Stock Code: 2889 WFH Annual Report is available at Taiwan Stock Exchange Market Observation Post System: http://mops.twse.com.tw Corporate Website: http:// www.waterland-fin.com.tw
WATERLAND FINANCIAL HOLDINGS 2018 ANNUAL REPORT April 30, 2019
Spokesperson Waterland Financial Holding Co., Ltd. Name: Andrew Chiu 4F/10F, No.167, Sec. 2, Nanjing E. Rd., Title: Executive Vice President Taipei (104) , Taiwan(R.O.C.) TEL：+886-2-2515-4567 Tel: 886-2-2515-4567 http://www.waterland-fin.com.tw E-mail: [email protected] International Bills Finance Corporation 2F/9-11F, No.167, Sec. 2, Nanjing E. Deputy Spokesperson Rd., Taipei (104) , Taiwan(R.O.C.) Name: Andre Huang TEL：+886-2-2518-1688 http://www.ibfc.com.tw Title: Manager Tel: 886-2-2515-4567 E-mail: [email protected] Waterland Securities Co., Ltd. 15F, No.188, Sec. 5, Nanjing E. Rd., Taipei (105) , Taiwan(R.O.C.) Stock Transfer Agent TEL：+886-2-2528-8988 http://www.wls.com.tw Waterland Securities
Address: 4F., No.199, Sec. 3, Chongqing N. Rd., Waterland Venture Capital Co., Ltd. Datong Dist., Taipei City 103, Taiwan (R.O.C.) 8F-6, No.188, Sec. 5, Nanjing E. Rd., Taipei (105) , Taiwan(R.O.C.) Tel: 886-2-2593-6666 TEL：+886-2-2528-8077 Website: http://www.wls.com.tw http://www.waterland-vc.com.tw
Auditors PwC Taiwan Auditors: Shu-Mei Chi, Hsien-I Chen Address: 27F, No. 333, Sec. 1, Keelung Rd., Xinyi Dist., Taipei 11012, Taiwan (R.O.C) Tel.: 886-2-2729-6666 Website: http://www.pwc.tw
Credit Rating Agency Fitch Australia Pty Ltd, Taiwan Branch Address: Rm. 1306, 13F., No.205, Dunhua N. Rd., Songshan Dist., Taipei City 105, Taiwan (R.O.C.) Tel.: 886-2-8175-7600 Website: https://www.fitchratings.com/site/taiwan
Name of any exchanges where the company's securities are traded offshore, and the method by which to access information on said offshore securities: None
CONTENTS ANNUAL REPORT 2018
I.Letter to Shareholders ...... 1 1.1 Operating Results in 2018 ...... 1 1.2 Business Plan for 2019 ...... 4 1.3 Development Strategy ...... 5 1.4 The Impact of the External Competitive Environment, Regulatory Environment, and Macroeconomic Conditions ...... 6 1.5 Credit Ratings ...... 8 II.Company Profile...... 9 2.1 Date of Incorporation ...... 9 2.2 Company History ...... 9 III.Corporate Governance Report ...... 14 3.1 Organization ...... 14 3.2 Directors and Management Team ...... 18 3.3 Remuneration of Directors, President, Vice President and Bonus to Employees ...... 36 3.4 Implementation of Corporate Governance ...... 42 3.5 Information Regarding the Company’s Audit Fee and Independence ...... 91 3.6 Replacement of CPA ...... 92 3.7 The Company’s Chairman, Chief Executive Officer, Chief Financial Officer, and Managers in Charge of its Finance and Accounting Operations Hold any Positions in the Company’s Independent Auditing Firm or its Affiliates During 2018...... 93 3.8 Changes in Shareholding of Directors, Managers and Major Shareholders ...... 93 3.9 Relationship among the Top Ten Shareholders ...... 96 3.10 Ownership of Shares in Affiliated Enterprises ...... 98 IV. Capital Overview ...... 99 4.1 Capital and Shares ...... 99 4.2 Bonds, Preferred Shares, Global Depository Receipts, Employee Stock Options, and Issuance of New Restricted Employee Shares...... 107 4.3 Status of New Shares Issuance in Connection with Mergers and Acquisitions ...... 107 4.4 Financing Plans and Implementation ...... 107 V. Operational Highlights ...... 108 5.1 Business Activities ...... 108 5.2 Trans-industry and Cross-selling Effectiveness ...... 125 5.3 Market and Sales Overview ...... 125 5.4 Human Resources ...... 132 5.5 Corporate Social Responsibility and Ethical Behavior ...... 134
5.6 Number of Employees of Non-supervisory Roles, Annual Average Welfare Expense of Employees and Difference with the Previous Year ...... 136 5.7 IT Infrastructure ...... 136 5.8 Labor Relations ...... 138 5.9 Important Contracts ...... 140 VI. Financial Information ...... 143 6.1 Five-Year Financial Summary ...... 143 6.2 Five-Year Financial Analysis ...... 146 6.3 Audit Committee’s Report for the Year 2018 ...... 149 6.4 Financial Statements for the Year 2018 ...... 149 6.5 For 2018 and Up to the Printing Date of this Annual Report of the Company and Affiliates, Any Occurrence of Financial Difficulties Affecting the Financial Status of the Company...... 149 VII. Review of Financial Conditions, Financial Performance, and Risk Management ...... 150 7.1 Analysis of Financial Status ...... 150 7.2 Analysis of Financial Performance ...... 151 7.3 Analysis of Cash Flow ...... 152 7.4 Major Capital Expenditure Items ...... 153 7.5 Investment Policy in the Year 2018, Main Causes for Profits or Losses, Improvement Plans and Investment Plans for the Coming Year ...... 153 7.6 Analysis of Risk Management ...... 155 7.7 Emergency Response Mechanism ...... 183 7.8 Other Significant Incidents ...... 183 VIII. Special Disclosure ...... 184 8.1 Information of Affiliated Enterprises ...... 184 8.2 Private Placement Securities in the Most Recent Years ...... 190 8.3 Shares in the Company Held or Disposed of by Subsidiaries in the Most Recent Years ...... 190 8.4 Other events requiring further explanation ...... 190 8.5 For 2018 and up to the printing date of the annual report, occurrence of events having material impact on shareholders' rights and interests or securities prices according to Subparagraph 2, Paragraph 3, Article 36 of Securities and Exchange Act ...... 190 Appendix: 2018 Consolidated Financial Statements ...... 191
Letter to Shareholders 1
I.Letter to Shareholders
1.1 Operating Results in 2018
1.1.1 Domestic and External Circumstances In the first half of 2018, the global economy was driven by the stable recovery in major countries, creating gentle growth. However, in the second half of 2018, due to the expansion of the trade issue between China and US and the impact of the new emerging market financial fluctuations, the growth pace varies among different countries. Subsequently, several negative risk factors were generated and affecting economic expansion. Among the major countries globally, the economy of US continues to expand, but the growth in Euro Area, Japan and China slowed. The international forecasting agencies IMF and IHS Markit estimate that the 2018 global economic growth rates are 3.6% and 3.2%, which are lower than 3.8% and 3.2% in 2017. Regarding the domestic economy, under the influence of the favorable factors of stable output with two-digit growth and the stock market index maintaining above ten thousand points, the performance for the first half of 2018 was great, and the economic growth rate estimated by the Directorate-General of Budget, Accounting and Statistics (DGBAS), Executive Yuan was 3.22%. Beginning from the third quarter, the trade war between China and US started to take effect, and the domestic output demand and consuming power were relatively reduced. In addition, with the US Federal Reserve System (Federal Reserve) continued to increase the interest rate, leading to strong USD and causing the global fund movement with violent financial fluctuation; therefore, the outlook for the second half of the year was changed to conservative. The economic growth estimated by DGBAS is 2.08%, slightly lower than the first half, and the estimated annual economic growth rate is 2.63%. In terms of the financial condition, the US economy continues to expand, and the Federal Reserve’s interest rate normalization solution continues to be activated, and the interest rate was raised by 1% in total in 2018, and the Federal Funds Rate was adjusted to between the interval of 2.25%-2.5%. In addition, although the central banks of major countries - Bank of Japan (BOJ) and European Central Bank (ECB) etc. still maintain the short-term interest rate at approximately 0%, nevertheless, due to different reasons, many Asian or new emerging market countries follow the policy of raising interest rate, the currency policy becomes tightened, such as: Malaysia, India, Indonesia, Thailand, Mexico, South Africa and South Korea etc. For the domestic market, since the variables in 2019 increase, in addition to the trade war, the slowing down of economic growth in China, unclear currency policy direction of major countries and the European political and economic situation disturbances can all
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have possible impacts on the domestic economy. In 2018, for a period of 4 quarters consecutively, the board of directors of the Central bank maintained the rediscount rate, rate on accommodation with collateral and short-term financing interest rate unchanged at 1.375%, 1.75% and 3.625%. The interest rate policy in Taiwan has been frozen continuously for ten sessions. The securities market in 2018 was also affected by the global economy, and the main stock indices worldwide all indicated the trend of high to low due to fluctuation at the end. During mid-October, due to the weak purchase of the long-term government bond sale in US, the 10-year government bond interest rate raises above 3.25% in US, causing the US stock to plunge for two consecutive days and leading the global market to pull back for correction. Regarding the domestic stock market, in the first half of 2018, due to the influence of the factors of the recovery of global economy and return of funds etc, the trading volume in the Taiwan stock market increased continuously, and the Taiwan SE Weighted Index (TWSE) also rose above 11,000 points. Subsequently, due to the factors of the trade conflict between China and US, and Federal Reserve continued to increase the interest rate, the internal funds were driven to exit from the new emerging financial market such as Taiwan. In mid-October, the Taiwan stock market was further affected by the plunge of the US stock market, and TWSE dropped over 660 points on October 11, ending the longest period of TWSE maintained above ten thousand points for nearly 17 months consecutively and also marked the record of single-day largest dropping point in the history. The TWSE at the end of the year closed at 9,727 points, and the annual decrease was approximately 8.60%. However, the trading volume of the stock market was increased, and the average TWSE daily trading volume in 2018 was NTD 119.87 billion, an increase of 23.01% over the NTD 97.45 billion in the previous year. 1.1.2 Change of Company Organization In 2018, the capital increased by surplus earnings was at an amount of NTD 331,999,920, and the paid-in capital after the increase reached NTD 28,198,659,360. The subsidiary, International Bills Finance Corporation (IBFC), newly established the financial product department in March 2018. 1.1.3 Outcome from Execution of Business Plan and Strategy In 2018, IBFC had no non-performing loans, the loaning asset quality was excellent, and the capital adequacy ratio was maintained at high level. The operation financial cost continued to increase due to the consecutive raise of interest rate by the Federal Reserve’s balance sheet normalization. Under the condition of the decrease of interest rate spread profit margin and credit discount expansion, opportunity was seized to establish high rating bonds, and multiple currency bonds portfolio is established; therefore, the overall bonds
Letter to Shareholders 3
positions and profit remained stable. For the equity and convertible bond investment, the timing for the investment was also controlled properly, such that the net profit after tax in 2018 was NTD 1.895 billion, and the earning per share (EPS) was NTD 1.05. In 2018, the brokerage fee income of Waterland Securities increased from last year, and it was mainly due to the effect of the reduction of the day-trading tax and the Taiwan stock market moving average of NTD 165.3 billion, an increase of 20.39% from 2017. However, TAIEX suffered from the great drop in October, 2018 to drop from the high point at 11,270 in January such that the longest period for the market maintained above ten thousand points was ended, and closed at 9,727 points at the end of the year, with an annual decrease of approximately 8.6%. Consequently, the profit from the proprietary business, an underwriting business of Waterland Securities did not reach the expectation, and the net profit after tax in 2018 was NTD 325 million, with EPS of NTD 0.43. In 2018, the investment industries of Waterland Venture Capital mainly focused on the information technology, optoelectronics and precision machinery sectors. At the end of 2018, the securities net investment was NTD 1.078 billion (excluding the long-term investment of equity method of NTD 1.059 billion), and the performance was considered relatively great in the capital market; in addition, with the reinvestment in the Guo Want International Leasing Corp. in China with a profit of RMB 11.46 million, the annual net profit after tax was NTD 97.82 million. 1.1.4 Budget Implementation and Profitability Analysis In 2018, the Investment income recognized under equity method of the Company is NTD 2.19 billion, net profit after tax is NTD 2.021 billion, EPS is NTD 0.72. For IBFC, the net income is NTD 2.92 billion, operating expense is 680.9 million, net profit after tax is 1.89 billion, EPS is NTD 1.05. For Waterland Securities, the income is NTD 2.27 billion, expenditure and expense is 1.96 billion, net profit after tax is 324.6 million, EPS is NTD 0.43. For Waterland Venture Capital, the income is NTD 148.1 million, expenditure and expense is 60.11 million, net profit after tax is 97.82 million, EPS is NTD 0.64. 1.1.5 Research and Development Status 1. In response to the government's internet-only bank policy planning, the Company establishes relevant operational plan with strategic cooperating partners, and applies business license with the competent authority. 2. Encourage employees to actively participate in on-job training courses, and
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invite professional instructors to organize business seminars in order to strengthen the employees’ professional abilities in legal compliance, corporate governance and financial technology etc. through training. 3. Understand the domestic/foreign economic, financial status and trend as well as cooperate with the business development needs, establish diverse, integrated strategic collaboration solutions in order to increase shareholders’ benefits and expand the operating synergy. 4. Periodically maintain the risk control system in order to strengthen the information system function and to reflect the operational risk timely.
1.2 Business Plan for 2019
1.2.1 Operating Policy and Guidelines 1. Launch the core business development strategies for bills, securities and venture capital etc. In addition, through the financial holding platform, integrate diverse financial services of the Group in order to increase the operating synergy of all affiliates, and to reduce the impact of the financial market change on the business. 2. Actively establish internet-only bank financial innovative solutions with the strategic cooperating partners, in light of providing convenient and secured financial service to customers. 3. Comply with policies of competent authority, strengthen and comply with the anti-money laundering and terrorism financing prevention, legal compliance, corporate governance and information security operation regulations in order to achieve sound operation management for the entire group. 4. Cope with the financial technology development, cooperate with the subsidiaries in the development of innovative business satisfying long-term development, and participate in the association in the industry, and seek competent authority's approval in the new business, in order to provide complete financial services in greater extend. 1.2.2 Targets According to the overall political and economic, financial trend and development as well as the operating status of the subsidiaries, the Company will continue to strengthen the operational management on the invested enterprises, improve profit contribution of each subsidiary, and assess the feasibility of the development of other financial businesses. The expected 2019 operating goals are: 1. IBFC: guaranteed issues of commercial papers for NTD 866 billion,
Letter to Shareholders 5
certification of commercial papers for NTD 1.6 trillion, purchase and sale of various bills for NTD 4 trillion, purchase and sale of various bonds for NTD 3.118 trillion. 2. Waterland Securities: Brokerage business volume of consigned purchase and sale transaction for 1.719 trillion, margin trading average balance of NTD 11 billion, short selling average balance of NTD 1.964 billion. 3. Waterland Venture Capital: Newly increased the investment amount of NTD 150 million, and focus on the individual cases in the four major sectors of smart machinery, biomedical, artificial intelligence and high value-added service industry etc.
1.3 Development Strategy
To improve the Group’s competitiveness, the Company will continue to develop diverse, integrated and strategic collaboration solutions, and complete the financial holding cash flow platform, heading toward the development of a medium and large financial holding company. In addition, in response to the government’s policies on the financial technology development, the Company actively plans innovative business models, and collaborates with the cooperating partner in the establishment of internet-only bank development solution, in light of creating diverse stable income sources and achieving the long-term strategy goals. IBFC will continue to strengthen the fixed income product core business, cultivate, maintain and develop target customer groups, in order to create differential service value. For the loan business, the company will continue to cooperate with government policy and develop new financing cases in order to increase the self-guarantee bills interest spread, and optimize the risk control mechanism, dynamically manage the customer credit status, and provide pre-warning for the occurrence of the loan account credit downgrade. In addition, the corporation’s overall service quality will be improved in order to seek the equity commodity subscription other than loan business or other business opportunities. Furthermore, to cope with the trend and demand, the company plans to actively introduce the financial technology application in order to provide diverse financial technology service. Waterland Securities will consider the market environmental change and the permission progress of the competent authority on the regulations and businesses in order to actively seize market opportunities and to increase the company’s profit sources. Moreover, the company will strengthen the Group's business collaboration mechanism, integrate research resources and strengthen the position operational control methods in order to provide products and
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services matching with the needs of customers and of greater quality. For the internal, the cost control will continue to be implemented, the investment decision making and risk management mechanism will be strengthened, such that under the long-term stable operational strategies, all businesses are able to have balanced development and continuous growth. The industries invested by the Waterland Venture Capital will focus on the three main sectors of the smart machinery, biomedical and artificial intelligence led by the government policies. In addition, investment opportunities in high value-added service industry will be developed. Furthermore, the ratio of the key strategic investment accounts will be continuously increased in order to prevent overly diversified investment. 1.4 The Impact of the External Competitive Environment, Regulatory Environment, and Macroeconomic Conditions
In recent years, material anti-money laundering control events occurred in Taiwan, such as the New York branch of Mega International Commercial Bank involved in relevant negligence, leading to major penalty by the competent authority in US and causing impacts on the international financial image of Taiwan. To seek reclassification on the “general watch list” by mutual survey of the Asia/Pacific Group on Money Laundering (APG), the Legislative Yuan passed the third reading on the “Money Laundering Control Act’ and “Counter-Terrorism Financing Act’ amendments in November 2018 in order to correct flaws in the regulatory requirements. In addition, APG assigned personnel conducted field surveys in Taiwan in November 2018, and interviews were performed on randomly selected financial service providers. After the review, the survey team provided positive recognition to Taiwan but expressed that there were still rooms for improvement, such as the financial institutions overly relying on the money laundering representative figures announced by the agency, but the offshore financial center OBU inspection mechanism should be enhanced, legal entity and substantial beneficiary disclosure should be more transparent etc. APG survey final result will be announced in the annual conference held in July 2019. If Taiwan becomes a member of the “general watch list” of the best level, it means that Taiwan has already achieved a certain standard in the anti-money laundering mechanism, and the scope of the international fund outward/inward remittance, financial institution overseas business, and Taiwanese overseas investment etc. in the future will not be restricted. Regarding the competent authority’s policies, to assist the transformation and integration of the financial industry in our nation in order to increase the competitiveness, FSC announced the amendments of the three laws of the
Letter to Shareholders 7
“Regulations Governing the Investing Activities of a Financial Holding Company” etc. in November 2018 in order to implement the deregulation that for the shareholding percentage of a financial holding company or bank in an invested financial institution for the first time, the controlling interest required to be acquired is reduced to exceed 10%, providing the option of taking parts in the shareholding cooperation before negotiation for merger, and the capital charge is used as the incentive, triggering the market mechanism to take effect, and promoting the “ financial institution-to-financial institution” merger and acquisition. Furthermore, regarding the financial technology policies, FSC established the financial technology innovation park and organized financial technology exhibition in Taipei based on the promotion of the financial technology innovation experimental mechanism, as well as permitted the establishment of internet-only bank. In 2018, demonstrating the ambition in the development and promotion of digital finance. All different fields of the financial sector and relevant financial technology operators actively participate in the development of innovative businesses in order to provide new model of financial services to the general public. Looking ahead of 2019, most of the international organizations, including IMF and OECD etc., believe that the global economy in the future may continue to expand; however, under the influence of the implementation of trade protectionism and new emerging market financial turmoil, the global growth rate has reached its top. IMF and IHS Markit estimate the global economic growth rates in 2019 to be 3.3% and 2.8%, which are lower than those in 2018. For the domestic market, the DGBAS estimates that the economic growth rate in the 4th quarter of 2018 is reduced to 1.76%, and the economy monitoring indicator in December changes to blue light, indicating the economy expansion pace becomes slow. The domestic and foreign main institutions estimate that the economic growth rate in Taiwan for 2019 is between 2.1%~2.6%, and the recovery force is relatively weaker than that in 2018. The economy in Taiwan is deeply affected by the global economic fluctuation, and if the scale of the trade war between China and US continues to be elevated, then it will cause the global trading and supply chain to shift, expand the negative effect on the output and economy of our nation; therefore, such issues shall be concerned continuously with great care. The government of our nation actively promotes the prospective fundamental construction plans, promotes investment and expands the domestic consuming power etc. with the substantial effect of expansion type of financial policies, which will become the key factor in determining whether the domestic economy continues its growth. With the rapid development of the financial technology and internet trend, along with the condition where the global economy is facing downward trend, the Company will uphold the principle of consistent stable operation to
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continuously strengthen the development of the core businesses, achieve operational efficiency, and based on the consideration of the benefits of the shareholders in priority, the Company will cooperate with the relaxation of business policies of the competent authority, seek appropriate strategic cooperating partners or subject matters and head toward the digital financial innovative development, in light of constructing a complete financial holding system, achieving operation synergy and satisfying the expectations of all of the shareholders. 1.5 Credit Ratings
Waterland International Bills Waterland Company Financial Holding Finance Corp. Securities Co., Ltd. Co., Ltd. Date of Rating July.17, 2018 July.17, 2018 July.17, 2018 National Long-Term Credit A+ (twn) A+ (twn) A+ (twn) Ratings National Short-Term Credit F1(twn) F1(twn) F1(twn) Ratings International Long-Term Credit BBB BBB BBB Ratings International Short-Term Credit F3 F3 F3 Ratings Outlook Stable Stable Stable
Chairman President
Company Profile 9
II.Company Profile
2.1 Date of Incorporation March 26, 2002 2.2 Company History
The company was established as a result of 100% share swap amongst International Bills Finance Corp., Concourse Securities Co., Ltd., and Grand Orient Securities Corp. on March 26, 2002. The company was listed on the TSE on the exact same day. In order to expand the market share and operating scale of the capital market, to reduce operating cost and to enhance operating efficiency and competitiveness, on October 18, 2002, two subsidiary securities companies were merged with International Bills Union Securities Co., Ltd., the surviving company. The company changed the name to Waterland Securities Co., Ltd. With the aim of expanding the corporate finance business and providing newly-founded companies with the required funds, the company invested NT$ 500 million to establish its third subsidiary, Waterland Venture Capital Co., Ltd., in July 2004. On June 29, 2005, the shareholders’ meeting of the company was held to elect the second-term board of directors and supervisors. The board of directors elected Hsin Li Investment Co., Ltd. (later renamed Nice Commercial Mortgage Corp.) as the chairman. It designated Victor Wei-chi Liu as its proxy to exercise the duties on July 20, 2005. On June 9, 2006, the new management team not only introduced professional managers and restructured its organizational structure, but also conducted a capital reduction of NT$ 1,869,210,700 to NT$ 8,270,789,300 at Waterland Securities Co., Ltd. to improve the operating constitution of subsidiaries. The company acquired an additional 18.94 million shares in Waterland Securities Co., Ltd. on October 23, 2007 and another 24,469 shares on January 4, 2008, pushing its stake in the latter to 34.01%. Taking into account the Waterland Securities stake held by its subsidiary International Bills Finance Corp., the company now controls 58.02% of the securities unit. At a general meeting on June 27, 2008, shareholders elected the company’s third-term board directors and supervisors. On July 10, the newly formed board
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elected Hungmen Enterprise Co. as chairperson. Mr. Steven Hung was appointed to be its representative to perform the duty. On October 13, 2008, WFH unit Waterland Securities Co., Ltd. set up Waterland Securities (HK) Co., Ltd. through Waterland Securities (BVI) Co., Ltd., an investment arm. At an extraordinary meeting held on December 15, 2008, shareholders of WFH unit Waterland Securities Co., Ltd. adopted the resolution to take over the six business outlets of Great Wall Securities Inc., including their fixed assets and operating interests. At a meeting held on December 25, 2009, the board of WFH unit Waterland Securities Co., Ltd. approved the purchase of a 20% stake in Paradigm Asset Management Co., Ltd. The transaction was completed on February 10, 2010. In an extraordinary session on January 10, 2011, the board of Waterland Securities Co., Ltd. approved the purchase of the remaining 80% stake in Paradigm Asset Management Co., Ltd. Upon completion of the settlement on January 24, 2011, Paradigm Asset Management became a wholly owned subsidiary of Waterland Securities. On June 24, 2011, the shareholders’ meeting of the company elected the fourth-term board of directors and supervisors. In its turn, the board of directors elected Wea Chi-lin chairman on July 5 of the same year. On October 26, 2011, the board of directors approved a proposal for WFH unit Waterland Venture Capital Co., Ltd. to start a financial leasing company in mainland China by means of indirect investment from a third location. On January 19, 2012, WFH unit Waterland Venture Capital Co., Ltd. set up BVI-registered IBF Financial Holding Co., Ltd. with capitalization of US$13.10 million. On February 15, 2012, WFH made a NT$400 million capital injection into unit Waterland Venture Capital Co., Ltd., raising the latter’s paid-in capital to NT$900 million. On May 23, 2012, WFH unit Waterland Venture Capital Co., Ltd. set up Guo Want International Leasing Corp. through IBF Financial Holding Co., Ltd., a BVI-registered investment arm. On August 24, 2012, the board of directors of WFH unit Waterland Securities Co., Ltd. approved the dissolution or disposal of Waterland Securities (HK) Co., Ltd. On June 7, 2013, WFH made a NT$210 million capital injection into unit
Company Profile 11
Waterland Venture Capital Co., Ltd., raising the latter’s paid-in capital to NT$1.11 billion. On July 17, 2013, WFH unit Waterland Venture Capital Co., Ltd. made a US$7 million capital injection into IBF Financial Holding Co., Ltd., raising the latter’s paid-in capital to US$20.1 million. On July 18, 2013, IBF Financial Holding made a US$7 million capital injection into Guo Want International Leasing Corp. On August 6, 2013, Guo Want International Leasing Corp. secured an updated business license for an entity capitalized at US$20 million. On September 23, 2013, WFH unit Waterland Securities Co., Ltd. registered a capital decrease by deleting repurchased shares; its paid-in capital was reduced to NT$8,689,639,630. On March 18, 2014, WFH made a NT$100 million capital injection into unit Waterland Venture Capital Co., Ltd., raising the latter’s paid-in capital to NT$1.21 billion. On March 20, 2014, WFH unit Waterland Venture Capital Co., Ltd. made a US$2 million capital injection into IBF Financial Holding Co., Ltd., raising the latter’s paid-in capital to US$22.1 million. On the same day, IBF Financial Holding made a US$2 million capital injection into Guo Want International Leasing Corp., raising the latter’s paid-in capital to US$22 million. Later in the month, Guo Want International Leasing Corp. secured an updated business license for an entity capitalized at US$30 million. On June 20, 2014, WFH shareholders held their annual general meeting to elect the 5th board of directors, which in turn elected Wea Chi-lin chairman and established an audit committee. On June 27, 2014, WFH bought 208,854,353 common shares of Waterland Securities Co., Ltd. from unit International Bills Finance Corp., thus pushing the company’s Waterland Securities holdings to 504,761,323 shares or a 58.09% stake. On September 16, 2014, WFH unit Waterland Securities Co., Ltd. completed a NT$70,360,370 capital increase out of earnings and a NT$200,000,000 capital increase out of capital reserves, pushing its paid-in capital to NT$8,960,000,000. WFH’s Waterland Securities holdings rose to 520,465,911 shares while keeping its stake at 58.09%. On August 13, 2014, WFH shareholders held an extraordinary general meeting to elect a new board director and an independent director, with the latter
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also appointed to the company’s audit committee. On November 26, 2014, WFH made a NT$250 million capital injection into unit Waterland Venture Capital Co., Ltd., raising the latter’s paid-in capital to NT$1.46 billion. On December 18, 2014, WFH unit Waterland Venture Capital Co., Ltd. made an US$8 million capital injection into IBF Financial Holding Co., Ltd., raising the latter’s paid-in capital to US$30.1 million. On the same day, IBF Financial Holding made an US$8 million capital injection into Guo Want International Leasing Corp., raising the latter’s paid-in capital to US$30 million. Later, Guo Want International Leasing Corp. secured an updated business license for an entity with registered and paid-in capital of US$30 million. In 2015, WFH unit Waterland Venture Capital Co., Ltd. completed an NT$80 million capital increase out of earnings, pushing its paid-in capital to NT$1.54 billion. In 2015, WFH unit Waterland Securities Co., Ltd. completed a NT$140 million capital increase out of earnings, pushing its paid-in capital to NT$9.1 billion. WFH’s Waterland Securities holdings rose to 528,598,190 shares while keeping its stake at 58.09%. From August 27 to October 26 in 2015, WFH repurchased 40,000,000 shares, pushing its treasure stock to 90,000,000 shares. On January 30, 2016, WFH conducted treasury stock deletion, decreasing its paid-in capital to NT$26,764,861,800. From March 29 to May 28 in 2016, WFH re-purchased 40,000,000 shares amounting to NT$316,245,320 for assignment to employees. On August 14 2016, WFH completed the surplus to capital increase of NT$695,886,410; which resulted in the paid-up capital of NT$27,460,748,210. On June 16, 2017, the general shareholders’ meeting of the company has elected the directors for the 6th term. On June 19, 2017, the board of directors has elected Mr. Wei, Chi-Lin as the chairman. On August 14, 2017, the Company has completed the increase in share capital from earnings, and the amount is NT$ 405,911,230; the amount of paid-in capital thus has become NT$ 27,866,659,440.
