have been significant had Cosmos Bank, Taiwan recognized the loss on the sale of the nonperforming loans as expense in the current year instead of deferring it. Management’s plans in regard to this matter are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As stated in Note 3 to the financial statements, Cosmos Bank, Taiwan adopted on January 1, 2006 the newly released Statements of Financial Accounting Standards (“Statements” or SFAS) No. 34 - “Accounting for Financial Instruments” and No. 36 - “Disclosure and Presentation of Financial Instruments” and related revisions of previously released Statements. The Bank also adopted, effective January 1, 2006, the newly revised SFAS No. 25 - “Business Combinations - Accounting Treatment under the Purchase Method,” which provided that goodwill should no longer be amortized and that goodwill should be assessed for impairment periodically. Cosmos Bank, Taiwan began applying SFAS No. 35 - “Accounting for Asset Impairment” on January 1, 2005. April 26, 2007, except for Note 1 and Note 23 on the Board of Directors’ resolution passed on April 27, 2007 to reduce capital, issue common shares and appropriate the earnings of 2006. Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations 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 financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors’ report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. 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 auditors’ report and financial statements shall prevail. - 2 - COSMOS BANK, TAIWAN BALANCE SHEETS DECEMBER 31, 2006 AND 2005 (In Thousands of New Taiwan Dollars, Except Par Value) Percentage Percentage Increase Increase 2006 2005 (Decrease) 2006 2005 (Decrease) ASSETS Amount Amount % LIABILITIES AND STOCKHOLDERS’ EQUITY Amount Amount % CASH AND CASH EQUIVALENTS (Note 4) $ 5,618,763 $ 4,606,577 22 DUE TO THE CENTRAL BANK AND OTHER BANKS (Note 17) $ 19,677,269 $ 21,791,642 (10 ) DUE FROM THE CENTRAL BANK AND CALL LOANS TO BANKS (Notes 5 and 29) 34,285,795 8,478,097 304 FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 2, 3 and 6) 31,214 49,211 (37 ) FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS, NET (Notes 2, 3, 6, 18 and 28) 4,223,017 26,991,766 (84 ) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS (Notes 2, 18 and 28) 2,160,839 5,547,572 (61 ) SECURITIES PURCHASED UNDER RESELL AGREEMENTS (Notes 2, 7 and 18) - 3,050,742 (100 ) PAYABLES (Notes 2, 19 and 28) 5,711,646 4,681,081 22 RECEIVABLES, NET (Notes 2, 3, 8 and 29) 7,055,771 10,386,418 (32 ) DEPOSITS AND REMITTANCES (Notes 20 and 28) 191,104,604 202,021,675 (5 ) DISCOUNTS AND LOANS, NET (Notes 2, 9 and 28) 130,593,007 155,080,959 (16 ) BANK DEBENTURES (Notes 2, 21 and 28) 13,167,163 - - AVAILABLE-FOR-SALE FINANCIAL ASSETS, NET (Notes 2, 3, 10, 18 and 29) 1,894,082 3,469,357 (45 ) OTHER FINANCIAL LIABILITIES (Notes 2 and 11) 194,978 97,144 101 EQUITY INVESTMENTS UNDER THE EQUITY METHOD (Notes 2, 3 and 11) 37,481 75,480 (50 ) OTHER LIABILITIES (Notes 2 and 22) 750,111 1,099,082 (32 ) OTHER FINANCIAL ASSETS, NET (Notes 2, 3 and 14) 12,278,073 10,873,623 13 Total liabilities 232,797,824 235,287,407 (1 ) FIXED ASSETS (Notes 2, 3 and 13) CAPITAL STOCK, $10.00 PAR VALUE Cost Authorized: 2,500,000 thousand shares; issued and outstanding: Land 4,553,582 4,553,582 - 2006 - 1,967,780 thousand shares; 2005 - 1,771,002 thousand shares 19,677,795 17,710,015 11 Buildings 2,848,599 2,848,599 - Machinery and equipment 1,675,701 1,561,905 7 CAPITAL SURPLUS Transportation and communications equipment 281,241 272,717 3 Paid-in capital in excess of par value 927,567 176,404 426 Miscellaneous equipment 401,254 424,999 (6 ) From treasury stock 2,245 2,245 - Total cost 9,760,377 9,661,802 1 Others 12,712 - - Accumulated depreciation (1,792,988 ) (1,442,317 ) 24 Accumulated impairment (176,728 ) (9,501 ) 1,760 942,524 178,649 428 7,790,661 8,209,984 (5 ) Construction in progress and prepayments for equipment 41,511 193,505 (79 ) RETAINED EARNINGS (ACCUMULATED DEFICIT) Legal reserve 777,389 744,058 4 Net fixed assets 7,832,172 8,403,489 (7 ) Special reserve 1,813,493 1,735,722 4 Unappropriated earnings (accumulated deficit) (11,286,541 ) 111,102 (10,259 ) INTANGIBLE ASSETS (Notes 2, 3, 13 and 28) Goodwill 409,776 416,879 (2 ) (8,695,659 ) 2,590,882 (436 ) Computer software 62,243 39,701 57 OTHERS Total intangible assets 472,019 456,580 3 Unrealized valuation losses on financial instruments (30,663 ) (82,263 ) (63 ) OTHER ASSETS, NET Total stockholders' equity 11,893,997 20,397,283 (42 ) Refundable deposits (Notes 28 and 30) 2,796,110 3,164,666 (12 ) Foreclosed collaterals, net (Notes 2, 3 and 16) 164,159 780,898 (79 ) CONTINGENCIES AND COMMITMENTS (Notes 2 and 30) Deferred loss on the sale of nonperforming loans (Notes 2 and 15) 32,712,701 18,749,041 74 Deferred income tax assets, net (Notes 2 and 26) 3,813,426 187,710 1,932 Others (Notes 2, 12, 13 and 28) 915,245 929,287 (2 ) Total other assets, net 40,401,641 23,811,602 70 TOTAL $ 244,691,821 $ 255,684,690 (4 ) TOTAL $ 244,691,821 $ 255,684,690 (4 ) The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated April 26, 2007) - 3 - COSMOS BANK, TAIWAN STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2006 AND 2005 (In Thousands of New Taiwan Dollars, Except Earnings (Loss) Per Share) Percentage Increase 2006 2005 (Decrease) Amount Amount % INTEREST REVENUE (Notes 2, 3 and 28) $ 14,555,747 $ 18,396,485 (21 ) INTEREST EXPENSE (Note 28) 4,362,795 3,721,411 17 NET INTEREST 10,192,952 14,675,074 (31 ) NET REVENUES(LOSSES) OTHER THAN INTEREST Service fee income, net (Notes 2, 28 and 31) 1,208,227 1,372,607 (12 ) Gains on the sale and valuation of on financial assets and liabilities at fair value through profit or loss (Notes 2, 3 and 6) 447,637 200,717 123 Realized gains on the sale of available-for-sale financial assets (Note 3) 461 509 (9 ) Income (losses)