Company Profile 13
Waterland Security Co., Ltd, one of the subsidiaries, has resolved to reduce the capital for NT$ 1.6 billion in the first extra shareholders’ meeting of Year 2017 on September 8, 2017. The capital change for the capital reduction has been registered on November 21, 2017. After the reduction, the paid-in capital has become NT$ 7.5 billion, and the shares held by the Company are reduced to 435,660,057 shares, representing 58.09% of total shares, as before. On August 8, 2018, the Company completed the capital increased by surplus earnings at an amount of NT$ 331,999,920, and the paid-in capital after the increase reached NT$ 28,198,659,360. On January 31, 2019, the board of directors’ special meeting of the Waterland Securities Co., Ltd. passed the resolution on the disposal of the 80% of shareholding of the (Waterland) Paradigm Asset Management Co., Ltd., and it was approved by FSC on February 27, 2019. The transaction was completed on March 4, 2019.
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III.Corporate Governance Report
3.1 Organization
3.1.1 Organizational Chart April 30, 2019
Shareholders’ Meeting
Audit Committee Board of Directors Chairman Remuneration Committee
Operational Development President Committee
Functional Executive Chief Chief Chief Governance Compliance Committees Vice Presidents Auditor Officer Officer
Corporate Compliance & Auditing Governance Legal Dept. Dept. Dept.
Administration Financial Information Planning Risk Dept. Dept. Dept. Dept. Management Dept.
Corporate Governance Report 15
3.1.2 Major Corporate Functions Audit Committee The operation of the Audit Committee is mainly to supervise the appropriate presentation of company’s financial reports, appointment (discharge) of CPA and independence as well as performance, effective implementation of company’s internal control, company’s compliance with relevant laws and regulations, and control of company’s existing or potential risks. Remuneration Committee The Commottee establishes and periodically reviews the performance evaluation of directors and managerial officers as well as the policy, system, standard and structure for the salary and remuneration. It also periodically evaluates and determines salary and remuneration of directors and managerial officers. Operational Development Committee It is established based on the needs of investment business and operation management, and acts as a management unit. Its main function is to manage the capital and financial affairs, investment strategy and scope of the Company, development and operation goals of subsidiaries as well as the cross-selling strategy planning etc. Administration Department Its function is to handle the administrative management affairs for the organization, documents, personnel, public relationship, secretary, general affairs and the human resource of subsidiaries and shared equipment etc. Financial Department Its function is to handle the Company’s capital structure planning and proposal, as well as execution of fund source and utilization planning, establishment of accounting system and preparation of annual budget and settlement, financial planning, analysis, management and tax affairs handling, approval of various expenses and accounting comprehensive management and related matters. Information Department Its function is to handle the planning, design, maintenance and execution of information affairs of the Company, the planning and integration of information system development direction for the Company and subsidiaries, integration of information system architectures and information security control, etc.
16 WATERLAND FINANCIAL HOLDINGS
Planning Department Its function is to handle the operational directives, investment planning of the Company, subsidiary equity management, establishment and execution of cross-selling, projects etc. Risk Management Department Its function is to handle the management of the market risk, credit risk, liquidity risk, operational risk, transaction with interested parties, firewall mechanism, as well as the risk managment regulations and system related matters. Corporate Governance Department Its function is to handle relevant matters of the audit committee, board of directors’ meeting and shareholders’ meeting according to the laws, to prepare meeting minutes for board of directors’ meeting and shareholders’ meeting, to provide documents necessary for the directors to perform duties, to assist directors in the compliance of laws and matters related to corporate governance etc. Compliance & Legal Department Its function is to handle the research, convey, consultation, coordination, execution, supervision and evaluation of legal compliance affairs; to analyze cause and propose improvement recommendations on major faults or inappropriateness in the legal compliance of each unit; to assist each subsidiary in the execution of legal compliance system affairs; and to handle affaires related to anti-money laundering and counter terrorist financing. Auditing Department Its function is to handle the establishment, execution, management and evaluation of the auditing affairs of the Company; as well as the auditing matters of the legal compliance system.
Corporate Governance Report 17
3.1.3 Subsidiaries April 30, 2019 NT$ in thousands Waterland Financial Holding Co., Ltd. HK$ in thousands US$ in thousands
Waterland Venture Capital International Bills Finance Waterland Securities Co., Co., Ltd. Corp. Ltd. (Note1) Stake ：100% Stake：100% Stake：58.09% Number of shares held： Number of shares held： Number of shares held： 154,000,000 shares 1,809,000,000 shares 435,660,057 shares Investment amount： Investment amount： Investment amount： NT$ 1,540,000 NT$ 21,249,131 NT$ 4,322,776
IBF Financial Holding Co., Waterland Futures Co., Ltd. Waterland Securities Waterland Securities (BVI) Ltd. Stake：99.88% Investment Consulting Co., Co., Ltd. Stake：100% Number of shares held： Ltd. Stake：100% Number of shares held： 59,930,244 shares Stake：100% Number of shares held： 30,100 shares Investment amount： Number of shares held： 5,581,620 shares Investment amount： NT$ 586,831 9,000,000 shares Investment amount：
US$ 30,100 Investment amount： US$ 5,582 NT$ 115,803
Note1: On January 31, 2019, the board of directors’ special meeting of the Waterland Securities Co., Ltd. passed Guo Want International the resolution on the disposal of the 80% of Waterland Securities (HK) Leasing Corp. shareholding of the (Waterland) Paradigm Asset Co., Ltd. (Note2) Stake：100% Management Co., Ltd., and it was approved by FSC Stake：100% Investment amount： on February 27, 2019. The transaction was completed Number of shares held： US$ 30,000 on March 4, 2019. 43,000,000shares Note2: The Board of Directors for Waterland Securities has Investment amount： passed a resolution on August 24, 2012 to dissolve or HK$ 43,000 dispose of Waterland Securities (HK). It is now undergoing the dissolution and settlement procedures.
18 WATERLAND FINANCIAL HOLDINGS
3.2 Directors and Management Team
3.2.1 Directors 1. Information of directors
Shareholding when Nationality/ Date First Current Shareholding Date Term Elected Title Country of Name Elected Elected (Years) Origin (Note 1) ％ ％ Shares Shares (Note 2) (Note 3)
Republic of Ren Wang Co., Ltd. 2017.06.16 3 2011.06.24 53,830,821 1.960 55,287,947 1.960 China (Taiwan)
Chairman
Republic of Chi-Lin Wea / Male 2017.06.16 3 2011.06.24 0 0 0 0 China (Taiwan)
Corporate Governance Report 19
April 16, 2019 Shareholding Executives, Directors or Spouse & Minor Supervisors who are by Nominee Shareholding spouses or within two Arrangement Experience（Education） Other Position degrees of kinship
Shares ％ Shares ％ Title Name Relation
Chairman, International Bills Finance Corp. Chairman, Chi Ting Venture Capital Co., Ltd. Chairman, Hua Ting Venture Capital Co., Ltd. Chairman, Yuan Ting Venture Capital Co., Ltd. 0 0 0 0 Ph.D in Economics, University of Paris Director, He Ting Venture Capital MBA, Imperial College London Co., Ltd. Dean, Graduate Institute of International Director, Li Ting Venture Capital Business, National Taiwan University Co., Ltd. Secretary General of the Cabinet, Taiwan Director, Fu Ting Venture Capital Government (Republic of China) Co., Ltd. Chairman, Land Bank of Taiwan Supervisor , Cheng Ting Venture Commissioner, Research, Development Capital Co., Ltd. and Evaluation Commission, Executive Director, AcBel Polytech Inc., Yuan Director, Nuvoton Technology - - - Director-General, Bureau of Personnel Corporation Administration Director, Taiwan Secom Co., Ltd. Chairman, Taiwan Financial Assets Independent Director, Sinbon Service Company Electronics Co, Ltd. Director, Chung-Hua Institution of Independent Director, Inventec Economic Research Besta Co., Ltd. Director, Taiwan Stock Exchange Independent Director, Formosa Corporation Plastics Corporation Director, Chung-Hsin Bills Finance Director, Avatack Co., Ltd. 0 0 0 0 Corp. Vice Chairman, Bio Preventive Medicine Corp. Director, Elan Microelectronics Corp. Supervisor, ACES Co., Ltd. Supervisor, Radium Life Tech Co., Ltd. Supervisor, Breeze Development Co., Ltd.
20 WATERLAND FINANCIAL HOLDINGS
Shareholding when Nationality/ Date First Current Shareholding Date Term Elected Title Country of Name Elected Elected (Years) Origin (Note 1) ％ ％ Shares Shares (Note 2) (Note 2)
Republic of First Commercial 2017.6.16 3 2011.6.24 82,889,217 3.018 85,132,914 3.019 China (Taiwan) Bank
Vice Chairman
Republic of Ying Wu / Female 2018.2.23 3 2018.2.23 0 0 0 0 China (Taiwan)
Republic of Ren Wang Co., Ltd. 2017.6.16 3 2011.6.24 53,830,821 1.960 55,287,947 1.960 China (Taiwan)
Director
Republic of Steven Hung / Male 2017.6.16 3 2005.6.29 2,096,793 0.076 2,153,550 0.076 China (Taiwan)
Republic of Ren Wang Co., Ltd. 2017.6.16 3 2011.6.24 53,830,821 1.960 55,287,947 1.960 China (Taiwan) Director Republic of Chin-Yuan Kung / 2017.6.16 3 2011.6.24 0 0 0 0 China (Taiwan) Male
Corporate Governance Report 21
Shareholding Executives, Directors or Spouse & Minor Supervisors who are by Nominee Shareholding spouses or within two Arrangement Experience（Education） Other Position degrees of kinship
Shares ％ Shares ％ Title Name Relation
Department of Public Finance, National Chengchi University Director, President and Chief Auditor of First Financial Holding Co., Ltd. Director, Vice President, Chief Auditor of 0 0 0 0 First Commercial Bank Manager, Hong Kong Branch, Ren-He Branch, First Commercial Bank Director, Taiwan Asset Management Company Senior Consultant, First Commissioner, Business Development Commercial Bank - - - Committee, Trust Association of R.O.C. Supervisor, International Bills Director, First Life Insurance Finance Corp. Chairman, First Property Insurance Agent Chairman, First Insurance Agent 0 0 0 0 Supervisor, Director, First Securities Investment Trust Supervisor, First Securities Supervisor, First Venture Capital Supervisor, First Financial Management Consulting Department of Law, National Taiwan Chairman, Waterland Securities University Co., Ltd. Chairman, Waterland Financial Holding Chairman, Waterland Futures 0 0 0 0 Co., Ltd. Co., Ltd. Chairman, International Bills Finance Director, Waterland Securities Corp. (BVI) Co., Ltd. Chairman, Taiwan Asset Management Independent Director, Sinyi Real - - - Company Estate Independent Director, China Steel Corp. Supervisor, Chuang-Yue Director, Taiwan External Trade Investment Co., Ltd. 3,865,351 0.137 0 0 Development Council Supervisor, Hong-Meng Director, China Airlines Investment Co., Ltd. Chairman, Taiwan Financial Assets Supervisor, Hong-Meng Business Service Company Co., Ltd. Taipei Instiute of Technology 0 0 0 0 Chairman, Tong-Lin Real Estate Co., Supervisor, Tong-Lin Real Estate Ltd. Co., Ltd. Director, Taiwan Business Bank Representative, Lidu Real Estate - - - Director, First Financial Holding Co., (Shanghai) Co., Ltd. Ltd. Chairman, Jia-Nien Construction 0 0 0 0 Director, First Commercial Bank Co., Co., Ltd. Ltd.
22 WATERLAND FINANCIAL HOLDINGS
Shareholding when Nationality/ Date First Current Shareholding Date Term Elected Title Country of Name Elected Elected (Years) Origin (Note 1) ％ ％ Shares Shares (Note 2) (Note 2)
Republic of Taiwan Cooperative 2017.6.16 3 2002.1.31 48,648,588 1.772 49,965,438 1.772 China (Taiwan) Bank
Director
Republic of Teng-Shan Tai / 2017.6.16 3 2014.6.20 0 0 0 0 China (Taiwan) Male
Republic of Hua Ji International 2017.6.16 3 2008.6.27 197,658 0.007 203,008 0.007 China (Taiwan) Development Corp.
Director
Republic of Michael Chen / 2017.6.16 3 2011.10.17 1,126,690 0.041 1,405,187 0.049 China (Taiwan) Male
Republic of Ren Wang Co., Ltd. 2017.6.16 3 2011.6.24 53,830,821 1.960 55,287,947 1.960 China (Taiwan) Director Republic of Cheng-Lin, Chen 2017.6.16 3 2017.6.16 0 0 0 0 China (Taiwan) / Male
Corporate Governance Report 23
Shareholding Executives, Directors or Spouse & Minor Supervisors who are by Nominee Shareholding spouses or within two Arrangement Experience（Education） Other Position degrees of kinship
Shares ％ Shares ％ Title Name Relation
EMBA, College of Technology Management, National Tsing Hua 0 0 0 0 University Master of Science in Economics, Chinese Culture University Vice President, Taiwan V.P. &General Manager, Seattle Branch Cooperative Bank - - - of TCB in U.S.A. Chairman, United Taiwan Bank S.V.P. & General Manager, International Director, Tamco Banking Department, Taiwan 0 0 0 0 Cooperative Bank Deputy Manager, United Taiwan Bank Executive V.P., Waterland Financial Holdings Director, International Bills Finance Corp Vice Chairman, Nice Group 0 0 0 0 Director, World Financing Co., Ltd. Director, He Ai Consulting Co., Master, London School of Economics Ltd. and Political Science Independent Director, Managing Director, Senior Executive Mikobeaute International Co., Officer, Advisor, Bowa Commercial Ltd. - - - Bank Ltd. Director, Thunder Tiger Corp. Director, Waterland Securities Co., Ltd. Director, A.G.V. Products Corporation Director, Chishing Recreation Village Co., Ltd. 0 0 0 0 Director, Datien International Development Co., Ltd. Director, Taifu International Co., Ltd. Supervisor, Nice Plaza Co., Ltd. Supervisor, Hola Co., Ltd. Vanung University Chairman, Pauguo Real Estate 0 0 0 0 Chairman of Pauguo Real Estate Management Co., Ltd. Management Co., Ltd. Chairman, BS Home Co., Ltd. - - - 0 0 0 0 Chief Strategy Officer, Herzu Investment Supervisor, Crowell Co., Ltd. Development Corp.
24 WATERLAND FINANCIAL HOLDINGS
Shareholding when Nationality/ Date First Current Shareholding Date Term Elected Title Country of Name Elected Elected (Years) Origin (Note 1) ％ ％ Shares Shares (Note 2) (Note 2) Republic of Ren Wang Co., Ltd. 2017.6.16 3 2011.6.24 53,830,821 1.960 55,287,947 1.960 China (Taiwan) Director Republic of Ho Chih-Chiang / 2017.6.16 3 2014.6.20 0 0 0 0 China (Taiwan) Male
Hua-Kang Republic of International Asset 2017.6.16 3 2008.6.27 197,658 0.007 203,008 0.007 China (Taiwan) Management Corp.
Director
Republic of James Y. L. Wei / 2017.6.16 3 2007.7.20 0 0 0 0 China (Taiwan) Male
Independent Republic of Yeong-Chyan Wu / 2017.6.16 3 2005.6.29 0 0 0 0 Director China (Taiwan) Male
Corporate Governance Report 25
Shareholding Executives, Directors or Spouse & Minor Supervisors who are by Nominee Shareholding spouses or within two Arrangement Experience（Education） Other Position degrees of kinship
Shares ％ Shares ％ Title Name Relation
Vice Chairman, Waterland Master, University of Stirling 0 0 0 0 Securities Co., Ltd. Bachelor, University of London Director, TiTV Co., Ltd. - - - Chairman, Vice Chairman, Pacific Director, Paradigm Asset 0 0 0 0 Securities Co., Ltd. Management Co., Ltd.
Doctor of Law, Wuhan University Master of Law, National Taiwan University 0 0 0 0 Managing Partner Attorney, Li Yuan Attorneys-at-Law Director, International Bills Finance Chief Attorney, Dacheng Law Corp. Offices Taiwan Director, Waterland Securities Co., Ltd. - - - Director, Vantone Capital Pte., President, Chinese Intellectual Property Ltd. Protection Association Director, Pacific Securities Co., Ltd. 0 0 0 0 Councilor, Taipei City Council Committee Member, Financial Consumption Committee of Consumer’s Foundation
Doctor of Law, Master of Law, University of Washington Bachelor of Law, National Taiwan University Professor of law, Dean of student affairs, Dean, Shih Hsin University Independent Director, Waterland President, Shih Hsin University Financial Holding Co., Ltd. Independent Director, Managing Director, Director, Taipei International Bills Finance Corp. 0 0 0 0 - - - Public Access Channel Association Independent Director, A.G.V. Secretary General, Commissioner, The Products Corporation Press Council of the R.O.C. Managing Director, NPC Commissioner, Executive Yuan Referendum Review Committee Supervisor, Executive Supervisor, Chinese Television System Inc. Independent Director, Taiwan High Speed Rail Corporation
26 WATERLAND FINANCIAL HOLDINGS
Shareholding when Nationality/ Date First Current Shareholding Date Term Elected Title Country of Name Elected Elected (Years) Origin (Note 1) ％ ％ Shares Shares (Note 2) (Note 2)
Independent Republic of Joanna Lei / Female 2017.6.16 3 2011.6.24 0 0 0 0 Director China (Taiwan)
Independent Republic of Ching-Sung Wu / 2017.6.16 3 2014.6.20 0 0 0 0 Director China (Taiwan) Male
Corporate Governance Report 27
Shareholding Executives, Directors or Spouse & Minor Supervisors who are by Nominee Shareholding spouses or within two Arrangement Experience（Education） Other Position degrees of kinship
Shares ％ Shares ％ Title Name Relation
Director, Eastern Home Shopping & Leisure Co., Ltd. Ph. D, Master, University of Chairman, Xing Yeh International Pennsylvania Ltd. Bachelor, National Taiwan University Vice Chairman, DCTV Co., Ltd. Chairman, Kinmen Kaoliang Liquor Inc. Director, Pacific Construction Legislator, Legislative Yuan, R.O.C. Co., Ltd. Adjunct Assistant Professor, Fu Jen Director, Pacific Department Catholic University Store Co., Ltd. Executive Director, Eastern Broadcasting Director, Tai Tou Co., Ltd. 0 0 0 0 Co., Ltd. - - - Director, ETtoday Co., Ltd. Vice Chairman and CEO, Pacific Legal representative, Natural Broadband Co. Ltd. Beauty Bio-Technology Limited Chairman, Baring Taiwan Co., Ltd. (Cayman) Director, Partner, Baring Asia Pacific Legal representative, Natural Communications Media Fund Beauty Bio-Technology (Hong Investment Vice President, American Kong) Company Limited Broadcasting Company (ABC), Legal representative, Natural Headquarter Beauty China Holding Limited (HK)
PhD of Business Administration University of California, Los Angeles (UCLA) Head and Director of Department and Graduate Institute of International Business, National Taiwan University Professor and Business School Visiting Professor, School of Economics Dean, Global Business Program, and Management, Tsinghua University, Chinese Culture University Beijing Independent Director, MicroBase Visiting Scholar, John F. Kennedy School Technology Corporation 0 0 0 0 of Government, Harvard Kennedy Independent Director, Anderson - - - School Industrial Corp. Director, Vanguard International Independent Director, Sogotec Semiconductor Co., Ltd. Precision Co., Ltd. Independent Director, Medigen Director, Cheng Chi Production Biotechnology Corp. Ltd. Director, Fuhua Financial Holding Co., Ltd. Managing Director, Oversea-Chinese Banking Corporation Limited Director, TaiGen Biotechnology Co., Ltd.
28 WATERLAND FINANCIAL HOLDINGS
Shareholding when Nationality/ Date First Current Shareholding Date Term Elected Title Country of Name Elected Elected (Years) Origin (Note 1) ％ ％ Shares Shares (Note 2) (Note 2)
Independent Republic of Wang, Yao-Shing / 2017.6.16 3 2014.8.13 0 0 0 0 Director China (Taiwan) Male
Note 1: The first election date refers to the date of assuming the position of director of the Company for the first time. Note 2: During the election, the shareholding percentage is calculated based on the share capital of 2,746,074,821 shares for the sixth session of director election of the Company on 6/16/2017. Note 3: The current shareholding percentage is calculated based on the share capital of 2,819,865,936 shares on the annual report printing date. Note 4: Where a director is institutional shareholders, for its major shareholders, please refer to Table 2. Major shareholders of institutional shareholders below.
Corporate Governance Report 29
Shareholding Executives, Directors or Spouse & Minor Supervisors who are by Nominee Shareholding spouses or within two Arrangement Experience（Education） Other Position degrees of kinship
Shares ％ Shares ％ Title Name Relation
Research Program, Syracuse University Master, Department of Public Finance, National Chengchi University Bachelor, Department of Public Finance, National Chengchi University Adjunct Associate Professor, Specialist, Secretary, Division Chief, Executive Master of Business Taxation and Tariff Committee, Ministry Administration, National of Finance Chengchi University 0 0 0 0 Section Chief, Securities Regulatory Independent Director, - - - Commission, Ministry of Finance FORLAND AUTO TRADE Section Chief, Deputy Director-General, HOLDING CO. LTD. Director General, Bureau of Monetary Independent Director, Fu Yu Affairs, Ministry of Finance Property Co., Ltd. Director-general, Training Institute, Ministry of Finance, R.O.C. Chairman of the Board, Land bank of Taiwan
30 WATERLAND FINANCIAL HOLDINGS
2. Major shareholders of the institutional shareholders December 31, 2018 Name of Institutional Shareholders Major Shareholders (Note) Ren Wang Co., Ltd. Norwares Overseas Inc. 100% First Commercial Bank First Financial Holding Co.,Ltd. 100% Hua Ji International Development Corp. World Finance Co., Ltd. 100% Taiwan Cooperative Financial Holding Co., Taiwan Cooperative Bank Ltd.100% Hua-Kang International Asset Management Corp. World Finance Co., Ltd.100% Note: The major shareholders refer to the shareholders with top ten shareholding percentage. Where the major shareholder of an institutional director is a legal entity, please refer to Table 3 below for its major shareholders. Source of information: Institutional directors of the Company.
3. Major shareholders of the Company’s major institutional shareholders December 31, 2018 Name of Institutional Major Shareholders (Note) Shareholders
Norwares Overseas Inc. Tsai Eng Meng 100%
Ministry of Finance 11.49%、 Bank of Taiwan 7.45%、 Hua Nan Bank 2.83%、 Civil Servants’ Retirement Fund 2.15%、China Life Insurance Co., Ltd. 1.91%、Chunghwa Post Co., Ltd.1.50%、Taiwan Tobacco and First Financial Holding Liquor Corporation 1.27%、Vanguard Emerging Markets Stock Index Co.,Ltd. Fund 1.22%、JPMorgan Chase Bank N.A., Taipei Branch in custody for Vanguard Total Interntional Stock Index Fund, a series of Vanguard Star Funds 1. 15%、Taiwan Life Insurance Co., Ltd. 1.05% Hui-tong International Development Co. 45.80%、Tang-li Culture& Media Co., Ltd. 19.50%、Taiwan NJC Corporation., Ltd. 19.08%、Taiwan First World Finance Co., Ltd. Biotechnology Incorporated 14.85% 、 Taiwan Miao-nong Dairy Development Co., Ltd.0.76% Ministry of Finance 26.06%、 Chunghwa Post Co., Ltd. 3.78%、 Taiwan Tobacco and Liquor Corporation 2.27%、 National Farmers’ Association, R.O.C. 1.54%、 Vanguard Emerging Markets Stock Index Fund , a Series Taiwan Cooperative OF Vanguard International Equity Index Funds 1.14%、 JPMorgan Financial Holding Co., Chase Bank N.A. Taipei Branch in Custody for Vanguard Total Ltd. International Stock Index Fund, a series of Vanguard Star Funds 1.12%、 Norges Bank - internal - NBIM PF EQ INTERNAL CFD 1.05%、 iShares Edge MSCI Min Vol Emerging Markets ETF 1.01%、 Dimensional Emerging Markets Value Fund 0.64%、 Government of Singapore 0.61% Note: The major shareholders refer to the shareholders with top ten shareholding percentage. Source of information: Information of shareholders at the last book closure date provided by each institutional directors of the Company.
Corporate Governance Report 31
4. Professional qualifications and independence analysis of directors April 16, 2019 Meet One of the Following Professional Qualification Requirements, Together with at Least Five Years Work Independence Criteria(Note) Experience An Instructor or A Judge, Public Have Work Higher Position in a Prosecutor, Attorney, Experience in Number of Criteria Department of Certified Public the Areas of Other Public
Commerce, Law, Accountant, or Other Commerce, Companies
Finance, Accounting, Professional or Law, Finance, in Which the
or Other Academic Technical Specialist or Accounting, Individual is
Department Related Who has Passed a or Otherwise Concurrently 1 2 3 4 5 6 7 8 9 10 to the Business Needs National Necessary for Serving as an
of the Company in a Examination and the Business of Independent Name Public or Private been Awarded a the Company Director Junior College, Certificate in a College or University Profession Necessary for the Business of the Company Chi-Lin Wea 3 Ying Wu 0 Steven Hung 1 Chin-Yuan Kung 0 Teng-Shan Tai 0 Michael Chen 1 Cheng-Lin, Chen 0 Ho Chih-Chiang 0 James Y. L. Wei 0 Yeong-Chyan 1 Wu Joanna Lei 0 Ching-Sung Wu 3 Wang, 2 Yao-Shing Note: Please tick the corresponding boxes that apply to the directors or supervisors during the two years prior to being elected or during the term of office. 1. Not an employee of the Company or any of its affiliates. 2. Not a director or supervisor of affiliates. Not applicable in cases where the person is an independent director of the its parent company, or any subsidiary in which the Company holds, directly or indirectly, more than 50% of the voting shares. 3. Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of 1% or more of the total number of outstanding shares of the Company or ranking in the top 10 in holdings. 4. Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the persons in the preceding three subparagraphs. 5. Not a director, supervisor, or employee of a corporate shareholder who directly holds 5% or more of the total number of outstanding shares of the Company or who holds shares ranking in the top five holdings. 6. Not a director, supervisor, officer, or shareholder holding 5% or more of the shares, of a specified company or institution which has a financial or business relationship with the Company. 7. Not a professional individual who is an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that provides commercial, legal, financial, accounting services or consultation to the Company or to any affiliate of the Company, or a spouse thereof. These restrictions do not apply to any member of the remuneration committee who exercises powers pursuant to Article 7 of the “Regulations Governing the Establishment and Exercise of Powers of Remuneration Committees of Companies whose Stock is Listed on the TWSE or Traded on the TPEx“. 8. Not having a marital relationship, or a relative within the second degree of kinship to any other director of the Company. 9. Not been a person of any conditions defined in Article 30 of the Company Act. 10. Not a governmental, juridical person or its representative as defined in Article 27 of the Company Act.
32 WATERLAND FINANCIAL HOLDINGS
3.2.2 Management Team
Spouse & Minor Nationality/ Country Date Shareholding Title Name Shareholding of Origin Effective Shares ％ Shares ％
Republic of China, Michael Y. J. Ding / President 2011.07.05 1,533,078 0.054 0 0 (Taiwan) Male
Republic of China, Michael Chen / Executive Vice President 2006.07.19 1,405,187 0.049 0 0 (Taiwan) Male
Republic of China, Executive Vice President Andrew Chiu / Male 2011.07.05 541,314 0.019 0 0 (Taiwan)
Republic of China, Wen-Chu Hou / Chief Auditor 2019.04.03 340,451 0.012 0 0 (Taiwan) Male
Corporate Governance Report 33
April 16, 2019 Shareholding Managers who are by Nominee Spouses or Within Two Experience（Education） Other Position Arrangement Degrees of Kinship Shares ％ Title Name Relation Ph.D. in Economics, Indiana University Chairman, Paradigm Asset Management Co., Ltd. Chairman, Waterland Securities Co., Ltd. Director, International Bills Chairman, Waterland Futures Co., Ltd. Finance Corp. Chairman, Fubon Investment Services Co., Ltd. Director, Waterland Securities President, Fubon Asset Management Co., Ltd. Co., Ltd. Chief Economist, Fubon Financial Holding Co Director, Waterland Venture 0 0 Ltd. - - - Capital Co., Ltd. President, Chief Investment Officer, International Director, IBF Financial Holding Securities Investment Trust Co., Ltd. Co., Ltd. Vice President, Chief Economist, Citigroup Independent Director, Ablerex Securities Co., Ltd. Electronics Co., Ltd. Associate Professor, Department of Business Administration, National Taiwan University of Science and Technology Director, International Bills Finance Corp. Vice Chairman, Nice Group Director, World Financing Co., Ltd. Director, He Ai Consulting Co., Ltd. Independent Director, M.Sc., the London School of Economics and Mikobeaute International Co., Political Science Ltd. 0 0 Managing Director, Senior Executive Officer, Director, Thunder Tiger Corp. - - - Advisor, Bowa Commercial Bank Ltd. Director, A.G.V. Products Director, Waterland Securities Co., Ltd. Corporation Director, Chishing Recreation Village Co., Ltd. Director, Datien International Development Co., Ltd. Director, Taifu International Co., Ltd. Supervisor, Nice Plaza Co., Ltd. Supervisor, Hola Co., Ltd.
MBA, University of Rochester Director, Guo Want President, Executive Vice President, Paradigm International Leasing Corp. 0 0 Asset Management Co., Ltd. - - - Director, IBF Financial Holding Manager, Standard Chartered Bank (Taiwan) Co., Ltd. Limited, Foreign Exchange Department
Accounting Department, Soochow University Director, Oversea-Chinese Banking Corporation Limited, Accounting Division 0 0 - - - - Chief Auditor, Central Insurance Co., Ltd. Chief Auditor, Assistant Vice President, International Bills Finance Corp.
34 WATERLAND FINANCIAL HOLDINGS
Spouse & Minor Nationality/ Country Date Shareholding Title Name Shareholding of Origin Effective Shares ％ Shares ％
Republic of China, Chief Compliance Officer An-Fa Chang/ Male 2019.03.15 157,002 0.005 0 0 (Taiwan)
Assistant Vice President, Republic of China, Tainyi Luor / Male 2018.03.01 387,492 0.013 0 0 Information Department (Taiwan)
Assistant Vice President, Republic of China, Risk Management Milton Huang/ Male 2013.03.01 189,894 0.006 0 0 (Taiwan) Department
Republic of China, 2019.03.25 Chief Governance Officer Jason Wu/ Male 0 0 0 0 (Taiwan) (Note 3)
Manager, Administration Republic of China, Andre Huang/ Male 2017.04.01 205,785 0.007 0 0 Department (Taiwan)
Senior Deputy Manager Republic of China, Hui-Yu Kuo/ Female 2016.06.01 104,114 0.003 0 0 Financial Department (Taiwan) Senior Deputy Manager Republic of China, Ian Lu/ Male 2016.04.01 267,092 0.009 32,460 0.001 Planning Department (Taiwan) Note: 1. All job positions including President, Vice President, Assistant Vice President, all departments and branch institution supervisor information, and all positions equivalent to President, Vice President or Assistant Vice President, regardless of the names of the titles, are disclosed. Note: 2. All of the above personnel are not assuming positions at the accounting firm performing the audit. Note: 3. According to the approval of the sixteenth meeting of the sixth term of board of directors’ meeting on March 25, 2019, the person was approved to concurrently assume the position of Chief Governance Officer and head of Dept. of Corporate Governance of the Company, effective since the approval by competent authority. 3.2.3 Chairman or President retired from the company or its affiliates return to assume the position of advisor: None
Corporate Governance Report 35
Shareholding Managers who are by Nominee Spouses or Within Two Experience（Education） Other Position Arrangement Degrees of Kinship Shares ％ Title Name Relation EMBA, National Chengchi University Director, Citibank Tientsin, Tsinta Branch Chief Compliance Officer, 0 0 - - - Assistant Vice President, International Bills International Bills Finance Corp. Finance Corp., Planning Department Chief Information Officer, Ph. D, School of Management, National Taiwan International Bills Finance Corp. University of Science and Technology Director, IBF Financial Holding 0 0 Chairman, Guo Want International Leasing Corp. - - - Co., Ltd. Senior Assistant Vice President, International Bills Director, Guo Want Finance Corp. International Leasing Corp. Manager, RiskManagement Master of Accounting, National Taiwan University Office, International Bills Deputy Manager, Howard Hotels Co., Ltd., 0 0 Finance Corp. - - - Financial Department Supervisor, Guo Want Manager, President Securities Corp. International Leasing Corp. Master of Laws, University of South California Vice President and Chief Compliance Officer, First Securities Investment Trust Co., Ltd. General Counsel and Chief Compliance Officer, Senior Executive Officer, 0 0 - - - Hontai Life Insurance International Bills Finance Corp. Judge, Taiwan High Court Kaohsiung Branch Court, Taiwan Kaohsiung District Court, Taiwan Shilin District Court Master of Laws, National Chengchi University 0 0 Junior Manager, E.SUN Financial Holding Co., - - - - Ltd. Department of Business Administration, National 0 0 - - - - Taiwan University MBA, National Taiwan University 0 0 - - - - Junior Manager, International Bills Finance Corp.
36
WATERLAND FINANCIALHOLDINGS 3.3 Remuneration of Directors, President, Vice President, and Bonus to Employees
3.3.1 Remuneration of Directors
Unit: NT$ thousands, December 31, 2018
Remuneration Ratio of Total Relevant Remuneration Received by Directors Who are Also Employees Ratio of Total Remuneration Compensation Compensation Bonus to (A+B+C+D) to Net Salary, Bonuses, and (A+B+C+D+E+F+G) Base Compensation Allowances (D) Profit Sharing- Employee Bonus Paid to Severance Pay (B) Directors (C) Income (%) Allowances (E) Severance Pay (F) to Net Income (%) (A) (Note3) (G) (Note6) Directors from Title (Note2) (Note4) (Note5) (Note4) an Invested Name (Note1) All companies Companies in Companies in Companies in Companies in the Companies Company Other Companies in Companies in in the Companies in the the the the The company consolidated in the than the The The the consolidated the consolidated The The The The The consolidated The company consolidated consolidated consolidated consolidated financial statements consolidated Company’s company company financial financial company company company company company financial financial statements financial financial financial financial Subsidiary statements statements Cash Stock Cash Stock statements statements statements statements statements 2,115 2,115 Ren Wang Co., Ltd.
Chairman 11,671 15,990 0 0 (Institutional (Institutional 169 319 0.69 0.91 0 0 0 0 0 0 0 0 0.69 0.91 None Representative: Chi-Lin Wea director) director) Director Ren Wang Co., Ltd. Ren Wang Co., Ltd. Director Representative: Steven Hung Ren Wang Co., Ltd. Director Representative: Chin-Yuan Kung Ren Wang Co., Ltd. Director Representative: Cheng-Lin Chen Ren Wang Co., Ltd. Director Representative: Chih-Chiang Ho Director First Commercial Bank Director First Commercial Bank Representative: Ying Wu Director Hua-Kang International Asset 2,904 Management Corp. 5,918 (1,570 for Director Hua-Kang International Asset (1,570 for official Management Corp. 7,687 22,060 0 0 28,554 29,884 official vehicle 1.93 2.86 3,945 3,945 0 0 1,693 0 1,693 0 2.21 3.14 None vehicle Representative: James Y. L. Wei further further Director Hua-Ji International Development Corp. provided) provided) Director Hua-Ji International Development Corp. Representative: Michael Chen Director Taiwan Cooperative Bank Director Taiwan Cooperative Bank Representative: Teng-Shan Tai Independent Joanna Lei Director Independent Yeong-Chyan Wu Director Independent Ching-Sung Wu Director Independent Yao-Shing Wang Director All the directors did not offer service to companies in the consolidated financial statements in 2018 in exchange for remuneration, except for the amount disclosed in the table.
Name of Directors (Note8)
Total of (A+B+C+D) Total of (A+B+C+D+E+F+G) Range of Remuneration Companies in the consolidated Companies in the consolidated The company The company financial statements financial statements Steven Hung, Chin-Yuan Chin-Yuan Kung, Cheng-Lin Chen, Steven Hung, Chin-Yuan Kung, Chin-Yuan Kung, Cheng-Lin Chen, Kung,Cheng-Lin Chen, James Y. L. Wei, Michael Chen, Cheng-Lin Chen, Chih-Chiang Ho, James Y. L. Wei, Teng-Shan Tai Under NT$ 2,000,000 Chih-Chiang Ho, James Y. L. Wei, Teng-Shan Tai James Y. L. Wei, Teng-Shan Tai Michael Chen, Teng-Shan Tai Hua-Kang International Asset Hua-Kang International Asset Hua-Kang International Asset Hua-Kang International Asset Management Corp., Hua-Ji Management Corp., Hua-Ji Management Corp., Hua-Ji Management Corp., Hua-Ji International Development Corp., International Development Corp., International Development Corp., International Development Corp., NT$2,000,000 ~ NT$5,000,000 (Excl.) Taiwan Cooperative Bank, First Taiwan Cooperative Bank, First Taiwan Cooperative Bank, First Taiwan Cooperative Bank, First Commercial Bank, Ying Wu, Commercial Bank, Ying Wu, Commercial Bank, Ying Wu, Commercial Bank, Ying Wu, Joanna Lei, Yeong-Chyan Wu, Joanna Lei, Yeong-Chyan Wu, Joanna Lei, Yeong-Chyan Wu, Joanna Lei, Yeong-Chyan Wu, Ching-Sung Wu, Yao-Shing Wang Ching-Sung Wu, Yao-Shing Wang Ching-Sung Wu, Yao-Shing Wang Ching-Sung Wu, Yao-Shing Wang Michael Chen, Steven Hung, NT$5,000,000 ~ NT$10,000,000 (Excl.) - Steven Hung, Chih-Chiang Ho Michael Chen Chih-Chiang Ho NT$10,000,000 ~ NT$15,000,000 (Excl.) Ren Wang Co., Ltd., Chi-Lin Wea Ren Wang Co. Ren Wang Co. Ren Wang Co. NT$15,000,000 ~ NT$30,000,000 (Excl.) Chi-Lin Wea Chi-Lin Wea Chi-Lin Wea NT$30,000,000~ NT$50,000,000 (Excl.) - - - - NT$50,000,000 ~ NT$100,000,000 (Excl.) - - - -
Over NT$100,000,000 - - - - Corporate Governance Report Total 18 18 18 18 Note 1: The Company selected the 6th term of Directors in the ordinary shareholders’ meeting on June 16, 2017. Note 2: The Company plans to distribute the 2018 remuneration of directors at an amount of NT$ 30,670 thousand. Note 3: It refers to the transportation fee and attendance fee of 2018. In addition, the company car rental provided for the Chairman and Vice Chairman are NT$ 930 thousand and NT$640 thousand, respectively. The drivers’ compensation is not counted into the remuneration. Note 4: The 2018 net income after tax of the Company is NT$ 2,021,559 thousand. Note 5: It refers to the salary, differential pay, various bonuses, allowance, rental cost for cars provided etc. of directors concurrently acting as employees in 2018. Note 6: The Company distributes the 2018 employees’ remuneration at an amount of NT$ 21,469 thousand. For directors with adjunct positions of President and Vice President, their employees’ remuneration is disclosed in the following table, Remuneration for President and Vice Presidents. Note 7: The Company and all companies listed in the consolidated report did not issue the employee stock option certificate and restricted stock awards in 2018. Note 8: It refers to the names for the payment of director’s remuneration at each bracket. 37
38
WATERLAND FINANCIALHOLDINGS 3.3.2 Remuneration of the President and Vice President December 31, 2018 Unit: NT$ thousands Ratio of total Compensation Bonuses and Allowances Profit Sharing- Employee compensation paid to the Salary(A) Severance Pay (B) (C) (Note1) Bonus (D) (Note2) (A+B+C+D) to net President and income (%) (Note3) Vice President from an Title Name Companies in Companies in Companies in Companies in the Companies Invested the the the The consolidated in the The The The The Company Other consolidated consolidated consolidated company financial consolidated company company company company Than the financial financial financial statements financial Company’s statements statements statements Cash Stock Cash Stock statements Subsidiary President Michael Y. J. Ding Executive Vice
Michael Chen President 7,406 16,708 Executive Vice Andrew Chiu (714 for (714 for President official official 12,870 17,738 0 0 7,877 0 10,086 0 1.39 2.20 181 Executive Vice vehicle vehicle Yen-Lang Chiu President further further Executive Vice provided) provided) Ming-Hau Ni President Chief Auditor Jeng-Shun Chen Note: Ming-Hau Ni, Chief Compliance Officer of IBFC, served concurrently as the Chief Compliance Officer of the Company from March 1st, 2018 to March 1st, 2019. Name of President and Vice President Range of Remuneration The company Companies in the consolidated financial statements Under NT$ 2,000,000 (Excl.) Yen-Lang Chiu, Ming-Hau Ni - NT$2,000,000 ~ NT$5,000,000 (Excl.) - - NT$5,000,000 ~ NT$10,000,000 (Excl.) Michael Y. J. Ding, Michael Chen, Andrew Chiu, Jeng-Shun Chen Michael Chen, Andrew Chiu, Jeng-Shun Chen , Ming-Hau Ni NT$10,000,000 ~ NT$15,000,000 (Excl.) - Michael Y. J. Ding ,Yen-Lang Chiu NT$15,000,000 ~ NT$30,000,000 (Excl.) - - NT$30,000,000 ~ NT$50,000,000 (Excl.) - - NT$50,000,000 ~ NT$100,000,000 (Excl.) - - Over NT$100,000,000 - - Total 6 6 Note 1: It refers to various bonuses, allowances. In addition, company car rental of NT$ 714 thousand is provided to President, and the President’s driver’s compensation is NT$1,404 thousand, not counted into the remuneration. Note 2: The Company plans to distribute the 2018 employee’s remuneration at an amount of NT$ 21,469 thousand, all in cash. Note 3: The 2018 net income after tax of the Company is NT$ 2,021,559 thousand. Note 4: The Company and all companies listed in the consolidated report did not issue the employee stock option certificate and restricted stock awards in 2018.
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3.3.3 Bonus of the Managers
Unit: NT$ thousands Employee Bonus Employee Ratio of Total - in Stock Bonus Amount to Net Title Name Total (Fair Market Value) - in Cash Income (%) (Note2) (Note2) (Note3) President Michael Y. J. Ding Executive Vice Michael Chen President Executive Vice Andrew Chiu President Chief Compliance Yen-Lang Chiu Officer Chief Compliance Ming-Hau Ni Officer Executive Chief Auditor Jeng-Shun Chen Officers 0 12,516 12,516 0.62 Assistant Vice (Note1) Tainyi Luor President Manager Sung-Ta Yang Manager Milton Huang Manager Andre Huang Manager Tiffany Hung Senior Deputy Hui-Yu Kuo Manager Senior Deputy Ian Lu Manager The employees’ remuneration (including stocks and cash) for managerial officers proposed to be distributed and approved by the board of directors’ meeting in the most recent year is listed. Net profit after tax refers to the net profit after tax of the most recent year. Note 1: The applicable scope of managerial officers is as follows: (1) President and equivalent level. (2) Vice President and equivalent level. (3) Assistant Vice President and equivalent level. (4) Financial Department supervisor. (5) Accounting Department supervisor. (6) Other personnel with the authority to manage affairs and provide signature for the Company. Note 2: The Company plans to distribute the 2018 employee’s remuneration at an amount of NT$ 21,469 thousand, all in cash. Note 3: The 2018 net income after tax of the Company is NT$ 2,021,559 thousand. 3.3.4 Remuneration of Consultants: None
40 WATERLAND FINANCIAL HOLDINGS
3.3.5 Comparison of Remuneration for Directors, Presidents and Vice Presidents in the Most Recent Two Fiscal Years and Remuneration Policy for Directors, Presidents and Vice Presidents
1. The ratio of total remuneration paid by the Company and by all companies included in the consolidated financial statements for the two most recent fiscal years to directors, presidents and vice presidents of the Company, to the net income. Unit: NT$ thousands 2017 2018 Difference Companies in Companies in Companies in the the the Year The company consolidated The company consolidated The company consolidated financial financial financial statements statements statements Total 97,014 135,397 86,891 126,456 -10.43% -6.60% remuneration Net income 2,370,784 2,021,559 -14.73% Ratio of total remuneration 4.09% 5.71% 4.30% 6.26% 0.21% 0.55% to net income
2. The policies, standards, and portfolios for the payment of remuneration, the procedures for determining remuneration, and the correlation with business performance and risks.
For the remuneration of directors of the Company, according to Article 32 of the Articles of Incorporation, shall be based on the balance obtained from the income before tax of the current year without deducting the employees’ remunerations and directors’ remunerations, and after the deduction of the reserved amount for making up the accumulated loss, following which an amount within 2% of such balance is appropriated as the remuneration of directors for the current year. The actual appropriation amount shall consider the business outcome of the company, performance contribution etc. in order to appropriate a reasonable remuneration within the amount specified in the Articles of Incorporation. The procedures for remunerations of directors and managerial officers of the Company comply with all of the regulations approved by the board of directors, and are reviewed with approval by the Remuneration Committee, followed by submitting to the board of directors for resolution in order to execute accordingly.
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The remuneration amount paid to directors, President and Vice Presidents of the Company in 2018 is decreased from the amount in 2017, and such decrease is mainly due to the net profit after taxes in 2018 decreased by nearly 14% from the value in 2017 such that the non-fixed remunerations including the remuneration of directors, performance bonus and remuneration of employees etc. are decreased. The salaries and bonuses paid by the Company to President and Vice Presidents are handled according to the “Employee Salary and Remuneration Payment Regulations” and “Employee Bonus Issuance Regulations”, wherein the bonus amount is appropriated according to the budget achievement status in the previous year. The appropriation of remuneration of employees is based on the regulations of Article 235-1 of the Company Act and the Articles of Incorporation of the Company, in which the calculation method for the remuneration of employees, appropriation ratio and issuance subjects etc. of the Company are specified. The comparison of the remuneration amount of directors and managerial officers as well as the net profit after tax of the Company in 2018 with the amount in 2017 indicates a positive relationship in the remuneration payment and the achievement of business objectives. In addition, the management talent, planning ability and execution of managerial officers are the foundation of the company in achieving stable business and performance creation. Any changes of the remuneration in the “Employee Bonus Issuance Regulations” and “Employee Remuneration Issuance Regulations” of the Company are made with reasonable distribution based on the company’s business outcome and individual performance in order to encourage managerial officers to focus on the business objectives of the Company; provided that the Company does not encourage directors and managerial officers to overly seek risk premiums.
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3.4 Implementation of Corporate Governance
3.4.1 Board of Directors 1. The attendance of directors (1) A total of 9 (A) meetings of the 6th Board of Directors were held in 2018. The attendance of directors were as follows: Attendance By Attendance Rate Title Name in Person Remarks Proxy (%)【Ｂ/Ａ】 (B) Ren Wang Co., Ltd. Chairman 9 0 100 - Representative: Chi-Lin Wea Vice First Commercial Bank 9 0 100 - Chairman Representative: Ying Wu Ren Wang Co., Ltd. Director 8 1 88.88 - Representative: Steven Hung Ren Wang Co., Ltd. Director 2 5 22.22 - Representative: Chin-Yuan Kung Taiwan Cooperative Bank Director 8 1 88.88 - Representative:Teng-Shan Tai Hua Ji International Development Director Corp. 9 0 100 - Representative:Michael Chen Ren Wang Co., Ltd. Director 9 0 100 - Representative: Cheng-Lin, Chen Ren Wang Co., Ltd. Director 9 0 100 - Representative: Ho Chih-Chiang Hua-Kang International Asset Director 9 0 100 - Representative:James Y. L. Wei Independent Yeong-Chyan Wu 8 1 88.88 - director Independent Joanna Lei 8 1 88.88 - director Independent Ching-Sung Wu 9 0 100 - director Independent Wang, Yao-Shing 9 0 100 - director (2) 2018 Attendance of Independent Directors 2018 Attendance of Independent Directors 6th Board of Directors Meeting 7th 8th 9th 10th 11th 2nd Interim 12th 13th 14th Yeong-Chyan Wu ◎ ◎ ◎ ☆ ◎ ◎ ◎ ◎ ◎ Joanna Lei ◎ ◎ ◎ ◎ ◎ ◎ ☆ ◎ ◎ Ching-Sung Wu ◎ ◎ ◎ ◎ ◎ ◎ ◎ ◎ ◎ Wang, Yao-Shing ◎ ◎ ◎ ◎ ◎ ◎ ◎ ◎ ◎ Note：◎Attendance in Person；☆By Proxy；＊Absent。
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2. Other mentionable items: Where the operation of the board of directors’ meeting is subject to any one of the following conditions, the date, session, proposal content, opinions of all independent directors and the handling of the company to the opinions of independent directors shall be described: (1) Resolutions referred to in Article 14-3 of the Securities and Exchange Act: None, as the Company has set up Audit Committee. (2) If resolutions of the directors’ meetings objected to by independent directors or subject to qualified opinion and recorded or declared in writing, the dates of the meetings, sessions, contents of motion, all independent directors’ opinions and the company’s response should be specified: None (3) If there are directors’ avoidance of motions in conflict of interest, the directors’ names, contents of motion, causes for avoidance and voting should be specified: None (4) Measures taken to strengthen the functionality of the board: The Board of Directors has established an Audit Committee and a Remuneration Committee to assist the board in carrying out its various duties. a. The board of directors of the Company is formed by thirteen directors (including four independent directors). Members of the board of directors are all equipped with professional experience in financial, commercial and management fields. In addition, to strengthen the professional functions of the board of directors and to link with the international trend, the Company has officially established the Remuneration Committee in September 1, 2011, in order to provide assistance to the board of directors in the planning and the evaluation of the directors’ remuneration standards, managerial officers’ performance evaluation system and remunerations of the Company. Since the fifth year of board of directors' meeting, Audit Committee has been established, and the supervisor system has been abolished. The Audit Committee is formed by all of the independent directors, and the principle of its establishment is mainly to assist the board of directors in the increase of corporate governance performance, and to understand relevant information of the Company as well as risks encountered timely through supervision on the Company’s internal control system, in order to enhance the effectiveness of the corporate internal control. b. The Company is committed to the increases of corporate governance outcome such that the Company explicitly specifies the seats, qualification criteria and selection method of independent directors in the Articles of Incorporation. In addition, the Company also follows the regulations of the
44 WATERLAND FINANCIAL HOLDINGS
Corporate Governance Best Practice Principles for TWSE/TPEx Listed Companies in order to arrange all of the directors to participate in the continuing education courses covering the financial, business and legal etc. of the corporate governance, and the continuing education hours also comply with the requirements. c. To strength the governance system of the board of directors, the Company has also established the Procedures for Board of Directors’ Meetings for compliance in order to increase the information transparency of the operation information of board of directors’ meetings, to disclose important resolutions of board of directors’ meetings in the annual reports and the Company’s website, as well as to disclose the status on the directors’ attendance of board of directors’ meeting and continuing education status on the Market Observation Post System. d. With the consideration on the balance between the exercise of rights and performance of obligations by directors and management officers, as well as the consideration on the effective reduction of risks borne by directors, management officers and the Company, the Company purchases the “Directors & Officers Professional Liability Insurance” for the directors and management officers of the Company. e. To further effectively promote the corporate governance operation, the Company has actively completed the establishment of works for various corporate governance operations and relevant regulations, including the establishment of: “Corporate Governance Best Practice Principles”, “Ethical Corporate Management Best Practice Principles”, “Corporate Social Responsibility Best Practice Principles” etc. f. To improve the performance of the board of directors, the board of directors of the Company has approved the establishment of the “Regulations for Evaluation of Board of Directors” and disclosed on the Company’s website. According to the requirements of these Regulations, the Company has completed the 2018 board of directors’ evaluation operation, and the result of the evaluation standard is “well-functioning”. The evaluation items include: A. Participation level in the company operation, B. Improvement in quality of board of directors’ decision, C. Selection of directors, organization structure and continuing education, D. Internal control and committee operation etc. g. The Company has staffed the corporate governance personnel on December 12, 2018 in order to protect the rights and benefits of the shareholders and to strengthen the functions of the board of directors. The main responsibilities of the corporate governance personnel include (1) provide documents necessary for directors to perform duties, (2) assist directors to comply with the laws, (3) perform meeting related affairs for the board of directors’ meeting and shareholders’ meeting according to the laws.
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The 2018 corporate governance duties execution status is as follows: (a). Assist independent directors and general directors to perform job duties, provide necessary documents and arrange the training for the directors: i. For the amendment and development of latest laws and regulations in the corporate operation field and corporate governance relevant field, provide periodic notices to members of the board of directors. ii. Provide company information required by the directors, maintain smooth communication and discussion between the directors and the units of auditing, legal compliance and financial etc. of the Company. iii. Assist the independent directors to perform individual interviews with the internal audit supervisors or CPA according to the corporate governance best practice principles in order to understand the needs of the financial service of the Company, and to assist the arrangement of relevant meetings. iv. In 2018, the training courses for directors organized by the Company include the May 23 - “Protection of Tax Payers’ Rights and Taxation Dispute and Resolution”, and October 25 - “Corporate Governance - Special Topic on Interested Party”. (b). Assist with the legal compliance of board of directors’ meeting and shareholders’ meeting procedure and resolution: i. Provide reports on the corporate governance operation status of the Company in the board of directors’ meeting, confirm that the shareholders’ meeting and board of directors’ meeting conventions comply with the relevant laws and the corporate governance best practice principles. ii. Assist the directors to comply with relevant laws of the Company Act, and Securities and Exchange Act etc. during the performing of duties or making resolution for the board of directors’ meeting, including the recusal requirements for the agendas of board of directors’ meeting etc. iii. After a board of directors’ meeting, responsible for verifying the major information announcement of important resolutions in order to ensure the legality and accuracy of the major information content and to ensure the properness of the investor transaction information etc. (c). Maintain investor relationship: Assist the organization of the institutional investors’ conference; arrange the interaction and communication among the company’s spokesman, senior executives and corporate investors or general shareholders, in order to allow the rights and benefits of the shareholders to be properly maintained.
46 WATERLAND FINANCIAL HOLDINGS
(d). Establish the board of directors’ meeting agenda, and provide notices to all directors seven days in advance (except for extraordinary meetings). During the issuance of the meeting convention notices, provide complete meeting documents, and complete the meeting minutes for a board of directors’ meeting within twenty days after the board of directors’ meeting. (e). Handle the preliminary registration for the shareholders’ meeting date, prepare meeting notice, meeting handbook and meeting minutes within the statutory deadlines. (5) Policy of plural directors a. The Company has established the Corporate Governance Best Practice Principles, in which Article 14 explicitly specifies the director diversity policy of the Company. To establish a sound structure for the board of directors of the Company, the board members shall be diverse and equipped with different professional backgrounds, genders or work fields. In addition, directors shall have the knowledge, skill, and experience necessary to perform their duties. b. To implement the diversity of board members of the Company, directors of the Company shall not be limited by the gender and age but shall be considered based on the professional quality and dedication as the formation principle. In the sixth board of directors, there are 2 female directors, and the average age of the board members is 61 years old. The age distribution of the board members are 3 directors of age between 41~50 years old, 3 directors of age between 51~60 years, 7 directors of age between 61~75 years. Among which, 5 directors of doctoral degree, 5 directors of master degree, 3 directors of bachelor/college degree. The directors are equipped with professional backgrounds in financial industry, general industries and academic fields respectively, and have expertise in financial, finance, commercial, management and legal etc. The board member diversity implementation status is as shown in the following table: Plural core Accounting items Operation and Business Crisis Industry International Legal Gender Judgement Financial Managment Management Knowledge Market Background Name Analysis Chi-Lin Wea Male Ying Wu Female Steven Hung Male Chin-Yuan Kung Male Teng-Shan Tai Male Michael Chen Male Cheng-Lin, Chen Male Ho Chih-Chiang Male James Y. L. Wei Male Yeong-Chyan Wu Male Joanna Lei Female Ching-Sung Wu Male Wang, Yao-Shing Male
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3.4.2 Audit Committee The purpose of the Audit Committee is to assist the board of directors to perform is supervision on financial, auditing and financial report processes executed by the Company as well as the quality and integrity in terms of the financial control. Annual work focus: Review financial report: The board of directors of the Company has prepared the 2018 business report, consolidated financial statements and earnings distribution proposal, in which the consolidated financial statement has been audited and certified by CPA Shu-Mei Chi, and CPA Hsien-I Chen of PwC Taiwan. The aforementioned business report, consolidated financial statements and earnings distribution proposal have been reviewed by the Audit Committee completely and are considered to be proper with compliance. Evaluate the effectiveness of the internal control system: The Audit Committee evaluates the effectiveness of the internal control system policies and procedures (including financial operating risk management, legal compliance and control measures), and also reviews the periodic reports conducted by the audit department, independent auditors and the management level of the Company. Review the matters requiring the consent of the Audit Committee specified in Article 14-5 of the Securities and Exchange Act
1. The attendance of the independent directors A total of 7 (A) Audit Committee meetings were held in 2018. The attendance of the independent directors was as follows: Attendance in By Attendance Rate Title Name Person (B) Proxy (%)【Ｂ/Ａ】 Independent director Yeong-Chyan Wu 7 0 100
Independent director Joanna Lei 7 0 100
Independent director Ching-Sung Wu 7 0 100
Independent director Wang, Yao-Shing 7 0 100
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2. Other mentionable items: (1) Where the operation of the Audit Committee’s meeting is subject to any one of the following conditions, the date, session, proposal content of the board meeting, and opinions of Audit Committee and the handling of the company to the opinions of Audit Committee shall be described: a. Resolutions referred to in Article 14-5 of the Securities and Exchange Act
Date Session Proposal content Resolution To purchase parts of the floors and parking lots of the Sixth Term of Board “TransGlobe Life Insurance Mingchuan Building” as 2/27/2018 of Directors’ the office for companies of this Group, it is proposed for Seventh Meeting approval. Regarding the 2017 final accounts of the Company, it is submitted for resolution. Regarding the proposal on the 2017 earning distribution of the Company, it is submitted for resolution. Regarding the proposal on the issuance of new shares from earnings of Company, it is requested for resolution. Sixth Term of Board Regarding the proposal on the amendment of the 3/27/2018 of Directors’ Eighth “Accounting System” of the Company as described in Meeting the explanation, and it is submitted for resolution. Regarding the proposal on the amendment of the “Anti-money Laundering and Counter Terrorism Audit Commitee: With Financing Plan” of the Company, it is submitted for unanimous resolution by resolution. all committee members Regarding the proposal on the revision of the “Disaster presented, the proposal is Emergency Responsive Measure Handbook” of the submitted to the Board of Company, it is submitted for resolution. Directors. Sixth Term of Board Regarding the proposal on the parts of the provisions of 5/23/2018 of Directors’ Ninth the “Risk Management Regulations” of the Company, it Board of Directors: Meeting is submitted for resolution. Passed with unanimous Regarding the 2018 first half consolidated financial resolution by all directors statements, it is submitted for resolution. presented. Regarding the proposal on the amendment of the “Legal Compliance System Execution Procedures” of the Company, it is submitted for resolution. Regarding the proposal on the amendment of the “Anti-money Laundering and Counter Terrorism Sixth Term of Board Financing Plan” of the Company, it is submitted for 8/22/2018 of Directors’ resolution. Eleventh Meeting Regarding the amendment of parts of the provisions of the “Regulations for Transferring Repurchased Shares to Employees” of the Company, it is submitted for resolution. Regarding the proposal on the establishment of the “Regulations for Handling Whistle-Blowing Cases” of the Company, it is submitted for resolution. Sixth Term of Board Regarding the proposal on the establishment of the 11/21/2018 of Directors’ “Regulations for Concurrent Serving of Responsible Thirteenth Meeting Person” of the Company, it is submitted for resolution.
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Date Session Proposal content Resolution Regarding the Company’s plan for the establishment of an internet-only bank jointly founded together with the Rakuten Bank, Ltd. and Rakuten Card Co., Ltd., and the Sixth Term of Board Company plans to invest in 49% of the equity of the of Directors’ Third 1/8/2019 internet-only bank, a proposal for authorization to Extraordinary chairman or the one he designates to sign joint venture Meeting contracts, set up internet-only bank, and conduct necessary administrative procedure to competent authority, it is submitted for resolution. Sixth Term of Board Regarding the proposal on the hiring of Chief Auditor 2/27/2019 of Directors’ of the Company, it is submitted for resolution. Fifteenth Meeting Regarding the 2018 final accounts of the Company, it is Audit Commitee: With submitted for resolution. unanimous resolution by Regarding the proposal on the 2018 earning distribution all committee members of the Company, it is submitted for resolution. presented, the proposal is Regarding the proposal on the issuance of new shares submitted to the Board of from earnings of Company, it is requested for Directors. resolution. Regarding the proposal on the amendment of the Board of Directors: “Anti-money Laundering and Counter Terrorism Passed with unanimous Financing Plan” of the Company, it is submitted for resolution by all directors Sixth Term of Board resolution. presented. 3/25/2019 of Directors’ Regarding the proposal on the amendment of the Sixteenth Meeting “Charter of Organization” of the Company, it is submitted for resolution. Regarding the proposal on the amendment of the “Procedure for Asset Acquisition and Disposal” of the Company, it is submitted for resolution. Regarding the proposal on the amendment of the “Procedures for Shareholders’ Meetings” of the Company, it is submitted for resolution. Regarding the proposal on the amendment of the “Articles of Incorporation” of the Company, it is submitted for resolution.
b. Resolutions which were not approved by the Audit Committee but were approved by two thirds or more of all directors, the dates of meetings, sessions, contents of motion, resolutions of the Audit Committee and the Company’s response to the Audit Committee’s opinion should be specified: None (2) If there are independent directors’ avoidance of motions in conflict of interest, the directors’ names, contents of motion, causes for avoidance and voting should be specified: None (3) Communications between the independent directors, the Company's chief internal auditor and CPAs (e.g. the items, methods and results of audits of corporate finance or operations, etc.)
50 WATERLAND FINANCIAL HOLDINGS
The Auditing Department of the Company periodically organizes the directors’ seminars for the internal operation handling status and auditing result by inspection agencies according to the “Corporate Governance Best Practice Principles for Financial Holding Companies”, and the Chief Auditor leads the staff of the Auditing Department to provide reports, explanation to the directors and exchange opinions with the directors. In addition, the seminar status and records are prepared for reporting to the board of directors’ meeting. The Auditing Department also periodically delivers detailed written documents on the audit handling status (including financial examination improvement status) of the Company to all independent directors, in order to allow all independent directors to timely and sufficiently understand the internal control and audit system implementation status of each company. Relevant audit handling status is also reported to the board of directors periodically. The annual reports and semi-annual reports of the Company shall be approved by more than 1/2 of all of the members of the Audit Committee in order to report to the board of directors’ meeting for resolution. During the review of the financial report by the Audit Committee, certified accountants (CPA) are invited to attend the review, and CPA provides sufficient communication on the company business operation overview, main auditing plans and procedures, audit results, and internal control inspection evaluation scope, method and discoveries etc. In addition to the periodic communications twice per year, meetings may also be held for communications at any time depending upon the needs. a. Independent Directors’ Communication with Internal Audit Supervisor： Date Focus of communication 1. The Auditing Department enhances the auditing operation in recent two 2/27/2018 years. 2. Communication for internal audit related matters. 3/22/2018 2017 second-half audit report. 8/20/2018 2018 first-half audit report. 1. 2019 audit plan. 11/15/2018 2. Material business operation flaws and improvement status of the Company and subsidiaries. 3/21/2019 2018 second-half audit report.
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b. Independent Directors’ Communication with Certified Public Accountant (CPA)： Date Focus of communication 1. 2017 operation overview. 2. Governance issues requiring communications in relation to 2017 financial report, including subsidiary audit planning and scope, basis for major accounting estimation and determination, key audit matters, major adjustments after audit, and related party transaction nonconforming to the regular business practice. 3/22/2018 3. Explanation on the audit opinions to be issued for 2017. 4. Scheduled audit plan for 2018. 5. Recent important changes on laws and interpretive rules related to financial reports. 6. Audit the independence of CPA. 1. 2018 first-half operation overview. 2. Governance issues requiring communications in relation to the first-half of 2018 financial report, including subsidiary audit planning and scope, basis for major accounting estimation and determination, key audit matters, major adjustments after audit, and related party transaction nonconforming to the regular business practice. 8/20/2018 3. Explanation on the audit opinions to be issued for the first-half of 2018. 4. Scheduled audit plan for the second-half of 2018. 5. Recent important changes on laws and interpretive rules related to financial reports. 6. Audit the independence of CPA. 1. 2018 operation overview. 2. Governance issues requiring communications in relation to 2018 financial report, including subsidiary audit planning and scope, basis for major accounting estimation and determination, key audit matters, major adjustments after audit, and related party transaction nonconforming to the regular business practice. 3/21/2019 3. Explanation on the audit opinions to be issued for 2018. 4. Scheduled audit plan for 2019. 5. Recent important changes on laws and interpretive rules related to financial reports. 6. Audit the independence of CPA.
3.4.3 Disclosure according to Guidelines for Corporate Governance Practices of Financial Holdings 1. Framework and rules for corporate governance The Company has established corporate governance related procedures and regulations, such as “Procedures for Shareholders’ Meetings”, “Procedures for Board of Directors’ Meetings”, “Director Election Regulations”, “Regulations for Board of Directors Performance Evaluation”, “Audit Committee Charter”, “Remuneration Committee Charter”, “Rules Governing the Scope of Powers of Independent Directors”, “Information Disclosure Operation Regulations”, “Ethical Corporate Management Best Practice Principles”, “Guidelines for the Adoption of
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Codes of Ethical Conduct”, “Report Case Handling Operation Procedures”, “Corporate Governance Best Practice Principles”, “Corporate Social Responsibility Best Practice Principles”, “Procedure for Anti-Money Laundering and Counter Terrorism Information Sharing” and “Anti-Money Laundering and Counter Terrorism Plan” etc. The Company convenes shareholders’ meetings and board of directors’ meetings according to regulations of the Company Act and relevant laws, executes according to the meeting procedures, and periodically provides financial and business information of the Company to shareholders via the information system of the Market Observation Post System and the Company’s website. The Company periodically plans the overall business strategies, risk management policy and directive principles for the Company and subsidiaries, as well as establishes independent risk management department in order to perform comprehensive risk assessment on the subsidiaries, and implement necessary control mechanisms. The Company also establishes a legal compliance unit under the President to be responsible for the planning, management and execution of legal compliance system, as well as assigns supervisors of the ranking of Vice President to act as the legal compliance supervisor of the headquarter in order to coordinate and manage legal compliance affairs. The legal compliance status is reported to the board of directors and Audit Committee at least once every half a year. The Company explicitly specifies the functions of each unit in the organization charter, and clearly define the management responsibilities of personnel, asset and financial. In addition, the Company also signs non-disclosure agreements with the subsidiaries related to the disclosure of customer information in order to ensure the privacy of customer information. 2. Stockholding Structure and Shareholders’ Right (1) Stockholding Structure：(Please refer to P.100) (2) Shareholders’ Right： The Company convenes the shareholders’ meetings according to the regulations of the Company Act and relevant laws, and also establishes meeting procedures. The board of directors stipulates the proposals for the shareholders’ meetings, and provides appropriate speech opportunities to shareholders. The Company has established the spokesman and deputy spokesman system in order to uniformly announce messages to the external. In addition, the Company discloses the financial, business and internal shareholding status of the Company on the Market Observation Post System and the Company’s website in order to provide information to the shareholders. Furthermore, according to the regulations of the Company Act, the Company announces the acceptance of shareholders’ meeting proposal related matters made by shareholders with more than 1% of shareholding in order to enhance the protection of the rights and benefits of shareholders.
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(3) Dvidiend Policy：(Please refer to P.103) 3. The structure of Board of Directors, and the professional qualifications and independence of directors (1) The structure of Board of Directors：(Please refer to P.18~29) (2) The professional qualifications and independence of directors：(Please refer to P.31) 4. Responsibilities of Board of Directors and Managers (1) Responsibilities of Board of Directors： The board of directors shall be responsible to the shareholders, and shall carry out its functions in compliance with acts and regulations, the articles of incorporation, and the resolutions of the shareholders' meetings. Directors shall perform duties in good faith and act as a prudent administrator with good care in the fulfillment of obligations. According to the Article of Incorporations, the authorities of the board of directors are as follows: Proposal and resolution for Article of Incorporation of the Company. Review of organization charter of the Company. Review of business plan. Proposal and resolution for capital increase/decrease. Proposal and resolution for surplus distribution and making up of loss. Review of budget and final accounts. Resolution for issuance of corporate bonds. Review of important contracts. Resolution on acquisition or disposal of important assets. Appointment and discharge of important employees. Designation of directors and supervisors of subsidiaries. Resolution for other important business affairs. Other authorities according to the laws or granted by the shareholders’ meeting. (2) Responsibilities of Managerial Officers： Manage affairs for the Company according to the regulations of the Articles of Incorporation, resolutions of shareholders’ meetings and board of directors’ meetings as well as within the contract authorization scope. Department managerial personnel shall attend the board of directors’ meetings in order to provide reports on the current company business status and respond to inquiries raised by the directors, in order to assist directors in understanding the current status of the Company and to make appropriate decisions.
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5. Formation, responsibilities and independence of Audit Committee (1) Formation of Audit Committee： The Audit Committee shall be formed by all of the independent directors of the Company, and the independent director, Yao-Shing Wang, acts as the convener. For the independent directors’ roster, main educational background and experience information, please refer to pages 24~29. (2) Responsibilities of Audit Committee： The operations of the Audit Committee of the Company shall follow the regulations of the Company Act, Securities and Exchange Act and other relevant laws, and shall also be handled according to the Audit Committee Charter of the Company. The main responsibilities of the Audit Committee include: supervise the effective implementation of internal control of the company, supervise company’s compliance with relevant laws and regulations, examine the appropriateness of the presentation of the company's financial reports, appointment/discharge of internal audit supervisor as well as the selection (discharge) of CPA and independence review etc. (3) Independence of Audit Committee: (Please refer to page 31) 6. Formation, responsibilities and operation status of Remuneration Committee (Please refer to pages 66~67) 7. Information on remuneration structure and policy (Please refer to pages 36~41)
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8. Continuing education status of directors Presently, the Company uploads the directors’ continuing education status onto the “Market Observation Post System” of the Taiwan Stock Exchange (TWSE): Date of Training Whether Date of training Training Job Title Name Assumption Organizer Course Name complies with Start date End date Hours of Duty requirements (note) Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Corporate Finance Chi-Lin 36th session director 06/16/2017 Yes Wei Corporate representative Taiwan Academy governance 10/25/2018 10/25/2018 of Banking and 3 training seminar Finance 37th session Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Corporate Finance 36th session director Ying Wu 02/23/2018 Yes Corporate representative Taiwan Academy governance 10/25/2018 10/25/2018 of Banking and 3 training seminar Finance 37th session Financial crisis Securities & 02/22/2018 02/22/2018 early warning and 3 Futures Institute Corporate type analysis Steven director 06/16/2017 Employee Yes Hung representative Securities & remuneration 03/07/2018 03/07/2018 3 Futures Institute strategy and tool utilization study Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Finance 36th session Corporate Chin-Yu Study on impact director 06/16/2017 Yes an Kung of trade conflicts representative Securities & between China 11/21/2018 11/21/2018 3 Futures Institute and US on enterprises of our nation Employee Securities & remuneration 03/07/2018 03/07/2018 3 Futures Institute strategy and tool Corporate Teng-Sha utilization study director 06/16/2017 Yes n Tai Corporate representative Taiwan Academy governance 10/25/2018 10/25/2018 of Banking and 3 training seminar Finance 37th session
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Date of Training Whether Date of training Training Job Title Name Assumption Organizer Course Name complies with Start date End date Hours of Duty requirements (note) Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Corporate Finance Michael 36th session director 06/16/2017 Yes Chen Taiwan Latest trend and representative Corporate analysis of 10/03/2018 10/03/2018 3 Governance Company Act Association amendment Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Corporate Finance Cheng-Li 36th session director 06/16/2017 Yes n Chen Corporate representative Taiwan Academy governance 10/25/2018 10/25/2018 of Banking and 3 training seminar Finance 37th session Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Corporate Finance Chih-Chi 36th session director 06/16/2017 Yes ang Ho Corporate representative Taiwan Academy governance 10/25/2018 10/25/2018 of Banking and 3 training seminar Finance 37th session Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Corporate Finance James Y. 36th session director 06/16/2017 Yes L. Wei Corporate representative Taiwan Academy governance 10/25/2018 10/25/2018 of Banking and 3 training seminar Finance 37th session Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Finance 36th session Responsibilities Independent Yeong-C 06/16/2017 of director and Yes Director hyan Wu Taiwan supervisor for Corporate 07/06/2018 07/06/2018 information 3 Governance disclosure and Association deceptive financial report Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Finance Independent Joanna 36th session 06/16/2017 Yes Director Lei 12th Term of Financial Taipei Corporate 10/15/2018 10/15/2018 Supervisory 3 Governance Commission Forum
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Date of Training Whether Date of training Training Job Title Name Assumption Organizer Course Name complies with Start date End date Hours of Duty requirements (note) Corporate Taiwan Academy governance 05/23/2018 05/23/2018 of Banking and 3 training seminar Finance Independent Ching-Su 36th session 06/16/2017 Yes Director ng Wu Important issue Securities & analysis on latest 08/28/2018 08/28/2018 3 Futures Institute amendment of Company Act OTC company new version of 05/08/2018 05/08/2018 Taipei Exchange corporate 3 governance Independent Yao-Hsin 06/16/2017 blueprint summit Yes Director g Wang 12th Term of Financial Taipei Corporate 10/15/2018 10/15/2018 Supervisory 3 Governance Commission Forum Note: It refers to whether the requirements for the number of continuing education hours, scope of continuing education, system of continuing education, arrangement of continuing education and information disclosure specified in the “Directions for the Implementation of Continuing Education for Directors and Supervisors of TWSE Listed and TPEx Listed Companies” are satisfied. 9. Interested parties’ rights, relationship, complaint channel, concerned issues and appropriate response mechanism The Company values the issues concerned by all interested parties, and provides diverse communication channels and information disclosure mediums in order to maintain proper dialogue and communication with the interested parties, as described below : (1) Employees: The Company maintains smooth communication channels with employees, and employees can express opinions directly. The internal of the Company also establishes the “Report Case Handling Operation Procedures” to explicitly specify the reporting channels and handling procedures. In addition, the Company also sets up e-mail box as one of the internal report and complaint channels. Verification and relevant operation are performed by designated personnel depending upon the situation. In addition, when the Company makes profits, employees can receive employee remuneration, and performance bonuses are also issued depending upon the budget target achievement status. (2) Customers: The Company maintains excellent relationship with customers in a long term. Each subsidiary is established with customer service direct line and e-mail box. Relevant standard contracts are handled according to the regulations of the competent authorities, and review period is also provided according to the law in order to ensure the rights and benefits of customers. Subsidiaries also organize customer social activities from time to time in order to promote the communication and exchange between the two parties.
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(3) Correspondent banks and other creditors: The Company maintains close relationships with the financial institutions and banks in the financial industry, provides detailed financial and business information upon signing of lending or interbank contracts, provides relevant documents through internally approved procedures, as well as provides collateral when it is deemed necessary, in order to ensure the rights and benefits of the bank or creditor. (4) Community: The Company and all subsidiaries maintain excellent interaction with the communications where they are located, and actively participate in the communication development or social welfare related activities. In addition, the Company and subsidiaries also provide care and assistance to disadvantaged groups in the community under the name of “Waterland Charity Foundation”, and the Company emphasizes the social responsibilities. 10. Disclosure of Financial Holding Company’s Consolidated Financial Report and Subsidiary’s Financial Report. The consolidated financial report of the Company and the financial report of publicly held subsidiaries are disclosed at the Market Observation Post System of TWSE according to the regulations. (Please refer to page 191~329.) 11. Disclosure of large exposure (Please refer to page 290.) 12. Relevant information of interested party transactions For the transactions with interested parties, the Company has established the “Regulations Governing the Transactions of the Company with Interested Parties” in order to prevent damages to the rights and benefits of the shareholders due to special transaction terms. (Please refer to pages 252~261.) 13. Disclosure of capital adequacy (Please refer to page 268.) 14. Detailed handling status for information disclosure specified in the regulations: (1) Publish the revenue and earning status of the previous month on a monthly basis, and publish the quarterly, semi-annual and annual financial reports according to the time specified. (2) The meeting convention time of shareholders’ meetings, proposals of shareholders’ meetings, meeting agenda and annual report, resolutions of shareholders’ meetings are published according to the time specified. (3) Shareholding change status of directors, major shareholders and managerial officers, board meeting attendance status and directors’ continuing education status are all published according to the regulations. (4) Where the Company and its subsidiaries encountering major information events, such events are inputted into the internet network information
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reporting system Market Observation Post System of TWSE for publication two hours prior to the transaction time of the business day following the day the event occurred. 15. Difference between execution outcome of corporate governance and financial holding company governance best practice principles and causes thereof. (Please refer to pages 61~65.) 16. Specific plans and measures for improving corporate governance (1) In 2017, the Company and the subsidiaries, IBFC and Waterland Securities, were all subject to disciplinary actions from the competent authority due to internal control weakness, and all three companies have established improvement measures (please refer to pages 78~79, required correction and improvement plan for internal control system) with the completion of improvement or continuous improvement in progress. (2) To implement the ethical management of the Company, it is encouraged to report any illegal conducts in violation of the morality and ethics. The Company established the “Report Case Handling Operation Procedures”, and effective whistle-blowing channel and handling procedures have been established. In the future, the Company assigns Auditing Department with authority execution independence to be in charge of the acceptance and investigation of whistle-blow cases in order to further strengthen the “Whistle-Blower Reporting System”. (3) To implement the corporate governance and to facilitate the board of directors to achieve their required functions, the Company has followed ‘Taiwan Stock Exchange Corporation Operation Directions for the Appointment of Independent Directors by TWSE Listed Companies’ and internal demand to set up Corporate Governance Department under President in March 2019, in order to handle relevant matters of the audit committee, board of directors’ meeting and shareholders’ meeting according to the laws, to prepare meeting minutes for board of directors’ meeting and shareholders’ meeting, to provide documents necessary for the directors to perform duties, to assist directors in the compliance of laws and matters related to corporate governance etc. 17. Risk management (Please refer to pages 155~183.) 18. Other information regarding corporate governance (1) The Company periodically convenes board of directors’ meetings, plans and establishes the meeting proposals in advance. The Company also informs all directors to attend according to the time specified (please refer to page 42 for the attendance status), and also provides sufficient meeting materials in advance in order to facilitate the directors in the decision making. During the proceeding of the meeting, the Presidents of each subsidiary and relevant
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department managerial personnel of the Company are arranged to attend the meeting in order to report the current business overview of the Company and the business development status of subsidiaries, as well as to respond to the questions raised by directors, thereby assisting the directors to understand the current business operation status of the Company and subsidiaries. (2) The Company properly assigns the matters according to the resolutions of the board meeting to appropriate units for execution, and also lists such matters for tracking and management, such that the execution status is reported in the next board meeting in order to allow the board meeting to sufficiently manage the execution progress. (3) For proposals subject to one’s own conflict of interest, such directors shall recuse according to the law. (4) The Company has appointed legal counsels to provide appropriate legal consultation service for the Company or to provide assistance to the board of directors and management level to improve their legal quality, thereby preventing the Company and relevant personnel from violating laws, promoting the Company’s governance works to be operated under relevant legal framework and statutory procedures.
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3.4.4 Corporate Governance Implementation Status and Deviations from “the Corporate Governance Best-Practice Principles for TWSE/TPEx Listed Companies” Implementation Status 1 Deviations from “the Corporate Governance Evaluation Item Best-Practice Principles for Yes No Abstract Illustration TWSE/TPEx Listed Companies” and Reasons 1. Stockholding structure and shareholders’ equity (1) Does the financial holding company (1) The Company makes itself accessible institute a set of internal operational to shareholders either by phone or by procedures for handling shareholder email. Designated personnel are proposals, doubts, disputes, and responsible for handling shareholders’ suits, as well as act in accordance proposals or complaints, which will be with the said procedures? passed on to management when necessary. (2) Does the financial holding company (2) In addition to the list of shareholders have access to the identity of major after stock registration, the Company shareholders who have actual keeps close track of their control over it as well as that of their stockholdings by drawing from their ultimate control persons? own reporting in accordance with the Financial Holding Company Act and insiders’ monthly reports of stockholding changes. A special section is set aside on the Company’s website for downloading of the needed application forms. (3) Does the financial holding company (3) The Company has laid down a set of None establish and implement risk control guidelines over risk management. Of and management as well as firewall these is a package that regulates mechanisms for its dealings with transactions between the Company or affiliated businesses? its subsidiaries and related parties, such as lending and endorsement, to avoid conflicts of interest. A firewall mechanism has also been installed to regulate joint operations or transactions involving the WFH Company and its subsidiaries. Also meant to avoid conflicts of interest, it applies to any collaboration in business endeavors and common use of information, equipment, business space or personnel, as well as cross-selling of financial products. A separate set of guidelines is enacted to preserve information security at the Company’s meetings attended by affiliated enterprises. 2. Composition and duties of the Board of Directors (1) Besides setting up the (1) The Company has established the Compensation Committee and Audit Compensation Committee and Audit Committee according to law, does Committee according to law. In the financial holding company accordance with its Articles of voluntarily set up other functional Incorporation, however, the Company None committees? has set up the Management and Development Committee as a supportive unit to the board of directors. (2) Does the financial holding company (2) In accordance with the Corporate evaluate the independence of its Governance Best Practice Principles
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Implementation Status 1 Deviations from “the Corporate Governance Evaluation Item Best-Practice Principles for Yes No Abstract Illustration TWSE/TPEx Listed Companies” and Reasons CPA on a regular basis? for Financial Holding Companies, the Company evaluates the independence of its CPA on a regular basis (at least once a year). The findings are then presented to the Audit Committee and Board of Directors. In the highlight are an evaluation form and a statement on CPA impartiality and independence drafted in accordance with the Bulletin of Norm of Professional Ethics for Certified Public Accountant (No. 10): Integrity, Objectivity and Independence. To date the Company has identified no compromise of independence that warrants penalties and thus there is no need for replacing its CPA. 3. If the financial holding company is (1)The Company has established listed in the TWSE/TPEx, is there a Corporate Governance Best Practice designated person on a full-time Principles for Financial Holding (part-time) basis appointed to Companies to build up an effective administer corporate governance framework for corporate governance, (including but not limited to providing vitalize the function of the Board and information for the directors and protect the rights of shareholders. supervisors necessary for the (2) The Company has set up Corporate performance of their duties, Governance Department under coordinating Board meetings and President in March 2019, which Shareholders’ Meetings and related coordinates Audit Committee matters, company registration and meetings, Board meetings and registration for making change, Shareholders’ Meetings. It also preparation of minutes of Board performs the function of corporate Meetings and Shareholders’ Meeting governance and is responsible for on record)? assisting the continuing education and None supply of information necessary for the directors in performing their duties and ensuring their immediate awareness of substantial events, coordinating meetings for the Board and Shareholders at regular intervals as required by law, making company registration and registration for making changes, and preparing minutes of Board Meetings and Shareholders’ Meetings on record. Legal advisors and Compliance & Legal Department also provide directors with all sorts of legal information that help them abide by related regulation. 4. Does the financial holding company (1) The Company makes public financial have in place channels for and operational information and communicating with related parties announces other material information (including but not limited to on its own website and the Taiwan shareholders, employees, and Stock Exchange’s Market Observation None customers)? Post System. (2) The Company’s website includes a special related parties section that lists telephone and fax numbers and email addresses for use by business partners,
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Implementation Status 1 Deviations from “the Corporate Governance Evaluation Item Best-Practice Principles for Yes No Abstract Illustration TWSE/TPEx Listed Companies” and Reasons shareholders, and other related parties. (3) A spokesperson and an acting spokesperson are appointed to facilitate communication with interested parties. (4) All the major subsidiaries have set up their respective customer service hotlines to respond to inquiries and questions. 5. Information disclosure (1) Does the financial holding company (1) The Company has built a website to build a website for disclosing disclose monthly revenue and information on finances, operations, earnings; consolidated quarterly and corporate governance? results reviewed or audited by an attesting CPA; important internal regulations; and other information related to corporate governance. Designated personnel are charged with the website. (2) Does the financial holding company (2) The Company’s website is presented resort to other means of information in both Chinese and English, and disclosure (such as building an linked to Taiwan Stock Exchange’s None English website, designating Market Observation Post System for personnel to collect and disclose the release of unaudited monthly material information, appointing a earnings or losses and other material spokesperson to communicate with information, of both the Company and the general public, and making its subsidiaries. In addition, a public the recordings of investor spokesperson and an acting briefings on its website)? spokesperson are responsible for relaying important messages of the Company to the general public. Designated personnel are given the duty of collecting and disclosing material information. 6. Is there other important information (1) Employee rights, employee welfare, that can facilitate better understanding investor relations, and rights of related of the financial holding company’s parties: corporate governance practices As dictated by law, all employees of (including but not limited to employee the Company and its subsidiaries are rights and interests, employee welfare, entitled to national health insurance investor relations, rights of interested and labor insurance. On top of parties, training records of directors employees' compensation by their and supervisors, implementation of risk performance and corporate earnings, management policy and risk evaluation employees will receive a year-end criteria, implementation of customer compensation by their performance. relations policy, purchases of insurance Employee rights are spelled out in the for directors and supervisors, and Labor Standards Law. There are None donations to political parties, clearly defined internal regulations stakeholders, and public interest with regard to providing employees organizations)? with incentives for pursuit of self-improvement and acquisition of certificates of specialized competence. Multiple channels are made available for employees to express themselves, thereby fostering a harmonious labor-management relationship. Building on friendly relations with customers, all subsidiaries have set up their respective hotlines and email to
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Implementation Status 1 Deviations from “the Corporate Governance Evaluation Item Best-Practice Principles for Yes No Abstract Illustration TWSE/TPEx Listed Companies” and Reasons better promote customer relations. Standardized contracts are drawn out by patterning after government models, and clients are always given a legally required period to scrutinize them. Likewise, the Company makes itself accessible to shareholders either by phone or by email. Designated personnel are responsible for handling shareholder proposals or complaints. The Company has a frequent need to deal with banks and other financial institutions. Alongside various internally approved documents, detailed, truthful financial and other pertinent information is always provided as it is called upon to sign contracts on general lending or call loans. When necessary, collateral is also provided to better protect banks or other creditors. The Company makes it a point to honor and protect the legitimate rights and interests of its investors. In order to maximize shareholder interests, it gives top priority to honesty and credibility in every aspect of business endeavors. (2) Training records of directors: None The Company’s directors, who possess the expertise needed to perform their duties, make it a point to undertake self-enhancement programs from time to time. Upon learning of courses on corporate governance, the Company regularly holds training sessions, and passes related information on to directors and supervisors irregularly. In addition, the Company has reported the directors’s training records on the Market Observation Post System. For more information please refer to the P. 55~57. (3) Implementation of risk management policy and risk measurement: Please refer to the P. 155~176. (4) Implementation of customer relations policies: In accordance with the Financial Holding Company Act and pertinent regulations, the Company and its subsidiaries have taken measures to protect the confidentiality of customer data and signed contracts intended to uphold customer rights and interests. The disclosure, transfer and common use of customer data are undertaken in tandem with the Regulations
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Implementation Status 1 Deviations from “the Corporate Governance Evaluation Item Best-Practice Principles for Yes No Abstract Illustration TWSE/TPEx Listed Companies” and Reasons Governing Cross-selling Among Subsidiaries within Financial Holding Company and other directives from the regulatory authority. The Company also has in place a set of internal guidelines on cross-selling by its subsidiaries. Furthermore, all subsidiaries have launched hotline and email services so that customer complaints, if any, can be dealt with in a timely fashion. (5) Purchases of insurance for directors: The Company has taken out liability insurance for directors and key staff members, providing them with a None hedge against risks that may arise as they exercise their rights and perform their duties. (6)Donations to political parties, interested parties and charitable groups: WFH donations in 2018: Amount Recipient (NT$) Waterland Charity 1,000,000 Foundation – Donation for Hualien earthquake disaster relief Cross-Strait CEO 100,000 Summit 7. Explain the status of the improvements made in response to the most recent annual assessment results published by the Corporate Governance Center of the Taiwan Stock Exchange Corporate, and propose priority improvement items and measures for matters that have not yet been improved. For the 4th Annual Evaluation of Corporate Governance (Year of assessment: 2017): The Company is evaluated between 6% to 20% of the total companies evaluated. In future, the Company will appoint the dedicated governance staff, improve the disclosure in English, and enhance the quality of disclosure for the non-financial information, for the purpose of improving the performance of the corporate governance. For the 5th Annual Evaluation of Corporate Governance (Year of assessment: 2018): The Company is evaluated between 21% to 35% of the total companies evaluated. The Company has set up Corporate Governance Department with Chief Governance Officer and staff om the first half of 2019. In the future, the Company will follow the governance trend of the competent authority, formulate relelvant governance system, including a standard procedure to fulfill directors’ request, independent directors sitting over 50% in remuneration committee, and enhance English information disclosure, in order to comply with the requirement from competent authority, and elevate the Company’s capacity for corporate governance.
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3.4.5 Composition, Responsibilities and Operations of the Remuneration Committee
1. Professional qualifications and independence analysis of remuneration committee members
Meets One of the Following Professional Qualification Criteria Independence Criteria Requirements, Together with at Least Five Years’ Work (Note 2) Experience Number of An instructor or A judge, public Has work Other Public higher position in a prosecutor, attorney, experience in Companies in department of Certified Public the areas of Which the commerce, law, Accountant, or other commerce, Individual is Title finance, accounting, professional or law, finance, Remarks Concurrently or other academic technical specialist who or accounting, (Note 1) 1 2 3 4 5 6 7 8 Serving as an department related to has passed a national or otherwise Remuneration the business needs of examination and been necessary for Committee the Company in a awarded a certificate in the business Member public or private a profession necessary of the
junior college, for the business of the Company Name college or university Company Independent Joanna Lei Director 0 - Ming-Fu Other Huang 1 - Jia-Dong Other Hsu 0 - Note 1: Director, Independent director, or Other. Note 2: Please tick the corresponding boxes that apply to a member during the two years prior to being elected or during the term(s) of office. 1. Not an employee of the Company or any of its affiliates. 2. Not a director or supervisor of affiliated companies. Not applicable in cases where the person is an independent director of the parent company, or any subsidiary in which the Company holds, directly or indirectly, more than 50% of the voting shares. 3. Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of 1% or more of the total number of outstanding shares of the Company, or ranking in the top 10 in holdings. 4. Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the persons in the preceding three sub-paragraphs. 5. Not a director, supervisor, or employee of a corporate shareholder who directly holds 5% or more of the total number of outstanding shares of the Company, or who holds shares ranking in the top five holdings. 6. Not a director, supervisor, officer, or shareholder holding 5% or more of the shares of a specified company or institution which has a financial or business relationship with the Company. 7. Not a professional individual, who is an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that provides commercial, legal, financial, accounting services or consultation to the Company or to any affiliate of the Company, or a spouse thereof. 8. Not a person of any conditions defined in Article 30 of the Company Act.
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2. Attendance of members at remuneration committee meetings (1). There are 3 members in the Remuneration Committee. (2). Term of the Third Remuneration Committee is from 19 Jun. 2017 to 15 Jun. 2020, 2 (A) meetings were held in 2018. The attendance record of the Remuneration Committee members was as follows: Attendance in Attendance Rate (%) Title Name By Proxy Remarks Person(B) 【Ｂ/Ａ】 Convener Joanna Lei 2 0 100 - Committee Ming-Fu Huang 1 1 50 - Member Committee Jia-Dong Hsu 2 0 100 - Member (3). Other mentionable items: a. If the board of directors declines to adopt or modifies a recommendation of the remuneration committee, it should specify the date of the meeting, session, content of the motion, resolution by the board of directors, and the Company’s response to the remuneration committee’s opinion: None. b. Resolutions of the remuneration committee objected to by members or subject to a qualified opinion and recorded or declared in writing, the date of the meeting, session, content of the motion, all members’ opinions and the response to members’ opinion should be specified: None.
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3.4.6 Corporate Social Responsibility
Deviations from “the Implementation Status Corporate Social Responsibility Evaluation Item Best-Practice Principles for Yes No Abstract Explanation TWSE/TPEx Listed Companies” and Reasons 1. Corporate Governance Implementation (1) Does the company declare (1)The board of directors of the Company has its corporate social approved the “Waterland Financial Holding Co., responsibility policy and Ltd. Corporate Social Responsibility Best examine the results of the Practice Principles” in order to be used as the implementation? basis for seeking and fulfilling the social compliance of the corporate. For the implementation of corporate social responsibilities (CSR) of the Company, the policies and principles are as follows: 1. Implement corporate governance. 2. Develop sustainable environment. 3. Maintain social welfare. 4. Enhance CSR information disclosure. (2) Does the company provide (2)The Company selects employees to participate in educational training on the forums, seminars and training courses related corporate social to social responsibility held by external responsibility on a regular institutions. basis? (3) Does the company (3)To improve the management of CSR of the None establish exclusively (or Company, the President acts as the convener of concurrently) dedicated the CSR project meeting, and the first-line managers “Administration Department’ is designated to be authorized by the board to the unit concurrently responsible for the be in charge of proposing promotion of CSR, in charge of the proposal and the corporate social execution of CSR policy, system or related responsibility policies and management directives as well as specific reporting to the board? promotion plan, and provide report on the CSR handling status to the board of directors. (4) Does the company declare (4)The Company has established the internal rules a reasonable salary of the “Employee Salary and Remuneration remuneration policy, and Payment Regulations”, “Employee Bonus integrate the employee Issuance Regulations” and “Employee performance appraisal Remuneration Issuance Regulations” etc. in system with its corporate order to explicitly specify reasonable salary and social responsibility policy, remuneration policies. In addition, the Company as well as establish an also establishes the “Regulations for Employee effective reward and Service and Reward/Punishment” to explicitly disciplinary system? specify the code of conduct required to be complied by employees, and relevant reward and disciplinary measures are also established. 2. Sustainable Environment Development (1) Does the company (1)The Company also responsively copes with the endeavor to utilize all relevant environmental management measures resources more efficiently promoted by the competent authority to save None and use renewable report papers, use of printing papers, printout materials which have low double sides as the handling principle in order to impact on the increase the resource utilization efficiency. environment?
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Deviations from “the Implementation Status Corporate Social Responsibility Evaluation Item Best-Practice Principles for Yes No Abstract Explanation TWSE/TPEx Listed Companies” and Reasons (2) Does the company (2)The Company adopts the computer-controlled air establish proper conditioning system to automatically shut down environmental the air conditioning supply at 7:00PM, and the management systems based air conditioner temperature is set at 26 degrees, on the characteristics of all of the toilets use the sensor faucets in order to their industries? prevent waste of water resources. (3) Does the company monitor (3)The Company implements the energy saving and the impact of climate carbon reduction plans, replaces the lighting change on its operations equipment in the office to LED lighting fixtures and conduct greenhouse gradually, and promotes the paperless operation gas inspections, as well as in the office, as well as gradually attempts to establish company replace the meeting materials in traditional strategies for energy printing method of written papers by information conservation and carbon technology in order to reduce the consumption reduction? of papers. The “Administrative Department” is designated to be the dedicated unit for the environmental None management in order to establish, promote and maintain relevant environmental management systems and specific action solutions, as well as continuously pay attention to the impacts of climate change on the business operation activities. The Company is a financial holding company/ According to the regulation of Paragraph 1 of Article 36 of the Financial Holding Company Act, the business of the Company shall be limited to investment in, and management of, its invested enterprises. Consequently, for the industry of the Company, the environmental management system certification of ISO14001 or similar standard is not applicable to the Company. 3. Preserving Public Welfare (1) Does the company (1)The rights and benefits of employees of the formulate appropriate Company all comply with the relevant management policies and regulations of the Labor Standards Act, and the procedures according to Company also establishes various personnel relevant regulations and the rules for employees in order to specify the International Bill of employee remuneration, service, evaluation etc. Human Rights? in order to be used as a basis for the conduct of employees. The employment policy does not involve any discrimination in gender, race, age, marriage and family status etc., but implements the equality for remuneration and employment None criteria, training and promotion opportunities. (2) Has the company set up an (2)In the “Ethical Corporate Management Best employee hotline or Practice Principles”, the Company explicitly grievance mechanism to specifies regulations on reporting and handle complaints with complaints. In addition, the Company also appropriate solutions? establishes the “Report Case Handling Operation Procedures” to explicitly specify the report channels and handling procedures, and e-mail box is also set up to be used as one of the reporting and complaint channels; personnel are trained to perform verification and relevant
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Deviations from “the Implementation Status Corporate Social Responsibility Evaluation Item Best-Practice Principles for Yes No Abstract Explanation TWSE/TPEx Listed Companies” and Reasons operation depending upon the situation. Furthermore, the Company also specifies relevant complaint and handling mechanism in the “Regulations for Sexual Harassment Control Measures, Complaint and Disciplinary Handling”. In the “Regulations for Employee Service and Reward/Punishment”, it is explicitly specified that during the verification of specific facts, the parties involved shall be provided with the opportunity to respond in order to ensure the smoothness of the employee complaint channel and the appropriate handling of complaints. (3) Does the company provide (3)The Company periodically performs fire safety a healthy and safe working inspection for the employee office environment, environment and organize and implements the cleaning operations of the training on health and environmental disinfection, carpet and air safety for its employees on conditioner cleaning etc. every half year and a regular basis? irregularly. In addition, the Company also implements drills or educational training irregularly for specific disaster conditions. For the employees’ health examination, the Company also specifies the expense subsidy regulations. (4) Does the company setup a (4)The Company sets up the company’s intranet, communication channel such that in addition to the website with employees on a announcement and employee communication, regular basis, as well as the Company also uses the internal e-mails None reasonably inform notices to inform important matters at any time. employees of any Furthermore, the Company also announces significant changes in company operation change messages through its operations that may have periodic meetings. an impact on them? (5) Does the company provide (5)To encourage employees to improve job skills its employees with career and to actively participate in various seminars development and training and trainings, the Company allows employees to sessions? select courses held by the Taiwan Academy of Banking and Finance, Securities and Futures Institute as well as associations of banks, securities, futures and investment trust etc. according to their job duty needs. Auditing and legal compliance personnel also participate in the continuing education for auditing and legal compliance related courses annually for a certain number of hours according to the regulations. The expenses are covered by the Company in full. In addition, for employees actively participate in the continuing education to obtain professional licenses based on the needs of the current duties or future job functions, the Company also provides subsidies. The internal of the company organizes business seminars according to the needs and also encourages employees to participate in external speeches or seminars.
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Deviations from “the Implementation Status Corporate Social Responsibility Evaluation Item Best-Practice Principles for Yes No Abstract Explanation TWSE/TPEx Listed Companies” and Reasons (6) Does the company (6)The Company and subsidiaries are established establish any consumer with the company websites to provide protection mechanisms and information on the business overview, product appealing procedures introduction and service items etc. For important regarding research procurement cases, such cases are announced on development, purchasing, the company websites according to the producing, operating and regulations. The websites are also indicated with service? the contact method in order to provide effective report channels for customers. (7) Does the company (7)“The Company is a financial holding company, advertise and label its and all main subsidiaries are in the business of goods and services financial service such that there is no product according to relevant requiring the qualification of audits by regulations and authentication institutions. Nevertheless, all international standards? services of the Company and all subsidiaries are under the high level of monitoring and supervision of the competent authority such as Financial Supervisory Commission etc., and all financial products launched are also required to qualify the review or to be approved by the competent authority according to relevant laws.” (8) Does the company evaluate (8)The Company is not in the production type of the records of suppliers’ business such that there is no demands for impact on the environment supply chain management of raw material and society before taking purchase etc.; nevertheless, the Company None on business partnerships? specifies in the internal regulations of the Company that before engaging in business relationship, suppliers shall be evaluated to determine whether there are records on the impacts of environment and society in order to prevent trading with parties violating with the CSR policies. The Company utilizes the power of purchasing to jointly improve the CSR with the transaction counterparties. (9) Do the contracts between (9)According to the regulations of the “Ethical the company and its major Corporate Management Best Practice Principles” suppliers include of the Company, during the signing of relevant termination clauses which contracts with suppliers for any external come into force once the purchases, relevant unit shall indicate that in suppliers breach the cases where the supplier violates the CSR policy corporate social and causes significant impacts on the responsibility policy and environment and society or involves in unethical cause appreciable impact conducts, the Company may rescind the contract on the environment and terms. In addition, the Company also establishes society? the “Supplier Management Guidelines” to request that during purchase, localization shall be implemented, and suppliers shall comply with the moral standards and requirements of the labor laws etc. 4. Enhancing Information Disclosure (1) Does the company disclose (1)The main channels for disclosing CSR related relevant and reliable information of the Company is the company information regarding its website, annual report and Market Observation None corporate social Post System. In addition, the Company has responsibility on its prepared the 2017 CSR Report and has disclosed website and the Market on the company website and Market Observation Observation Post System Post System. The content of the report includes
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Deviations from “the Implementation Status Corporate Social Responsibility Evaluation Item Best-Practice Principles for Yes No Abstract Explanation TWSE/TPEx Listed Companies” and Reasons (MOPS)? the sections of corporate governance, working environment, educational training, corporate responsibility and social welfare etc. 5. If the Company has established the corporate social responsibility principles based on “the Corporate Social Responsibility Best-Practice Principles for TWSE/TPEx Listed Companies”, please describe any discrepancy between the Principles and their implementation: None
6. Other important information to facilitate better understanding of the company’s corporate social responsibility practices：
In 2018, Waterland Charity Foundation performed the elderly nursing and care, disadvantaged group and physical/mental disabled caring environment improvement, as well as dependent children and teenager education and care services etc. The welfare matters performed include:
(1) Accept the handling of 0206 Hualien earthquake rescue project donated and designated by Waterland Financial Holding Co, Ltd., field survey of the Hualien disaster damage and recovery status, provide subsidies to Hualien Newdawn Nursing Center for repair of lighting equipment and air conditioning facilities, and provide donation to Hualien County Emergency Rescue Association to purchase equipment and service cars in order to execute various disaster protection and rescue operations in the Eastern Taiwan region timely. (2) Provided donation to Tapeng Culture and Education Foundation to perform air force survivor and children care or disabled children educational subsidies in pursuit of cultivating military survivor children of public servants died in line of duty to complete their academic studies. (3) Provided donation to low-income household, student ○○ Zheng at Hukou Township, Hsinchu County for emergency relief aid fund in order to allow student Zheng to receive proper medical care and to assist family members and relieve them from economic difficulties. (4) Provided donation to low-income household Mr.○○ Ai at Dali District, Taichung City, referred by Wufeng Children and Families Center of Taichung City Government in order to assist him to relieve from economic difficulties during the temporary unemployment period due to the recovery medical treatment. (5) Provided donation to baseball team of Xinyi Junior High School, Keelung City, with relevant fees for baseball equipment improvement and participation in contest etc., as well as allowing this school, with 60% of disadvantaged students from poor or low-income households, single-parent and grandparenting households to have a positive spirit of sportsmanship for healthy, normal activities, learning of team work and persistent attitude. (6) Provided donation to Taipei Parents of Visual Impaired Association to purchase high performance computers for drawings, dot pattern printer and laser cutter in order to prepare teaching materials for translation into braille books such that more visual impaired children can obtain better books for read, to increase the interaction and communication of information between normal and blind, as well as to improve the learning efficiency and effect for visual impaired students. (7) Provided donation to Beuen Foundation to expand disadvantaged elderly meal and health care service regions to six communities at north Toucheng, and the number of people serviced to 30%. (8) Assisted Taichung Kuang Ying Children Care Home to construct garden space and septic tank in order to comply with the sanitary and safety, to improve the living environment quality for children and teenagers, in order to maintain the physical health of children. (9) Organized the “Children Companion for Elderly” with John Tung Foundation for elementary students to accompany elderly people in educational experience project, allowing young students to understand the physical and mental state of elderly, to learn the identification of elderly depression emotion and provide assistance, in light of increasing the interaction skills of students with elderly, and the ability of students to accompany elderly at home. (10) Provided donation to CommonWealth Magazine Education Foundation to execute the Hope Reading Project for two remote schools, in light of cultivating life-time learning habit through the promotion of reading, and improving the living quality of rural areas. (11) Assisted the A Kernel of Wheat Foundation and Taitung Christian Hospital to organize the disabled “Mobile Showing Service” in order to provide showers, medicine dressing and care services etc., thereby improving the living quality of elderly living alone and disabled. (12) Provided donation to Happy Mountain Nursing Center having more than one hundred medium to severe disabled for one-year of meal non-staple food, in order to care the balanced nutrition obtaining, improve immune system, and to reduce hazards due to external environmental changes. (13) Provided donation to Bin-Mao Junior High School at Taimali Township, Taitung County to organize the “Diverse Learning Implementation Project”, for students to participate in English proficiency tests, occupational
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Deviations from “the Implementation Status Corporate Social Responsibility Evaluation Item Best-Practice Principles for Yes No Abstract Explanation TWSE/TPEx Listed Companies” and Reasons license tests etc. and night-time course program, in pursuit of allowing 100% of graduates to continue their academic studies and to increase the future employment abilities of students. Furthermore, in conjunction with the GHF education innovative student scholarship, provide assistance to students and KIPP etc. school technical education communication, thereby improving the international vision of students.
For the aforementioned activities, a total of NTD 3.82 million is donated. The Foundation's source of fund for 2018 comes from not only the fund accrued interest but also the donation of NTD 2.5 million received from “International Bills Finance Corp.” and the donation provided by “Waterland Financial Holding Co., Ltd.” for the 0206 Hualien earthquake rescue project in order to jointly provide social welfare charity services. 7. A clear statement shall be made below if the corporate social responsibility reports were verified by external certification institutions:
The Company has prepared the 2017 Corporate Social Responsibility Report according to the “Taiwan Stock Exchange Corporation Rules Governing the Preparation and Filing of Corporate Social Responsibility Reports by TWSE Listed Companies” and the Global Reporting Initiative (GRI) as the primary architecture along with the strategy directives of financial enterprise supplementary indicators to perform the drafting of the report with core disclosure method. In addition, for the content of the report, PwC Taiwan has also performed the limited assurance for the performance indicators selected according to the Assurance Standards No. 1 “Assurance case not belonging to historical financial information audit or review” announced by the Accounting Research and Development Foundation.
3.4.7 Ethical Corporate Management
Implementation Status Deviations from “the Ethical Corporate Management Evaluation Item Best-Practice Principles Yes No Abstract Illustration for TWSE/TPEx Listed Companies” and Reasons 1. Establishment of ethical corporate management policies and programs (1) Does the company declare (1)To establish corporate culture of ethical its ethical corporate management and to develop a sound company, management policies and the Company has established the “Ethical procedures in its Corporate Management Best Practice Principles” guidelines and external according to the “Ethical Corporate Management documents, as well as the Best Practice Principles for TWSE/TPEx Listed commitment from its Companies”. There are also “Guidelines for the board to implement the Adoption of Codes of Ethical Conduct” which policies? prevents conflict of interests, and “Procedures for Board of Directors’ Meetings” which requires directors’ recusal due to conflict of interests. The None Company also upholds the corporate management principles of “Trust, Efficiency, Innovation”, and has also demonstrates the sincere management commitment of the Company in documents and publications to the external. (2) Does the company (2)The Company has set up “Guidelines for the establish policies to Adoption of Codes of Ethical Conduct” and all prevent unethical conduct the affiliates have their own internal guidelines, with clear statements which stipulated regulations for the procedures regarding relevant for handling receipt of benefits, promotion of procedures, guidelines of setup of corporate ethical management conduct, punishment for organization, regulations on recusal of conflict of violation, rules of appeal, interest, mechanism for report and punishment
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Implementation Status Deviations from “the Ethical Corporate Management Evaluation Item Best-Practice Principles Yes No Abstract Illustration for TWSE/TPEx Listed Companies” and Reasons and the commitment to etc. Legal Compliance units hold educational implement the policies? seminar by quarter to share lesson learned, and to remind all the employees of professional ethics. (3) Does the company (3)In cases where any directors, managerial officers establish appropriate and employees of the Company discover matters precautions against violating the ethical management requirements, high-potential unethical he or she shall report to the Auditing Department conducts or listed immediately. They can find contact method for activities stated in Article whistleblowers in the Company’s homepage. The 2, Paragraph 7 of the Company shall ensure the confidentiality of the Ethical Corporate identity of the reporter and the report content. Management The Company prevents the occurrence of Best-Practice Principles unethical conducts through regular and irregular for TWSE/TPEx Listed audits (including operation procedures, Companies? information communication, personnel abnormalities etc.). There is no violation of professional ethics in 2018. 2. Fulfill operations integrity policy (1) Does the company (1)For suppliers and cooperating parties, inspection evaluate business partners’ on unethical conducts is performed before ethical records and trading, and the commercial contracts are also include ethics-related specified with clauses related to ethical conducts. clauses in business contracts? (2) Does the company (2)The Company designates the “Compliance & establish an exclusively Legal Department’ under the President to be the (or concurrently) unit for promoting the corporate ethical dedicated unit supervised management, to ensure the implementation of by the Board to be in ethical management and to report the following to charge of corporate the board of directors on the execution status at integrity? least once a year: establishment of related guidelines, auditing system and implementation result, whistleblower protection, legal compliance report submitting to Audit Committee and Board of Directors, legal training of directors and employees, assessment of the Company’s None counterparties’ ethics, and disclosure of financial and business information, etc. (3) Does the company (3)In cases where any directors, managerial officers establish policies to and employees of the Company discover matters prevent conflicts of violating the ethical management requirements, interest and provide he or she shall report to the Auditing Department appropriate immediately. They can find contact method for communication channels, whistleblowers in the Company’s homepage.The and implement it? Company shall ensure the confidentiality of the identity of the reporter and the report content. (4) Has the company (4)The accounting system of the Company is established effective established according to the regulations of the systems for both competent authority, and financial reports are accounting and internal prepared according to the financial reporting control to facilitate ethical standards, such that there are no external accounts corporate management, or reserved secret accounts. and are they audited by In terms of the internal control, the Company has either internal auditors or explicitly specified that cashier and accounting CPAs on a regular basis? shall not be handled by one identical person. The internal auditors periodically audit the
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Implementation Status Deviations from “the Ethical Corporate Management Evaluation Item Best-Practice Principles Yes No Abstract Illustration for TWSE/TPEx Listed Companies” and Reasons compliance status of the aforementioned system and report to Audit Committee and Board of Directors at least once a year, in order to reduce the chance of occurrence of unethical management risk in the business activities. (5) Does the company (5)Employees are selected to participate in the regularly hold internal and external trading trainings for commercial bribery external educational prevention, malpractice case study, insider trading trainings on operational prevention, company fraud case analysis etc. In integrity? addition, the ethical policy and prevention of unethical conducts of the Company are promoted and educated to the internal legal compliance, internal control and other courses of the Company. The Company held a interested party themed seminar for directors in October 2018, and a workshop for prevention of credit extention to interested parties in November 2018. Affiliated companies also held training sessions respectively, which cover subjects such as Personal Information Protection Act, Money Laundering Control Act, Labor Standards Act, Financial Consumer Protection Act, and Sexual Harassment Prevention Act. There were 848 persons receiving training, which was an accunulation of 4,256 training hours. 3. Operation of the integrity channel (1) Does the company (1)The Company has also established the “Report establish both a Case Handling Operation Procedures” to reward/punishment explicitly specify the reporting channels and system and an integrity handling procedures. In addition, the Company hotline? Can the accused also announced on homepage the e-mail box, be reached by an mail address, telephone and fax number for appropriate person for internal report and complaint, which is managed follow-up? by Auditing Department. Verification and relevant operation are performed by designated personnel depending upon the situation. (2) Does the company (2)In cases where any directors, managerial officers establish standard and employees of the Company discover matters None operating procedures for violating the ethical management requirements, confidential reporting on he or she shall report to the Auditing Depeartment investigating accusation immediately. The Company shall ensure the cases? confidentiality of the identity of the reporter and the report content. (3) Does the company (3)The Company shall ensure the confidentiality of provide proper the identity of the whistleblower and report whistleblower protection? content. The Company shall protect whistleblowers, shall not have him dismissed, demoted, his pay cut, or his legal right jeopardized. Shall he find himself in disadvantaged circumstances due to whistleblowing, he could file a complaint with Audit Committee or Board of Directors. 4. Strengthening information disclosure None (1) Does the company The Company’s Ethical Corporate Management disclose its ethical Best-Practice Principles and the results of our
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Implementation Status Deviations from “the Ethical Corporate Management Evaluation Item Best-Practice Principles Yes No Abstract Illustration for TWSE/TPEx Listed Companies” and Reasons corporate management implementation have been posted on the Company’s policies and the results of Chinese / English website and MOPS. its implementation on the company’s website and MOPS? 5. If the company has established the ethical corporate management policies based on the Ethical Corporate Management Best-Practice Principles for TWSE/TPEx Listed Companies, please describe any discrepancy between the policies and their implementation. There have been no differences.
6. Other important information to facilitate a better understanding of the company’s ethical corporate management policies (e.g., review and amend its policies). The status of the Company’s fulfillment of the ethical management has been disclosed in the annual report.
3.4.8 Corporate Governance Guidelines and Regulations
The Company has established corporate governance related procedures and regulations, such as “Procedures for Shareholders’ Meetings”, “Procedures for Board of Directors’ Meetings”, “Director Election Regulations”, “Regulations for Board of Directors Performance Evaluation”, “Audit Committee Charter”, “Remuneration Committee Charter”, “Rules Governing the Duty of Independent Directors”, “Information Disclosure Operation Regulations”, “Guidelines for the Adoption of Codes of Ethical Conduct”, “Ethical Corporate Management Best Practice Principles”, “Report Case Handling Operation Procedures”, “Guidelines for Legal Compliance System Execution”, “Corporate Governance Best Practice Principles”, “Corporate Social Responsibility Best Practice Principles”, “Procedure for Anti-Money Laundering and Counter Terrorism Information Sharing” and “Anti-Money Laundering and Counter Terrorism Plan”, etc. For further inquires, please go to the company website, website address www.waterland - fin.com.tw/resite-11.asp. 3.4.9 Other Important Information Regarding Corporate Governance
1. To manage internal major messages of the Company, the board of directors has approved and established the “Information Disclosure Operation Regulations”, and is published in the company intranet for the compliance of all employees in order to prevent violation or occurrence of insider trading. 2. During the assuming of the term of office by a new director, the Company also provides the Handbook for Directors and Supervisors of TWSE/TPEx Listed Companies published by TWSE as well as relevant educational information.
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3.4.10 Internal Control Systems
1. Internal control system declaration Waterland Financial Holding Co., Ltd. Internal Control System Declaration
To: Financial Supervisory Commission March 25, 2019 We, in representation of Waterland Financial Holding Co., Ltd., hereby declares the Company, for the period from January 1, 2018 to December 31, 2018, has properly complied with the “Implementation Rules of Internal Audit and Internal Control System of Financial Holding Companies and Banking Industries” to establish an internal control system and to implement risk management, which is executed by an a detached and independent Auditing Department to perform the audit and to report to the board of directors and the Audit Committee periodically. Upon careful assessment, the internal control and legal compliance status of all units of the Company, except for the matters listed in the attachment, have been thoroughly and effectively executed. This Declaration shall become part of the main content of the annual report and prospectuses of the company, and shall be publicly disclosed externally. In case of any illegal conducts of severe false, concealing etc. in the aforementioned publicly disclosed content, the Company shall bear the legal liabilities specified in Article 20, Article 32, Article 171 and Article 174 of the Securities and Exchange Act.
Declared by
Chairman： Chi-Lin Wea President： Michael Y. J. Ding Chief Auditor： Wei-Chih Chen Chief Compliance Officer： An-Fa Chang
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Waterland Financial Holding Co., Ltd. Required Correction and Improvement Plan for Internal Control System Base date: December 31, 2018 Predefined Matters requiring corrections Improvement measures improvement completion time 【The Company】 2018.10.30 Jin-Guan-Yin-Kong-Zi No. 1.The material weakness, improvement Already improved. 10702736822 Letter: recommendation and specific improvement measures Regarding the Proprietary Trading are reported to the audit committee meeting and the Department of the subsidiary, Waterland board of directors’ meeting. After the resolution of Securities, engaged in the trading of stocks the two meetings, “when the Administration issued by the subjects specified in Department performs the interested party Paragraph 1 of Article 45 of the Financial information maintenance and inspection operation, if Holding Company Act, it was found to fail a declaration obligator is found to have any missing to report to the board of directors for declaration matters, report shall be submitted to the supermajority resolution, indicating that Chairman and President in order to urge the the Company had not properly performed declaration obligator to make correction immediately the collection of interested party data, data and internal records shall be made. The obligator filing and maintenance operation. responsible for the declaration of interested party Consequently, according to Paragraph 1 of affairs shall bear the indemnification liability for the Article 54 of the Financial Holding company in case of any faults”. In addition, the Company Act, such fault shall be resolution is issued in the form of notices for corrected. informing and reminding all declaration obligators to fulfill the obligation for declaration. 2.For the operational weakness and disciplinary action, punishment on personnel is rendered according to the “Regulations for Employee Service and Reward/Punishment”. 3.The two-way diverse methods are adopted to improve the handling of interested party transaction searches, including two-way data filing, diverse searches, declaration promotion operation frequency acceleration and second-line of defense for legal compliance operation improvement. 4.The audit of interested party transaction is listed as a key auditing focus for 2019. 5.Continue to organize educational trainings for directors and handling personnel. 【Subsidiary, IBFC】 2018.10.8 Jin-Guan-Yin-Kong-Zi No. 1.Already revised the forms and supplemented the All weaknesses 10701034650 Letter: information of secondary customers with existing have been In 2017, FSC conducted inspections on the transactions prior to 5/24/2017. The substantial improved general services of IBFC, and for the beneficiaries of customers were re-confirmed and the completely. anti-money laundering and counter customer risk assessment date was corrected. terrorism financing operation, the 2.Already revised relevant operational regulations company failed to thoroughly understand according to the document preservation period customer background and substantial specified in the guidelines template of the company. beneficiary, and the operational regulations established failed to properly specify the document preservation period, which was found to be inconsistent with the regulations established by the company. Consequently, disciplinary action was rendered for correction.
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Predefined Matters requiring corrections Improvement measures improvement completion time 【Subsidiary, Waterland Securities】 2018.10.30 Jin-Guan-Yin-Kong-Zi No. 1.The correction operation already completed. Improvement 10702736821 Letter: 2.Already immediately corrected the review of data already completed FSC conducted inspection on the general content of interested party. For the related party on March 24, 2017. services performed by Waterland information form completed by each director, Securities in 2017, and regarding the articulation audit shall be performed actively: For the Proprietary Trading Department of stock names in the related party database similar to Waterland Securities engaged in the the ones of OTC companies, searches on the business trading of securities issued by the subjects registration data of MOEA are conducted actively in specified in Subparagraph 2 of Paragraph order to ensure the accuracy and integrity of the data 1 of Article 45 of the Financial Holding provided. Company Act during the period from 3.Establish proprietary business investment portfolio 2015.11.25 to 2017.2.2, it was found to weekly. After completing relevant operation fail to report to the board of directors for procedures according to regulations, transaction shall supermajority resolution in advance, only be performed after the completion of computer violating the regulation of Paragraph 1 of setting. Article 45 of the Financial Holding 4.In addition to the procedure for the trading unit to Company Act. Consequently, according to perform inspection on the investment subject matter, Subparagraph 14 of Article 60 of the control mechanism is further added: Financial Holding Company Act, an (1)Daily operation; The Information Department administrative fine of NTD 2 million was performs comparison on the company names rendered. between the publicly listed stock data files and the data files of the related parties in order to confirm the instantaneity of the database. (2)Related party database change operation: Upon receiving the related party database change notice for the financial holding company, the Information Department shall immediately perform the comparison on the uniform business number and the company name for the publicly listed company database. If the comparison result indicates any suspected stock, notice is issued to the President’s Office. In addition, for the suspected stock, the business registration company information of MOEA is further downloaded, and once the uniform business number is confirmed to be correct without errors, it is then permitted for processing, in order to maintain the accuracy of the database.
2. Where CPA is entrusted to review the internal control system, the CPA examination report shall be disclosed.： None.
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3.4.11 Violation Sanctions, Major Flaws and Improvement Status of the Company and Subsidiaries in the Last Two Years and Up to the Report Printing Date.
1. Any indictment of a responsible person or employee by a prosecutor for an offense related to the occupation： According to 2015 Shen-Jian-Zi No. 1529 Judgment and 2016 Jian-Zi No. 2497 of the Taiwan Taipei District Court, ○○ Cheng at the Jingxin Branch of Waterland Securities committed the offense of non-government agency failing to use the personal information in accordance with the scope of the specific purpose of collection provided as specified in Paragraph 1 of Article 41 of the Personal Information Protection Act, consequently, the suspension of punishment for two years was rendered and a penalty fine of NTD 20,000 was imposed. The aforementioned conduct failed to comply with the regulation of Subparagraph 2 of Paragraph 2 of Article 18 of the “Regulations Governing Responsible Persons and Associated Persons of Securities Firms”; consequently, FSC issued the Jin-Guan-Zheng-Quan-Zi No. 1060003615 Notice of Punishment on March 17, 2017 and ordered Waterland Securities to impose the disciplinary action of suspending such employee from the performing duties for one month. (Jin-Guan-Zheng-Quan-Zi No. 1060003615 dated March 17, 2017) Improvement status: Waterland Securities further emphasizes its demands on the branches to comply with relevant laws and regulations thoroughly, and incorporate this case into relevant educational teaching materials for personal information protection in order to organize regular and irregular educational trainings. 2. Any fine imposed by the FSC for violation of a law or regulation： (1) IBFC handling real estate appraisals and loan case as well as relevant operations of internal control and audit system etc. failed to establish internal control and audit system or failed to implement thoroughly, such that it violated the regulation of Article 43 of the Act Governing Bills Finance Business. According to the regulation of Subparagraph 9 of Article 64 of the Act Governing Bills Finance Business, a penalty fine of NTD 4 million was imposed. (Jin-Guan-Yin-Kong-Zi No. 10660001231 dated April 6, 2017) Improvement status: Regarding the handling of real estate appraisal and loan case mentioned in this notice of punishment, relevant loan case is not subject to overlending and the principle and interest have been repaid normally such that the credit can be ensured. For the improvement opinions provided by the competent authority, IBFC has established cooperative improvement
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measures in order to improve relevant internal control system and to complete the corporate governance. The Company will also fulfill the responsibility of a financial holding parent company on the supervision and management of its subsidiary. (2) Waterland Securities acted as the proxy solicitor for the extraordinary shareholders’ meeting dated March 13, 2017, of Taiwan Pulp & Paper Corporation (hereinafter referred to as “TPPC”). According to the statistical information of the solicited number of TPPC shares published on the website of Securities & Futures Institute, Waterland Securities solicited 475 proxies, and the number of shares solicited was 18,302,319 shares; however, Waterland Securities had already obtained 556 proxies for a total of 13,601,336 shares that had not yet submitted to the shareholder services agent of this extraordinary shareholders’ meeting to perform statistical statement. Therefore, it was determined to violate the regulations of Article 12 and Paragraph 1 of Article 16 of the Regulations Governing the Use of Proxies for Attendance at Shareholder Meetings of Public Companies. According to Paragraph 1 of Article 179 of the Securities and Exchange Act, the responsible person of such conduct was penalized for a fine of NTD 240 thousand. (Jin-Guan-Zheng-Jiao-Fa-Zi No. 1060015314 dated April 28, 2017) Improvement status: This case was due to the Shareholders Service Department supervisor of Waterland Securities failed to perform inspection and was subject to instructions of the trustor. To prevent re-occurrence of similar events, the following control measures are improved and submitted to the board of directors’ meeting for resolution: a. In the “Regulations for Delegation of Authorities” of Waterland Securities, the “shareholders’ meeting management” is further added with the item of “proxy solicitation operation”. b. The aforementioned shareholders’ meeting management - approval authority for the proxy solicitation operation is elevated from the “shareholders service unit supervisor” to “President”, and the President is requested to improve the supervision and management of the proxy solicitation operation in order to ensure the sound operation of the Shareholders Service Department. (3) The Banking Bureau, FSC rendered a disciplinary action according to the general service examination opinion conducted by the Financial Examination Bureau on Waterland Securities in 2017: The Proprietary Business Department of Waterland Securities engaged in the trading of securities (8444-Green River-KY company stocks) issued by the subject described in Subparagraph 2 of Paragraph 1 of Article 45 of the Financial Holding Company Act during the period from November 25, 2015 to
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February 2, 2017, but failed to report to the board of directors for supermajority resolution in advance, such that it had violated the regulation of Paragraph 1 of Article 45 of the same Act. With the consideration that Waterland Securities had discovered such issue and reported to the board of directors’ meeting for ratification, and performed improvement measures of checking the database, improving data inspection and approval etc., a penalty fine of NTD 2 million was imposed according to Subparagraph 14 of Article 60 of the same Act. (Jin-Guan-Yin-Kong-Zi No. 10702736820 dated October 30, 2018) Improvement status: Waterland Securities reported to the board of directors’ meeting on March 24, 2017 for ratification was approved, and the correction operation was completed. To prevent re-occurrence of similar event due to failure of immediate update of some related party information, the interested party database comparison control mechanism is further added. (4) The account of trader ○○Yang at Nangang Branch of Waterland Securities was subject to day-trade operation on February 6, 2018, but failed to inform the trader about the result of day trade, which was not in conformity with the internal control system of the Company. Upon examination, it was considered to violate the regulation of Paragraph 2 of Article 9 of Regulations Governing the Operation of Futures Introducing Broker Business by Securities Firms. A penalty fine of NTD 120 thousand was imposed on Waterland Securities according to Subparagraph 2 of Paragraph 1 of Article 119 of the Futures Trading Act at the time of such conduct. (Jin-Guan-Zheng-Qi-Zi No. 10803065421 dated March 7, 2019 and Jin-Guan-Zheng-Qi-Fa-Zi No. 1080306542) Improvement status: Since the occurrence of the event on February 6, 2018, Waterland Securities has cooperatively handle the matter according to the responsive improvement measures announced by the competent authority and the adjustment precautions made by the futures company, and the Company will continue to enhance the education through educational training. 3. Any deficiency for which an official reprimand was issued by the FSC： (1) Regarding the Proprietary Trading Department of the subsidiary, Waterland Securities, engaged in the trading of stocks issued by the subjects specified in Paragraph 1 of Article 45 of the Financial Holding Company Act, it was found to fail to report to the board of directors for supermajority resolution, indicating that the Company had not properly performed the collection of interested party data, data filing and
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maintenance operation. Consequently, according to Paragraph 1 of Article 54 of the Financial Holding Company Act, such fault shall be corrected. (2018.10.30 Jin-Guan-Yin-Kong-Zi No. 10702736822 Letter). Improvement status: The two-way diverse methods are adopted to improve the handling of interested party transaction searches, including two-way data filing, diverse searches, declaration promotion operation frequency acceleration and second-line of defense for legal compliance operation improvement. The Company will continue to organize educational trainings for directors and handling personnel, and strengthen the audit of interested party transaction, in order to complete the collection, filing and maintenance of interested party data. (2) IBFC had weakness in the handling of anti-money laundering and counter terrorism financing operation, and it was determined to have the likelihood of affecting the sound operation. According to Article 51 of the Act Governing Bills Finance Business that Paragraph 1 of Article 61-1 of the Banking Act shall be applied, such weakness should be corrected. (Jin-Guan-Yin-Kong-Zi No. 10701034650 dated October 8, 2018) Improvement status: Regarding the anti-money laundering and counter terrorism financing operation procedure described in this disciplinary action, IBFC has revised relevant forms and performed re-assessment and correction. For the improvement opinions provided by the competent authority, IBFC has established cooperative improvement measures in order to increase relevant internal control system and to improve the corporate governance. (3) Taiwan Stock Exchange conducted audit on the Taoyuan Branch of Waterland Securities from September 29~30, 2017, and the following weakness was found: a. Sales representative ○○ Shih (hereinafter referred to as “staff Shih”) accepted the commission for trading securities for customer ○○ Chen (hereinafter referred to as “Chen”) during the period from April 8 to November 3, 2016, and it was determined that there was full authorization in the commission for making decision on the type, quantity, price and buy in and sell out on behalf of the customer. b. As the branch auditor ○○ Hsu (hereinafter referred to as “staff member Hsu) inspected the telephone consignment voice recording, it was found that the Commission Agreement with the selection of telephone for order placement and trading failed to indicate the voice recording for commission through telephone call, and there was no audit report prepared according to the regulations for submission to the manager.
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c. Branch manager ○○ Kuo (hereafter referred to as “staff member Kuo”) failed to inform the branch auditor about the trading dispute status such that for the complaint filed by Chen at the branch, there was no preservation of complete handling report and record. The aforementioned event was determined to violate Paragraph 2 of Article 2 of the Regulations Governing Securities Firms, and disciplinary action was rendered for Waterland Securities according to Article 65 of the Securities and Exchange Act. In addition, Waterland Securities was ordered to suspend the duty performance of staff Shih for six months. For the faults of staff member Hsu and staff member Kuo, Waterland Securities was requested to make its own decision for the punishment and handling. (Jin-Guan-Zheng-Quan-Zi No. 1070305711 dated March 7, 2018) Improvement status: a. Regarding the aforementioned weakness, the Brokerage Business Unit of Waterland Securities has informed all branches about the disciplinary action due to such branch’s fault and notification records have been preserved. The auditors of other branches are requested to pay attention on such faults during auditing. b. The Auditing Office of Waterland Securities will perform at least one time of audit without any early warning every three months until it is considered to have completed the improvement, and relevant records will be preserved for recordation. (4) FSC conducted general service inspection on Waterland Securities during the period from August 21 to September 7, 2017, and relevant weaknesses were found, including that when the company handling the commissioned trading of securities, for the incorrect number of stocks entered by customers via the electronic order placement to buy in stocks, the company adopted the method of reporting as company’s incorrect account method for such matter. Regarding the money laundering and terrorism financing risk assessment, the company failed to identify the level of the money laundering and terrorism financing risk according to various risk factors for individual products or services. Before the launch of a new product or service, the company failed to conduct thorough money laundering risk assessment. In addition, for the business branches of Waterland Securities engaging in trading of foreign currency securities, records of the transaction counterparty price inquiry and price negotiation processes were not preserved. Consequently, the company was determined to violate Paragraph 2 of Article 2 of the Regulations Governing Securities Firms, and disciplinary action was rendered and issued to Waterland Securities. (Jin-Guan-Zheng-Quan-Zi No. 1070303597 dated March 8, 2018)
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Improvement status: The headquarter Auditor Office of Waterland Securities has strengthened the auditing process on such weakness, and the assessment thereof has been improved completely. (5) FSC conducted the project inspection on the anti-money laundering, counter terrorism financing and non-proliferation at Waterland Securities during the period from April 11~April 19, 2018, and the following weakness were found: During the handling of account opening for corporate customers, the company failed to properly identify the substantial beneficiary, failed to perform the substantial beneficiary name verification operation and the verification for names of non-substantial beneficiary. Regarding the handling of customer money laundering and terrorism financing risk assessment operation, the company failed to execute according to Article 3 of the Anti-Money Laundering and Counter Terrorism Financing Plan, such that the customer risk level was underestimated. Regarding the checking of negative news and important politically exposed persons (PEP) of customers, the company failed to perform customer review and re-assessment its money laundering risk when major changes in the customer identity and background information was known. The aforementioned weaknesses were determined to violate the Regulations Governing Securities Firms, and disciplinary action was rendered and issued to Waterland Securities. (Jin-Guan-Zheng-Quan-Zi No. 1070345936 dated December 11, 2018) Improvement status: The headquarter Auditor Office of Waterland Securities has strengthened the auditing process on such weakness, and the assessment thereof has been improved completely. For the weaknesses inspected and listed, the company has corrected the defects with improvement immediately, and has also strengthened the educational trainings on anti-money laundering and counter terrorism financing related operations for the first-line of operating staff. The Auditing Office has already listed the weaknesses into the monthly enhanced auditing items in order to prevent re-occurrence of similar faults. (6) Taiwan Stock Exchange conducted audit at Waterland Securities on September 27, 2018, and it was found: The former manager of Luzhou Branch, ○○ Wang, was engaged in the loan borrowing and loan agency matter, and it was determined to violate Paragraph 2 of Article 2 of the Regulations Governing Securities Firm. Consequently, a disciplinary action was rendered and issued to Waterland Securities according to Article 65 of the Securities and Exchange Act. (Jin-Guan-Zheng-Quan-Zi No. 1080303078 dated January 29, 2019)
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Improvement status: a.The Brokerage Business Unit of Waterland Securities has requested to inform all branches about the disciplinary action due to such branch’s fault and notification records have been preserved. The auditors of other branches are requested to pay attention on such faults during auditing. b.Regarding the Brokerage Department of Waterland Securities, enhanced guidance and auditing have been implemented, such that at least one time of audit without any early warning will be performed every three months until it is determined to have completed the improvement. 4.Any matters in which sanctions were imposed by the FSC pursuant to Paragraph 1 of Article 54 of the Financial Holding Company Act： None 5.Any security incident arising from employee infidelity or material contingencies (e.g. fraudulent acquisition, theft, misappropriation, or robbery of assets; forgery of documents or securities; acceptance of a bribe; losses from natural disaster; losses from external causes; hacker attack, data theft, or leak of trade secrets or customer data; or other such material incidents) or failure to faithfully abide by the Directions for Maintenance of Security at Financial Institutions. If actual losses, whether singly or in aggregate, exceed NT$50 million in any given year, disclose the nature and amount of the loss： None 6. Other matters that must be disclosed pursuant to FSC designation： None
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3.4.12 Major Resolutions of Shareholders’ Meeting and Board Meetings
1. Shareholders’ Meeting Resolution and Execution Year Date Proposal Resolution Execution Status 2017 business Number of voting rights of attending shareholders was Already handled report and 2,170,503,558 shares, among which 2,102,235,263 shares according to the financial for assent (including electronic votes of 516,305,885 resolution. statement are shares), 10,328,681 shares for dissent (including submitted for 10,328,681 shares), 57,939,614 shares for abstention approval (including electronic votes of 57,932,970 shares). The number of shares of assenting votes accounted for 96.85% of the attending shareholder voting rights; therefore, this proposal was approved accordingly. Regarding the Number of voting rights of attending shareholders was The date of August proposal on the 2,170,503,558 shares, among which 2,102,260,655 shares 8, 2018 was already 2017 surplus for assent (including electronic votes of 516,331,277 set to be the 2018 earning shares), 10,305,984 shares for dissent (including dividend Ordinary 2018 distribution, it is 10,305,984 shares), 57,936,919 shares for abstention distribution base shareholders June 15 submitted for (including electronic votes of 57,930,275 shares). The date, and cash ’ meeting approval. number of shares of assenting votes accounted for dividends were 96.85% of the attending shareholder voting rights; issued on August 22 therefore, this proposal was approved accordingly. of the same year. Regarding the Number of voting rights of attending shareholders was The date of August proposal on the 2,170,540,168 shares, among which 2,102,156,540 shares 8, 2018 was already issuance of new for assent (including electronic votes of 516,220,349 set to be the shares from shares), 10,411,204 shares for dissent (including dividend earnings of 10,411,204 shares), 57,972,424 shares for abstention distribution base Company, it is (including electronic votes of 57,935,983 shares). The date, and stock requested for number of shares of assenting votes accounted for dividends were resolution. 96.85% of the attending shareholder voting rights; issued on therefore, this proposal was approved accordingly. September 5 of the same year.
2. Major Resolutions of the Board of Directors’ Meeting Session of Board Date of Directors’ Proposal Content Resolution Meeting To purchase parts of the floors and After the Chairperson inquires the consents of Sixth Term of parking lots of the “TransGlobe Life all attending directors, the revision of this 2/27/2018 Board of Directors Insurance Mingchuan Building” as proposal is as described in Description 6, and Seventh Meeting the office for companies of this the rest is approved as proposed. Group, it is proposed for approval. After the inquiry of the Chairperson, all Regarding the 2017 final accounts of attending directors agree with the proposal the Company, it is submitted for without objections, this case is passed as resolution. proposed. After the inquiry of the Chairperson, all Regarding the proposal on the 2017 Sixth Term of attending directors agree with the proposal earning distribution of the Company, 3/27/2018 Board of Directors without objections, this case is passed as it is submitted for resolution. Eighth Meeting proposed. Regarding the proposal on the After the inquiry of the Chairperson, all issuance of new shares from earnings attending directors agree with the proposal of Company, it is requested for without objections, this case is passed as resolution. proposed.
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Session of Board Date of Directors’ Proposal Content Resolution Meeting After the Chairperson inquiries the consents of all attending directors, for this proposal, the content of “Chapter 1. General Information” is to be added with the following texts of “The ‘Accounting System’ of the Company established in 2002 with four previous amendments shall change to adopt the new dividend income taxation system starting from 2018 in accordance with the International Financial Reporting Standard 9 (IFRS 9) Regarding the proposal on the “Financial Instrument” and the “Regulations amendment of the “Accounting Governing the Preparation of Financial Reports System” of the Company as described by Financial Holding Companies” of FSC in the explanation, and it is submitted amended on August 2, 2017, the “Financial for resolution. Holding Enterprise Accounting Items and Codes” of Taiwan Stock Exchange amended on November 17, 2017, and the Income Tax Amendment passing the third reading at the Legislative Yuan on January 18, 2018, to eliminate the double taxation calculation deduction system. Accordingly, the “Accounting System” of the Company is amended for the Sixth Term of fifth time on March 27, 2018.” The rest of the 3/27/2018 Board of Directors proposal is passed as proposed. Eighth Meeting After the Chairperson inquires the consents of all attending directors, for this proposal, Chapter 5 Supplementary Provisions of the Disaster Emergency Responsive Measures Handbook is to be added with the following texts “IV. Where the Company or subsidiaries encounter other Regarding the proposal on the emergencies of disasters described in this revision of the “Disaster Emergency Handbook, such that the company properties, Responsive Measure Handbook” of personnel safety of the company may be the Company, it is submitted for jeopardized or the normal operation of the resolution. Company may be affected, the President may provide instructions to activate the disaster responsive system according to this Handbook.” The content of Article 4 of Chapter 5 Supplementary Provisions is revised to Article 5, and the rest of the proposal is passed as proposed. Regarding the proposal on the After the inquiry of the Chairperson, all amendment of the “Anti-money attending directors agree with the proposal Laundering and Counter Terrorism without objections, this case is passed as Financing Plan” of the Company, it is proposed. submitted for resolution. Regarding the proposal on the parts of After the inquiry of the Chairperson, all Sixth Term of the provisions of the “Risk attending directors agree with the proposal 5/23/2018 Board of Directors Management Regulations” of the without objections, this case is passed as Ninth Meeting Company, it is submitted for proposed. resolution. Regarding the 2018 first half After the inquiry of the Chairperson, all Sixth Term of consolidated financial statements, it is attending directors agree with the proposal 8/22/2018 Board of Directors submitted for resolution. without objections, this case is passed as Eleventh Meeting proposed.
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Session of Board Date of Directors’ Proposal Content Resolution Meeting Regarding the proposal on the After the inquiry of the Chairperson, all amendment of the “Legal Compliance attending directors agree with the proposal System Execution Procedures” of the without objections, this case is passed as Company, it is submitted for proposed. resolution. Regarding the proposal on the After the inquiry of the Chairperson, all amendment of the “Anti-money attending directors agree with the proposal Laundering and Counter Terrorism without objections, this case is passed as Financing Plan” of the Company, it is proposed. submitted for resolution. Regarding the amendment of parts of After the Chairperson inquires the consents of the provisions of the “Regulations for all attending directors, the content of posterior Transferring Repurchased Shares to section of Paragraph 1 of Article 5 of this Employees” of the Company, it is proposal “...Chairperson executes the submitted for resolution. distribution depending upon the outstanding achievement, special performance, specific contribution or other matters of employees.” is amended to “...Chairperson executes the distribution depending upon the outstanding achievements, specific contribution or special performance of employees.” The rest of the proposal is passed as proposed. Regarding the proposal on the After the inquiry of the Chairperson, all establishment of the “Regulations for attending directors agree with the proposal Handling Whistle-Blowing Cases” of without objections, this case is passed as the Company, it is submitted for proposed. resolution. Regarding the proposal on the After the inquiry of the Chairperson, all Sixth Term of establishment of the “Regulations for attending directors agree with the proposal Board of Directors 11/21/2018 Concurrent Serving of Responsible without objections, this case is passed as Thirteenth Person” of the Company, it is proposed. Meeting submitted for resolution. Regarding the amendment of parts of After the Chairperson inquires the consents for the provisions of the “Regulations for all of the attending directors, the content of the Employee Salary and Compensation anterior section of Paragraph 2 of Article 3 of Payment” of the Company, it is this proposal “Where an employee concurrently submitted for resolution. serving in other job duty of the Company, depending upon the qualification requirements Sixth Term of of the concurrent job duty, level of Board of Directors 12/19/2018 responsibility..., concurrent allowance shall be Fourteenth issued.” is amended to “Where an employee Meeting concurrently serving/acting as a deputy in other job duty of the Company, depending upon the qualification requirements of the concurrent job duty, level of responsibility...concurrent allowance shall be issued. “ The rest of the proposal is passed as proposed. Regarding the Company’s plan for the After the inquiry of the Chairperson, all establishment of an internet-only attending directors agree with the proposal with Sixth Term of bank jointly founded together with the amendments, and this case is passed. Board of Directors Rakuten Bank, Ltd. and Rakuten Card 1/8/2019 Third Co., Ltd., and the Company plans to Extraordinary invest in 49% of the equity of the Meeting internet-only bank, a proposal for authorization to chairman or the one
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Session of Board Date of Directors’ Proposal Content Resolution Meeting he designates to sign joint venture contracts, set up internet-only bank, and conduct necessary administrative procedure to competent authority, is submitted for resolution. Sixth Term of Regarding the proposal on the hiring After the Chairperson requesting for consents of 2/27/2019 Board of Directors of Chief Auditor of the Company, it is all attending committee members, this case is Fifteenth Meeting submitted for resolution. passed as proposed. Regarding the 2018 final accounts of After the Chairperson requesting for consents of the Company, it is submitted for all attending committee members, this case is resolution. passed as proposed. Regarding the proposal on the 2018 After the Chairperson requesting for consents of earning distribution of the Company, all attending committee members, this case is it is submitted for resolution. passed as proposed. Regarding the proposal on the After the inquiry of the Chairperson, all issuance of new shares from earnings attending directors agree with the proposal of Company, it is requested for without objections, this case is passed as resolution. proposed. Regarding the proposal on the After the inquiry of the Chairperson, all amendment of the “Anti-money attending directors agree with the proposal Laundering and Counter Terrorism without objections, this case is passed as Financing Plan” of the Company, it is proposed. submitted for resolution. Regarding the proposal on the After the inquiry of the Chairperson, all amendment of the “Charter of attending directors agree with the proposal Sixth Term of Organization” of the Company, it is without objections, this case is passed as 3/25/2019 Board of Directors submitted for resolution. proposed. Sixteenth Meeting Regarding the proposal on the After the inquiry of the Chairperson, all amendment of the “Procedure for attending directors agree with the proposal Asset Acquisition and Disposal” of without objections, this case is passed as the Company, it is submitted for proposed. resolution. Regarding the proposal on the After the inquiry of the Chairperson, all amendment of the “Procedures for attending directors agree with the proposal Shareholders’ Meetings” of the without objections, this case is passed as Company, it is submitted for proposed. resolution. Regarding the proposal on the After the inquiry of the Chairperson, all amendment of the “Articles of attending directors agree with the proposal Incorporation” of the Company, it is without objections, this case is passed as submitted for resolution. proposed. Regarding the proposal on the After the inquiry of the Chairperson, all subsidiaries’ relocation to the same attending directors agree with the proposal office building, it is submitted for without objections, this case is passed as resolution. proposed. 3.4.13 Major Issues of Record or Written Statements Made by Any Director or Supervisor Dissenting to Important Resolutions Passed by the Board of Directors
None
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3.4.14 Resignation or Dismissal of the Company’s Key Individuals, Including the Chairman, CEO, and Heads of Accounting, Finance, Internal Audit and R&D April 16, 2019 Date of Date of Reasons for Resignation or Title Name Appointment Termination Dismissal Chief Auditor Jeng-Shun Chen 9/ 23/2008 3/1/2019 Retirement 3.5 Information Regarding the Company’s Audit Fee and Independence
3.5.1 Audit Fee
Period Covered by CPA’s Accounting Firm Name of CPA Audit Remarks Shu-Mei Chi PwC Taiwan Hsien-I Chen 2018.01.01~2018.12.31 - Unit: NT$ thousands Fee Items Audit Fee Non-audit Fee Total Fee Range 1 Under NT$ 2,000,000 780 750 1,530 2 NT$2,000,000 ~ NT$4,000,000 3 NT$4,000,000 ~ NT$6,000,000 4 NT$6,000,000 ~ NT$8,000,000 5 NT$8,000,000 ~ NT$10,000,000 6 Over NT$100,000,000 3.5.2 The Content of the Amounts of Both Audit and Non-audit Fees and the Details of the Non-audit Services for Non-audit Fees Paid to the CPA, to the Accounting Firm of the CPA, and to Any Affiliated Enterprise of Such Accounting Firm Are Equivalent to One Quarter or More of the Audit Fees Paid.
Unit: NT$ thousands Non-audit Fee Period Accounting Name of Audit Covered System Company Human Remarks Firm CPA Fee Others Subtotal by CPA’s of Design Registration Resource Audit Other non-audit fees refer to capital from Shu-Mei earnings second review Chi fee of NTD 190 thousand, corporate PwC Taiwan 780 - 60 - 690 750 2018 social responsibility report service fee of Hsien-I NTD 400 thousand, Chen IFRS9 project service fee for NTD 100 thousand.
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3.5.3 When the Accounting Firm Is Changed and the Audit Fees Paid for the Financial Year in which the Change Took Place Are Lower than those Paid for the Financial Year Immediately Preceding the Change, the Amount of the Audit Fees Before and After the Change and the Reason Shall Be Disclosed. None 3.5.4 When the Audit Fees Paid for the Current Financial Year Are Lower than those Paid for the Immediately Preceding Financial Year by 15 Percent or More, Specify the Amount, Percentage and Reason for the Reduction in Audit Fees. None 3.6 Replacement of CPA
3.6.1 Regarding the former CPA
Replacement Date January 1, 2019 Replacement reasons and Due to internal restructuring at PwC Taiwan explanations Parties CPA The Company Describe whether the Company Status terminated or the CPA did not Termination of appointment - - accept the appointment No longer accepted (continued) - - appointment Other issues (except for unqualified issues) in the audit None reports within the last two years - Accounting principles or practices - Disclosure of Financial Statements Yes - Audit scope or steps Differences with the company - Others None Remarks/specify details: None Other Revealed Matters None
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3.6.2 Regarding the successor CPA
Name of accounting firm PwC Taiwan Name of CPA Shu-Mei Chi, Wei-Chi Lin Date of appointment January 1, 2019 Consultation results and opinions on accounting treatments or principles with respect to specified transactions and the None company's financial reports that the CPA might issue prior to the engagement. Succeeding CPA’s written opinion of disagreement toward the None former CPA 3.6.3 Former CPA’s disagreement matters of the Company, and successor CPA’s written opinions on the disagreement matters, and reply letter in case of any disagreement. None 3.7 The Company’s Chairman, Chief Executive Officer, Chief Financial Officer, and Managers in Charge of its Finance and Accounting Operations Hold any Positions in the Company’s Independent Auditing Firm or its Affiliates During 2018. None 3.8 Changes in Shareholding of Directors, Managers and Major Shareholders
3.8.1 Change Status of Share Transfer and Share Pledge of Directors and Managers Unit: Shares As of Apr. 16, 2019 2018 (Note 1) (Note 2) Pledged Pledged Title Name Holding Holding Holding Holding Increase Increase Increase Increase (Decrease) (Decrease) (Decrease) (Decrease) Ren Wang Co., Ltd.(Note3) 655,588 0 0 0 Chairman Representative： Chi-Lin Wea 0 0 0 0 First Commercial Bank (Note 3) 1,009,481 0 0 0 Director Representative ： Ying Wu (Note 4) 0 0 0 0 Ren Wang Co., Ltd.(Note 3) 655,588 0 0 0 Director Representative ：Steven Hung 25,536 0 0 0 Hua-Kang International Asset 2,407 0 0 0 Director Management Corp. Representative ： James Y. L. Wei 0 0 0 0 Hua Ji International Development Corp. 2,407 0 0 0 Director Representative ： Michael Chen 13,721 0 248,000 0 Ren Wang Co., Ltd.(Note 3) 655,588 0 0 0 Director Representative ： Chin-Yuan Kung 0 0 0 0
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As of Apr. 16, 2019 2018 (Note 1) (Note 2) Pledged Pledged Title Name Holding Holding Holding Holding Increase Increase Increase Increase (Decrease) (Decrease) (Decrease) (Decrease) Ren Wang Co., Ltd.(Note 3) 655,588 0 0 0 Director Representative ： Cheng-Lin, Chen 0 0 0 0 Ren Wang Co., Ltd.(Note 3) 655,588 0 0 0 Director Representative ： Ho Chih-Chiang 0 0 0 0 Taiwan Cooperative Bank (Note 3) 592,475 0 0 0 Director Representative ： Teng-Shan Tai 0 0 0 0 Independent Yeong-Chyan Wu 0 0 0 0 Director Independent Joanna Lei 0 0 0 0 Director Independent Ching-Sung Wu 0 0 0 0 Director Independent Wang, Yao-Shing 0 0 0 0 Director President Michael Y.J. Ding 12,249 0 500,000 0 Executive Michael Chen 13,721 0 248,000 0 Vice President Executive Andrew Chiu 5,232 0 100,000 0 Vice President Chief Auditor Wen-Chu Hou (Note 5) 1,878 0 182,000 0 Manager Tainyi Luor 2,721 0 158,000 0 Manager An-Fa Chang (Note 6) (71,099) 0 153,000 0 Manager Milton Huang 852 0 118,000 0 Manager Andre Huang 803 0 138,000 0 Manager Hui-Yu Kuo 677 0 47,000 0 Manager Ian Lu 1,969 0 101,000 0 Manager Tiffany Hung 31,370 0 104,000 0 Note 1: Refers to the comparison between the increased (decreased) number of shares held, pledged at the end of 2018 and at the end of 2017. Note 2: Refers to the comparison between the increased (decreased) number of shares held, pledged on April 16, 2019 and at the end of 2018. Note 3: Refers to a shareholder with holding of more than 1% of the total share amount of the Company. Note 4: Starting from February 23, 2018, the corporate director, First Commercial Bank Co, Ltd. assigned the person to assume the position as Vice Chairperson. Note 5: According to the approval of the fifteenth meeting of the sixth term of board of directors’ meeting on February 27, 2019, the person was employed as the Chief Auditor. Note 6: According to the approval of the fifteenth meeting of the sixth term of board of directors’ meeting on February 27, 2019, the person was approved to concurrently assume the position of Headquarter Legal Compliance Supervisor of the Company. Note 7: The counterparties of share transfer or pledge are not related parties.
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3.8.2 According to Article 11 of the Regulations Governing Total Number of Shares with Voting Rights issued by One Identical Financial Holding Company Held by the Same Person or Same Related Party Exceeding a Certain Ratio, Such That There Is a Need to Report the Equity, the Change Status of the Share Transfer and Share Pledge thereof.
Unit：Share 2018 As of Apr. 16 2019 (Note 1) Increase Increase Increase Increase Title Name (decrease) of (decrease) of (decrease) of (decrease) of pledged pledged shareholding shareholding shares shares Same Person or Ren Wang Co., Same Related 655,588 0 0 0 Ltd. (Note2) Parties Same Person or Norwares Same Related 2,774,417 0 (233,975,841) 0 Overseas Inc. Parties Same Person or Norwares Co., Same Related - - 233,975,841 0 Ltd. (Note3) Parties Same Person or Tsai He-Yuan Same Related 705 0 0 0 Co., Ltd. Parties Note 1: Refers to the comparison between the increased (decreased) number of shares held, pledged on April 16, 2019 and at the end of 2018. Note 2: Refers to a shareholder holding more than 1% of the total share amount of the Company. Note 3: Refers to a shareholder holding more than 1% of the total share amount of the Company; it acquired shares disposed by Norwares Overseas Inc. on March 19, 2019 and March 25, 2019. Note 4: No share is pledged.
Shares Trading with Related Parties
Relationship between Reason for Date of Counterparty and Major Transaction Name Counterparty Shares Transfer Transaction Shareholders Holding Price (NT$) 10% or more Norwares 2019.3.19 Norwares Co., Norwares Overseas Inc. Overseas Disposal 233,975,841 2,480,143,915 2019.3.25 Ltd. is the controlling Inc. company of Norwares Norwares 2019.3.19 Norwares Acquisition Co., Ltd. 233,975,841 2,480,143,915 Co., Ltd. 2019.3.25 Overseas Inc.
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3.9 Relationship among the Top Ten Shareholders
April 16, 2019 Name and Relationship Between Shareholding the Company’s Top Ten Current Spouse’s/minor’s by Nominee Shareholders, or Spouses or Name Shareholding Shareholding Remarks Arrangement Relatives Within Two Degrees (Note) Shares % Shares % Shares % Name Relationship Ren Wang Substantial related Norwares Co., Ltd. 233,975,841 8.30 0 0 0 0 - Co., Ltd. party Legal representative: 0 0 0 0 0 0 - - - Shao-Chung Tsai Reponsible person Hotel Taipei Miramax Mayer Steel 161,956,634 5.74 0 0 0 0 is a relative within - Co., Ltd. Pipe Corp. 2 degrees Legal representative: 0 0 0 0 0 0 - - - Chun-Fu Huang First Commercial Bank, 85,132,914 3.02 0 0 0 0 - - - Ltd. Legal representative: 0 0 0 0 0 0 - - - Tsan-Chang Liao Nice Nice Commercial Investment & Mortgage Corp. is Development an institutional Nice Commercial 83,472,454 2.96 0 0 0 0 Co., Ltd. director of Nice - Mortgage Corp. Investment & Development Co., Ltd. Legal representative: 0 0 0 0 0 0 - - - Hui-Lun Tsai Norwares Substantial related Ren Wang Co., Ltd. 55,287,947 1.96 0 0 0 0 - Co., Ltd. party Legal representative: 0 0 0 0 0 0 - - - Yu-Sheng Li Yong-Shin Yong-Shin Development Development Co., Co., Ltd. Ltd. is an Taiwan Fire & Marine institutional 55,137,465 1.96 0 0 0 0 - Insurance Co., Ltd. director of Taiwan Fire & Marine Insurance Co., Ltd. Legal representative: 0 0 0 0 0 0 - - - Tai-Hung Li Taiwan Fire Yong-Shin & Marine Development Co., Insurance Ltd. is an Yong-Shin Co., Ltd. institutional 53,560,747 1.90 0 0 0 0 - Development Co., Ltd. director of Taiwan Fire & Marine Insurance Co., Ltd.
Legal representative: 0 0 0 0 0 0 - - - Chien-Cheng Li
Corporate Governance Report 97
Name and Relationship Between Shareholding the Company’s Top Ten Current Spouse’s/minor’s by Nominee Shareholders, or Spouses or Name Shareholding Shareholding Remarks Arrangement Relatives Within Two Degrees (Note) Shares % Shares % Shares % Name Relationship Hotel Taipei Reponsible person Mayer Steel Pipe Corp. 53,000,508 1.88 0 0 0 0 Miramax Co., is a relative within - Ltd. 2 degrees Legal representative: 0 0 0 0 0 0 - - - Chun-Fa Huang Nice Nice Commercial Commercial Mortgage Corp. is Mortgage an institutional Nice Investment & 51,965,559 1.84 0 0 0 0 Corp. director of Nice - Development Co., Ltd. Investment & Development Co., Ltd. Legal representative: 0 0 0 0 0 0 - - - Hui-Lun Tsai Taiwan Cooperative 49,965,438 1.77 0 0 0 0 - - - Bank Co., Ltd. Legal representative: 0 0 0 0 0 0 - - - Chung-Ta Lei Note: The relationship of top 10 shareholders listed is disclosed according to the Regulations Governing the Preparation of Financial Reports by Financial Holding Companies.
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3.10 Ownership of Shares in Affiliated Enterprises
December 31, 2018 Unit: shares Direct or Indirect Affiliated Ownership by the Ownership by Directors, Total Ownership Enterprises Company (Note 2) Supervisors, Managers (Note 1) Shares % Shares % Shares % International Bills 1,809,000,000 100% 0 0% 1,809,000,000 100% Finance Corporation Waterland Securities 843 435,660,057 58.09% 0% 435,660,900 58.09% Co., Ltd. (Note 3) Waterland Venture 154,000,000 100% 0 0% 154,000,000 100% Capital Co., Ltd. Waterland Futures 59,930,244 0 0% 99.88% 59,930,244 99.88% Co., Ltd. (Note 4) Waterland Securities 9,000,000 Investment 0 0% 100% 9,000,000 100% (Note 4) Consulting Co., Ltd. Waterland Securities 5,581,620 0 0% 100% 5,581,620 100% (BVI) Co., Ltd. (Note 4) Waterland Securities 43,000,000 0 0% 100% 43,000,000 100% (HK) Co., Ltd. (Note 5、6) Paradigm Asset 41,000,000 Management Co., 0 0% 100% 41,000,000 100% (Note 7) Ltd. IBF Financial 30,100 0 0% 100% 30,100 100% Holding Co., Ltd. (Note 3) Guo Want International Leasing 0 0% (Note 8) 100% (Note 8) 100% Corp. Note 1: Refers to the reinvestment enterprises of the Company and subsidiaries and with controlling interest. Note 2: Refers to the investment performed according to Article 36 of the Financial Holding Company Act. Note 3: Refers to the shareholding of the subsidiary, Waterland Venture Capital Co., Ltd. Note 4: Refers to the shareholding of the subsidiary, Waterland Securities Co., Ltd. Note 5: Refers to the shareholding of Waterland Securities (BVI) Co., Ltd. Note 6: Refers to the dissolution and liquidation related operations currently performed by Waterland Securities (Hong Kong) Co., Ltd. Note 7: On April 11, 2018, FSC approved the change of the Chinese name of “Paradigm Asset Management Co., Ltd.” to “Waterland Paradigm Asset Management Co., Ltd.”, and the base date of such change is June 1, 2018. On January 31, 2019, the board of directors’ special meeting of the Waterland Securities Co., Ltd. passed the resolution on the disposal of the 80% of shareholding of the (Waterland) Paradigm Asset Management Co., Ltd., and it was approved by FSC on February 27, 2019. The transaction was completed on March 4, 2019. Note 8: Enterprise reinvested 100% by IBF Financial Holding Co., Ltd., and Guo Want International Leasing Corp. is not a company limited by shares such that it has no shareholding amount.
Capital Overview 99
IV. Capital Overview
4.1 Capital and Shares
4.1.1 Source of Capital
Unit: Shares, NT$ Month/ Par Authorized Capital Paid-in Capital Remark Year Value Shares Amount Shares Amount Sources of Capital Other Conversion of common shares： International Bills Finance Corp.: 1,809,000,000 shares - Mar. 2002 10 5,000,000,000 50,000,000,000 2,119,882,469 21,198,824,690 Concourse Securities Corp. Ltd.: 171,236,367 shares Great Orient Securities Corp.: 139,646,102 shares Increase in share capital from earnings: Oct. 2007 10 5,000,000,000 50,000,000,000 2,162,280,119 21,622,801,190 - 42,397,650 shares (Note 1) Increase in share capital from earnings: Oct. 2008 10 5,000,000,000 50,000,000,000 2,194,714,321 21,947,143,210 - 32,434,202 shares (Note 2) Increase in share capital from earnings: Oct. 2010 10 5,000,000,000 50,000,000,000 2,333,449,302 23,334,493,020 - 138,734,981 shares ( Note 3) Increase in share capital from earnings: 114,339,016 shares Nov. 2011 10 5,000,000,000 50,000,000,000 2,454,788,666 24,547,886,660 - New shares from capital surplus: 7,000,348 shares ( Note 4) Increase in share capital from earnings: 63,824,506 shares， Aug. 2012 10 5,000,000,000 50,000,000,000 2,552,980,214 25,529,802,140 - New shares from capital surplus: 34,367,042 shares ( Note 5) Increase in share capital from earnings: Sept. 2013 10 5,000,000,000 50,000,000,000 2,628,069,621 26,280,696,210 - 75,089,407 shares ( Note 6) Increase in share capital from earnings: Sept. 2014 10 5,000,000,000 50,000,000,000 2,687,365,223 26,873,652,230 - 59,295,602 shares ( Note 7) Increase in share capital from earnings: Sept. 2015 10 5,000,000,000 50,000,000,000 2,766,486,180 27,664,861,800 - 79,120,957 shares ( Note 8) Treasury stock deletion: 90,000,000 Feb. 2016 10 5,000,000,000 50,000,000,000 2,676,486,180 26,764,861,800 - shares ( Note 9) Increase in share capital from earnings: Sept. 2016 10 5,000,000,000 50,000,000,000 2,746,074,821 27,460,748,210 - 69,588,641 shares ( Note 10) Increase in share capital from earnings: Sept. 2017 10 5,000,000,000 50,000,000,000 2,786,665,944 27,866,659,440 40,591,123 shares ( Note 11) -
Increase in share capital from earnings: Sept. 2018 10 5,000,000,000 50,000,000,000 2,819,865,936 28,198,659,360 33,199,992 shares ( Note 12) -
Authorized Capital Share Type Issued Shares Remarks Un-issued Shares Total Shares (Note 13) Common shares 2,819,865,936 2,180,134,064 5,000,000,000 - Note 1：Financial Supervisory Commission, Executive Yuan, Jin-Guan-Zheng-Yi-Zi No. 0960037315 Letter dated July 24, 2007, became effective since declaration on July 24, 2007. Taiwan Stock Exchange Tai-Zheng-Shang-Zi No. 09600292751 Letter approval for start of trading at security exchange market on October 8, 2007.
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Note 2：Financial Supervisory Commission, Executive Yuan, Jin-Guan-Zheng-Yi-Zi No. 0970038955 Letter dated August 11, 2008, became effective since declaration on August 8, 2008. Taiwan Stock Exchange Tai-Zheng-Shang-Zi No. 09700304961 Letter approval for start of trading at security exchange market on October 17, 2008. Note 3：Financial Supervisory Commission, Executive Yuan, Jin-Guan-Zheng-Fa-Zi No. 0990039843 Letter dated August 5, 2010, became effective since declaration on August 5, 2010. Taiwan Stock Exchange Tai-Zheng-Shang-Zi No. 0990031759 Letter approval for start of trading at security exchange market on October 22, 2010. Note 4：Financial Supervisory Commission, Executive Yuan, Jin-Guan-Zheng-Fa-Zi No. 1000044003 Letter dated September 20, 2011, became effective since declaration on September 20, 2011. Taiwan Stock Exchange Tai-Zheng-Shang-Zi No. 1000037002 Letter approval for start of trading at security exchange market on November 25, 2011. Note 5：Financial Supervisory Commission, Executive Yuan, Jin-Guan-Zheng-Fa-Zi No. 1010030289 Letter dated July 17, 2012, became effective since declaration on July 17, 2012. Taiwan Stock Exchange Tai-Zheng-Shang-Yi-Zi No. 10100195451 Letter approval for start of trading at security exchange market on August 30, 2012. Note 6：Financial Supervisory Commission, Executive Yuan, Jin-Guan-Zheng-Fa-Zi No. 1020026556 Letter dated July 16, 2013, became effective since declaration on July 16, 2013. Taiwan Stock Exchange Tai-Zheng-Shang-Yi-Zi No. 1020018489 Letter approval for start of trading at security exchange market on September 10, 2013. Note 7：Financial Supervisory Commission, Executive Yuan, Jin-Guan-Zheng-Fa-Zi No. 1030025773 Letter dated July 15, 2014, became effective since declaration on July 15, 2014. Taiwan Stock Exchange Tai-Zheng-Shang-Yi-Zi No. 10300193121 Letter approval for start of trading at security exchange market on September 19, 2014. Note 8：Financial Supervisory Commission, Executive Yuan, Jin-Guan-Zheng-Fa-Zi No. 1040025894 Letter dated July 17, 2015, became effective since declaration on July 17, 2015. Taiwan Stock Exchange Tai-Zheng-Shang-Yi-Zi No. 10400189351 Letter approval for start of trading at security exchange market on September 16, 2015. Note 9：Financial Supervisory Commission Jin-Guan-Yin-Kong-Zi No. 10400316630 dated January 18, 2016, approval for retiring treasury stocks of 90,000,000 shares already issued, and the alternation registration has been completed and approved by the Ministry of Economic Affairs on February 26, 2016, the paid-in-capital after the capital reduction is NTD 26,764,861,800. Note 10：Financial Supervisory Commission, Executive Yuan, declared it effective since July 18, 2016. Taiwan Stock Exchange approved trading at security exchange market on September 9, 2016. Note 11：Financial Supervisory Commission, Executive Yuan, declared it effective since July 20, 2017. Taiwan Stock Exchange approved trading at security exchange market on September 8, 2017. Note 12：Financial Supervisory Commission, Executive Yuan, declared it effective since July 13, 2018. Taiwan Stock Exchange approved trading at security exchange market on September 5, 2018. Note 13：Listed stock. 4.1.2 Status of Shareholders April 16, 2019 Foreign Government Financial Other Juridical Domestic Institutions Item Total Agencies Institutions Persons Natural Persons & Natural Persons Number of 4 63 426 159,511 356 160,360 Shareholders Shareholding 89,744 317,963,049 1,062,516,755 1,103,292,948 336,003,440 2,819,865,936 (shares) Percentage 0.00% 11.28% 37.68% 39.13% 11.91% 100%
Capital Overview 101
4.1.3 Shareholding Distribution Status 1. Common Shares Face value of the share: NT$ 10 April 16, 2019 Class of Shareholding Number of Shareholders Shareholding (Shares) Percentage (Unit: Share) 1 ~ 999 71,560 14,669,056 0.52% 1,000 ~ 5,000 51,021 112,767,384 3.98% 5,001 ~ 10,000 15,516 110,413,480 3.92% 10,001 ~ 15,000 8,209 97,834,321 3.47% 15,001 ~ 20,000 3,301 57,446,844 2.04% 20,001 ~ 30,000 4,182 100,121,178 3.55% 30,001 ~ 50,000 2,855 108,270,004 3.84% 50,001 ~ 100,000 2,059 139,829,206 4.96% 100,001 ~ 200,000 931 123,178,895 4.37% 200,001 ~ 400,000 384 102,270,700 3.63% 400,001 ~ 600,000 111 53,821,072 1.91% 600,001 ~ 800,000 40 28,097,391 1.00% 800,001 ~ 1,000,000 31 27,141,775 0.96% 1,000,001 or over 160 1,744,004,630 61.85% Total 160,360 2,819,865,936 100%
2. Preferred Shares None 4.1.4 List of Major Shareholders
April 16, 2019 Shareholding Shareholder's Name Shares Percentage Norwares Co., Ltd. 233,975,841 8.30% Hotel Taipei Miramar Co., Ltd. 161,956,634 5.74% First Commercial Bank , Ltd. 85,132,914 3.02% Nice Commercial Mortgage Corp. 83,472,454 2.96% Ren Wang Co., Ltd. 55,287,947 1.96% Taiwan Fire & Marine Insurance Co., Ltd. 55,137,465 1.96% Yong-Shin Development Co. Ltd. 53,560,747 1.90% Mayer Steel Pipe Corp. 53,000,508 1.88% Nice Investment & Development Co., Ltd. 51,965,559 1.84% Taiwan Cooperative Bank Co., Ltd. 49,965,438 1.77% Note：The list covers the company’s 10 largest shareholders.
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4.1.5 Market Price, Net Worth, Earnings, and Dividends per Share
Unit: NT$ Year 2017 2018 01/01/2019-04/30/2019 Items Market Price per Share (Note 1) Before adjustment 9.64 11.45 10.55 Highest Market Price After adjustment 9.50 11.31 - Before adjustment 8.23 9.34 9.47 Lowest Market Price After adjustment 8.11 9.23 - Before adjustment 9.11 10.26 10.42 Average Market Price After adjustment 8.98 10.14 - Net Worth per Share (Note 2) Before Distribution 11.68 11.58 12.13 After Distribution 10.90 (Note 2) - Earnings per Share (Note 1) Weighted Average Shares 2,759,054,269 2,799,865,936 2,807,365,936 Diluted Earnings Per Share 0.86 0.72 0.29 Adjusted Diluted Earnings Per Share 0.85 (Note 2) - Dividends per Share Cash Dividends Before adjustment 0.65 (Note 2) - (Note 1) After adjustment 0.64 (Note 2) - Stock Dividends Dividends from Retained Earnings 0.12 (Note 2) - Dividends from Capital Surplus - (Note 2) - Accumulated Undistributed Dividends - - - Return on Investment Price / Earnings Ratio (Note 3) 10.59 14.25 - Price / Dividend Ratio (Note 4) 14.02 (Note 2) - Cash Dividend Yield Rate (Note 5) 7.14% (Note 2) - Note 1: Perform retroactive adjustment according to the number of shares issued for capital increase converted from earnings and capital reserve. Note 2: Up to the report printing date, the 2018 earning distribution proposal has not yet be resolved by the ordinary shareholder’s meeting. Note 3: Price / Earnings Ratio = Average Market Price / Earnings per Share Note 4: Price / Dividend Ratio = Average Market Price / Cash Dividends per Share Note 5: Cash Dividend Yield Rate = Cash Dividends per Share / Average Market Price
Capital Overview 103
4.1.6 Dividend Policy and Implementation Status
1. Dividend Policy For a sound dividend policy, the Company has specified the standards for earning distribution in the Articles of Incorporation in order to consider the fund planning of the future development of the Company and to satisfy the investment needs for the obtaining of dividends by shareholders. According to Article 33 of the Articles of Incorporation of the Company: To continuously expand the scale and increase profitability along with the consideration of relevant laws, the Company adopts the residual dividend policy. After the annual final accounts of the Company being settled, if there are earnings, such earnings shall be used to make up the accumulated loss and make payment for the tax according to the laws, set aside the legal reserve and appropriate or reverse special reserve, followed by combining the remaining balance with the undistributed earnings at the beginning of the same period for the board of directors to appropriate more than 50% for the distribution of shareholders’ dividends. Regarding the earning distribution described in the preceding paragraph, the board of directors shall establish the earning distribution proposal and report to the shareholders’ meeting for resolution. For the ratio of the shareholders’ dividend distribution, the cash dividend shall not be less than 10% of the total number of dividends distributed in the current year, and stock dividends may be distributed for the remaining amount. 2. Proposed Distribution of Dividend According to the resolution approved in the sixteenth meeting of the sixth term of board of directors on March 25, 2019, the Company proposes to distribute cash dividend of NTD 0.45 per share, for a total of NTD 1,268,939,671; stock dividend of NTD 0.10 per share, for a total of NTD 281,986,600; and such proposal will be sent to the 2019 ordinary shareholders’ meeting for resolution.
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4.1.7 Impact of the Distribution of Bonus Shares Proposed in the Present Shareholders’ Meeting on the Business Performance of the Company and Earning per Share.
Unit: NT$ thousands Year 2019 (Estimated) Item Initial Paid-in Capital 28,198,659 Cash Dividend per share NT$ 0.45 (Note) Stock Dividend per share: increase in share capital from Dividend 0.010 share (Note) earnings Stock Dividend per share: new shares from capital surplus - Operating Profit Operating Profit Year-on-year Comparison (%) Net Income After Tax Operating Net Income After Tax Year-on-year Comparison (%) Performance EPS EPS Year-on-year Comparison (%) Average Annual Return of Investment (Reciprocal of Average Annual P/E Ratio) Pro Forma EPS There is no 2019 ‘Increase in Share Capital from Pro Forma Average financial forecast, Earnings’ Replaced by ‘Cash Annual Return of therefore no disclosure Dividend’ Investment is required. Pro Forma EPS Pro Forma EPS 0 New Shares from Capital Pro Forma Average and P/E Ratio Surplus Annual Return of Investment 0 New Shares from Capital Pro Forma EPS Surplus & ‘Increase in Share Pro Forma Average Capital from Earnings’ Replaced Annual Return of by ‘Cash Dividend’ Investment Note: The 2019 expected stock and cash dividend distribution are proposed according to the earning distribution proposal approved in the resolution of the board of directors’ meeting dated March 25, 2019.
Capital Overview 105
4.1.8 Employee Bonus and Directors' and Supervisors' Remuneration
1. Information Relating to Employee Bonus and Directors’ Remuneration in the Articles of Incorporation According to Paragraph 1 of Article 32 of the Articles of the Incorporation of the Company: “When there is a profit in the year-end settlement of the Company, remuneration of employees and remuneration of directors shall be appropriated. However, where the Company still has accumulated losses, amount shall be reserved for making up the accumulated loss first.” According to Paragraph 2 of Article 32 of the Articles of Incorporation of the Company: “The Company shall be based on the balance obtained from the income before tax of the current year without deducting the employees’ remunerations and directors’ remunerations, and after the deduction of the reserved amount for making up the accumulated loss, following which an amount above 0.1% and within 2% of such balance is appropriated as the remuneration of employees and within 2% of such balance as the remuneration of directors for the current year. The remuneration of employees may be made in the form of stock or cash, and the subjects for receiving the stock or cash may include employees of affiliates satisfying certain criteria.” According to Paragraph 3 of Article 32 of the Articles of Incorporation of the Company: “The decision on the distribution ratio for the remuneration of employees and remuneration of directors as well as the remuneration of employees may be made in the form of shares or cash, which shall be determined based on the resolution of the Board of Directors’ meeting attended by more than 2/3 of the directors and the consents of a majority of the attending directors, and report to the shareholders’ meeting shall be made.” According to Paragraph 4 of Article 32 of the Articles of Incorporation of the Company: “The issuance of the remuneration of employees shall be handled according to the “Regulations for Employee Remuneration Issuance” of the Company.” 2. The Estimated Basis for Calculating the Employee Bonus and Directors’ and Supervisors’ Remuneration The 2018 remuneration of employees and remuneration of directors of the Company are calculated based on the revenue before tax of the current year without the deduction of the remuneration of employees and remuneration of directors within the percentage range specified in the Articles of Incorporation, and is recognized as the operating expenses of 2018. Subsequently, if there is any difference in the actual distribution amount and estimated value, it is handled as difference in estimation, and recognizd as the gain/loss of next year. Regarding the calculation basis for the number of shares for the remuneration of employees distributed in shares, since all of the remuneration of employees in
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2018 is distributed in cash, the number of shares is not applicable. 3. Profit Distribution for Employee Bonus and Directors’ and Supervisors’ Remuneration for 2018 Approved in Board of Directors Meeting (1) Recommended Distribution of Employee Bonus and Directors’ and Supervisors’ Remuneration: a. Remuneration of employees: Distributed in cash for NTD 21,468,678, distributed in shares for NTD 0. b. Remuneration of directors: NTD 30,669,540. c. The board of directors approved the distribution of employees’ remuneration and directors’ remuneration, and such amounts are higher than the estimated expense for 2018 with an increase of NTD 511,159, which belongs to estimation differences, and will be listed in the 2019 income statement according to the accounting estimation variation. (2) Ratio of Recommended Employee Stock Bonus to Capitalization of Earnings: Since all of the remuneration of employees in 2018 is distributed in cash, it is not applicable. 4. Information of 2017 Earnings Set Aside for Employee Bonus and Directors’ Remuneration: In 2017, the actual distribution of remuneration of employees in cash is NTD 26,492,431, and the distribution of shares is of NTD 0; the actual distribution of remuneration of directors is NTD 36,126,043, which are consistent with the amount recognized as expense in 2017. 4.1.9 Buyback of Treasury Stock April 30, 2019 Treasury stocks: Batch Order 5th Batch Purpose of buy-back Transfer to emplyee Timeframe of buy-back 2016/3/29~2016/5/28 Price range NT$ 5.52~11.78 Class, quantity of shares bought back 40,000,000 shares Value of shares bought-back NT$ 316,245,320 Group capital adequacy ratio before repurchase of company Record date：2015/12/31 shares (Note 1) Ratio：178.06% Group capital adequacy ratio after repurchase of company shares Record date：2016/6/30 (Note 1) Ratio：164.90% Shares sold/transferred 40,000,000 shares Accumulated number of company shares held - Percentage of total company shares held (%) - Execution progress of transfer of repurchased shares to 100% employees
Capital Overview 107
Status where transfer fails to be completed within three years - after the repurchase such that FSC adopts restrictive measures Note 1: It is based on the information reported to the competent authority in the most recent repurchase of treasury stocks.
4.2 Bonds, Preferred Shares, Global Depository Receipts, Employee Stock Options, and Issuance of New Restricted Employee Shares.
None 4.3 Status of New Shares Issuance in Connection with Mergers and Acquisitions 4.3.1 CPA’s Opinions on the Reasonability of Conversion Ratio for the Merger or Transfer to Other Financial Institution in the Most Recent Year： None 4.3.2 Status of any Merger or Transfer to Other Financial Institutions Performed in the Most Recent Five Years. None 4.3.3 Status of Issuance of New Shares for Merger or Transfer to Other Financial Institution Approved in the Resolution of Board of Directors’ Meeting in the Most Recent Years and Up to the Printing Date of Annual Report. None 4.4 Financing Plans and Implementation
4.4.1 Financing Plans Up to the printing date of annual report of last quarter, any previous issuances or private placements of securities not yet been completed and those completed in the last three years with project effectiveness not yet revealed： None 4.4.2 Implementation None
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V. Operational Highlights
5.1 Business Activities
5.1.1 Business Scope 1. The Company The profit-seeking business of the Company is financial holding company industry, and the scope of business is as follows: (1) The company may invest in the following businesses: a. Financial holding company. b. Bank business. c. Bills finance enterprises. d. Credit card business. e. Trust enterprises. f. Insurance enterprises. g. Securities enterprises. h. Futures enterprises. i. Venture capital enterprises. j. Foreign financial institutions which have been approved for investment by the Competent Authority. k. Other enterprises for which the Competent Authority determines to be financial related. (2) Management of the invested businesses described in the preceding subparagraph. (3) Other businesses excluding the ones listed in Subparagraph 1 that the Company may apply for approval for investment with the competent authority. (4) Other businesses approved by the competent authority for handling. 2. International Bills Finance Corporation (1) Certification and underwriting service of short-term notes and bills. (2) Brokerage and dealer service of short-term notes and bills. (3) Guarantee and endorsement service of short-term notes and bills. (4) Act as financial institution interbank broker. (5) Corporate financial consultation service business. (6) Dealer service of government bonds.
Operational Highlights 109
(7) Certification and underwriting business of financial bonds. (8) Dealer service of financial bonds. (9) Financial derivatives business approved by the competent authority for handling. (10) Dealer service of corporate bonds. (11) Investment related equity products. (12) Proprietary trading of bonds and securitization products (limited to fixed-income instruments) at profit-seeking location. (13) Dealer service of foreign currency bonds. (14) Convertible bond asset SWAP. (15) Cross-selling among subsidiaries of financial holding company. 3. Waterland Securities (1) Brokerage of securities at the stock exchange market. (2) Proprietary trading of securities at the stock exchange market. (3) Brokerage of securities at its branches. (4) Proprietary trading of securities at its branches. (5) Underwriting of securities. (6) Agency of security transfer services. (7) Margin purchase/short sales services. (8) Brokerage of foreign securities. (9) Concurrent futures dealer service. (10) Short-term notes/bills service. (11) Futures trading auxiliary service. (12) Concurrent securities investment consulting service. (13) Other securities related businesses approved by the competent authority for handling. 4. Waterland Venture Capital (1) Provide capitals directly to invested enterprises. (2) Provide corporate operation, management and consultation service to invested enterprises.
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5.1.2 Revenue Distribution
1. Waterland Financial Holding Co., Ltd. NT$ in thousands Year 2017 2018 Item Amount % Amount % Investment Income 2,557,845 99.59 2,192,606 99.14 Others 10,403 0.41 19,015 0.86 Total 2,568,248 100.00 2,211,621 100.00
2. International Bills Finance Corp. NT$ in thousands Year 2017 2018 Item Amount % Amount % Bills 1,830,316 49.94 1,937,235 66.26 Bonds 1,023,313 27.92 952,662 32.59 Stocks 215,295 5.87 41,596 1.42 Others 596,214 16.27 (7,994) (0.27 ) Total 3,665,138 100.00 2,923,499 100.00
3. Waterland Securities Co., Ltd. NT$ in thousands Year 2017 2018 Item Amount % Amount % Brokerage 1,727,547 69.76 1,915,322 84.40 Proprietary Trading 723,210 29.21 296,505 13.07 Underwriting 11,983 0.48 38,326 1.69 Others 13,642 0.55 19,124 0.84 Total 2,476,382 100.00 2,269,277 100.00
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4. Waterland Venture Capital Co., Ltd. NT$ in thousands Year 2017 2018 Item Amount % Amount % Gain(Loss) on Financial assets at (10,663) (5.35) 64,139 43.31 fair value through profit or loss Realized gain (loss) on 106,091 53.20 - - available-for-sale financial assets Gain on disposal of financial assets 5,255 2.64 - - at cost Dividend income 15,933 7.99 29,281 19.77 Income(Loss) from investments 82,781 41.52 54,683 36.92 under the equity method Total 199,397 100.00 148,103 100.00 5.1.3. New products development 1. International Bills Finance Corp. (1)The foreign currency interest rate future hedge trading, for hedging the volatility of foreign currency bonds and maintains the momentum of earning. (2) The competent authority has allowed the bill traders to provide the services related to the derivatives of FX rates and interest rates. The Company will simulate various trading models, in order to catch the opportunities and increase profits. (3)Regarding the guarantees on foreign currency bills, the Company participates with the Bill Finance Association, to coordinate with the authorities to advocate. (4) The stock and equity-linked products, including equity futures, TDR, and off-shore ETF, and trading for the ETF price difference and the arbitrage among various products. (5)Establish the sales channels for the interest rate derivatives, in order to expand the source of fee incomes. 2. Waterland Securities (1) Through professional financial engineering model, design diverse new financial products in order to provide diverse wealth management choices to customers. (2) Cooperate with the competent authority permitting new products and new laws, apply for the business undertaking qualifications and develop trading strategies, as well as establish relevant trading system. (3) Cooperate with the competent authority permitting the creation of customer ledgers of securities firms' settlement accounts, the Company has already applied for the opening and construction of information system, and ledger
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operation related information system has been launched. Presently, the ledger account test is in process, and it is expected that it can be launched online to provide services to the external in recent period. (4) Cooperate with the competent authority permitting the electronic method of application online service for applicants with account opening not in person and for existing customers, credit transaction account with online account opening and contract renewal will be planned. (5) To cooperate with the securities market with the launch of intraday continuous trading starting from March 23, 2020, the Company will cooperate to plan the simulation platform in order to allow investors to use the simulation order placement interface to become familiar with the continuous trading model. 3. Waterland Venture Capital None 5.1.4 Business Plan for 2019 1. The Company (1) Launch the core business development strategies for bills/notes, securities and venture capital etc. In addition, through the financial holding platform, integrate diverse financial services of the Group in order to increase the operating synergy of all affiliates, and to reduce the impact of the financial market change on the business. (2)Actively establish internet-only bank financial innovative solutions with the strategic cooperating partners, in light of providing convenient and secured financial service to customers. (3) Comply with policies of competent authority, strengthen and comply with the anti-money laundering and terrorism financing prevention, legal compliance, corporate governance and information security operation regulations in order to achieve sound operation management for the entire group. (4)Cope with the financial technology development, cooperate with the subsidiaries in the development of innovative business satisfying long-term development, and participate in the association in the industry, seek competent authority's approval in the new business, in order to provide complete financial services in greater extend. 2. International Bills Finance Corporation (1) Lending Business a. Intensify dynamic control of lending to avoid non-performing loans that hamper the profits of the Company. b. Strengthen the penetration into the industry through the development of secured and good quality new lending business.
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c. Perform classification management of accounts to enhance the spread and utilization rate for proper use of loan resources and generate better income from bills finance. d. Adjust the structure of loan and optimize the quality of loan portfolio in order to diversify credit risk. e. Keep abreast with the schedule and plan of customers in syndicated loans, and request the shareholder banks to give further support for participating in syndicated loans. (2)Bills Business a. Cultivate institutional clients in further depth, launch the sale of different secondary markets bills and increase outright sale in greater scope and depth. Engage in flow operations to upgrade the return and the effective control of risk to maintain a higher BIS ratio. b. Target large companies in good standing of credit rating and make further effort in developing the underwriting of guarantee-free bills. In addition, the Company will encourage large companies without rating to open for credit rating to enlarge the scale of the guarantee-free bills market. c. Launch FRCP with a term of longer than 1 year at fixed or floating rate with mark up in pricing. Keep abreast of the capital needs of the customers in the long run, and make further efforts in underwriting and joint underwriting of commercial papers. d. Strengthen strategic partnership with banks pro-actively, secure the opportunity for underwriting bills guaranteed by banks in good standing and actively seek to secure the position as an underwriter in large syndicated loans. e. Participate in the bidding of treasury bills, municipal bonds and guarantee-free commercial papers offered by state-owned enterprises, and purchase NCDs from banks with good rating. f. Target at the FRCP currently in holding or with terms longer than 1 year for matching with the needs of customers in mid to long-term investments to enlarge the scale of operations and reduce the risk of one-way operations. (3) Bond Business a. Reach out for foreign currency bonds in good rating and high return, develop more sources of funding for RP bonds trading in foreign currencies to generate better return of spread. b. Diverse currency and region arrangement for bond investment portfolio in order to diversify investment risks and to increase the profit source. c. Strengthen outright purchases and sales of bonds, particularly government bonds, from a range bound trading approach.
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d. Grow earnings by conducting strategic trading of government bonds and their derivatives. e. Identify quality short-term bonds that both generate reasonable returns and meet customer needs. f. Dynamically adjust repurchase agreement customer structure, and implement anti-money-laundering control measures in order to allow the fund source to be more stable and diversified, such that the capital cost is reduced. g. Promote RP of bond in foreign currencies and further develop customer base to broaden the sources for funding foreign currencies. (4) Proprietary Trading of Equities a. Keep abreast of industry trend to reach out for short-term investments of equity with strict control of market risks. b. Enhance the capacity of research and intensify the application of information system facilities for establishing long-term investment positions when the equity price is low. c. Differentiate the investment portfolio by attribute and adjust the ratio of hedge in line with changes in the market to reduce loss and maintain profit. d. Reinforce cooperation with other securities companies in order to explore business opportunities in SPO/IPO. e. Enhance the position of ETF as well as the subscription of convertible bond in the primary market to generate incomes with diversification of the sources of incomes. f. Install KM system for the systematic storage of information by industry as a means for accumulating competitive power of investments in the long run. (5) New Businesses Actively participate the following derivatives and new types of products trades, and focus on the operation of niche products with yields： a. The foreign currency interest rate future hedge trading, for hedging the volatility of foreign currency bonds and maintains the momentum of earning. b. The competent authority has allowed the bill traders to provide the services related to the derivatives of FX rates and interest rates. The Company will simulate various trading models, in order to catch the opportunities and increase profits. c. Regarding the guarantees on foreign currency bills, the Company participates with the Bill Finance Association, to coordinate with the authorities to advocate. d. The stock and equity-linked products, including equity futures, TDR, and off-shore ETF, and trading for the ETF price difference and the arbitrage
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among various products. e. Establish the sales channels for the interest rate derivatives, in order to expand the source of fee incomes. 3. Waterland Securities (1)Brokerage Business Spot Services a. Continue to significantly increase number of employees, and recruit outstanding teams in the same industry to join the Company in order to increase the market share. b. Institute appropriate systems and fortify the functions of the organization to create the economies of scale and upgrade the value of channels. c. Actively expand new product business opportunities, seek new product market brand awareness and market share, and expand customer base. d. Continue the improvement in professional standing and provide customized services for earning higher dependence of the customers. e. Track the monthly performance of dealers and give guidance to those with a substandard track record; let go dealers who simply cannot improve their performance after giving guidance. Institutional Services a. Build on the experience of providing major investment trusts and life insurers with tailor-made services to win over new customers among other institutions, listed companies, investment firms, and major individual investors. As a consequence, establishment of a better-rounded customer base is further increasing market share. b. Host a greater number of seminars and lectures on various topics of interest, organize visits to listed companies, hold investment forums in twice a year, and vie for opportunities to deliver presentations to institutional investors, thereby enhancing the firm’s market visibility and bolstering the content and quality of institutional services. Strive for higher ratings among institutional investors so as to attract new customers and enhance market share. c. The Institutional Customer Department of Waterland Securities cooperate with the Waterland Investment Consulting to plan a overseas visiting trip. It is expected to obtain the latest and most updated information of relevant industries and company profile. d. Guide the customers to lend out stocks in holding to vitalize customer assets, improve the balance and revenues of securities lending. Futures and Options Services
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a. Enhance the efficiency of placing mobile orders: satisfy the needs of customers in better quality and quantity of trade order through mobile ordering. b. The educational training and motivation: there are many future products in the world, and thus the know-how of the products for the sales shall be improved through the educational training. Through the motivation activities, the knowledge toward the products is deepened, and thus the sales will be benefited. c. Tailor-made services: strengthen tailor-made services to increase customer satisfaction among the firm’s top-tier clientele, thereby further enhancing service quality as to stably increasing trading volumes. Electronic Trading Services a. To accommodate the deregulation of new business by the competent authority, the policies and regulations, and the demands of clients, the e-trading system has been added new features and optimized, so that the loyalty and engagement of the clients are improved. b. Grasp the core value of the FinTech, and improve and plan the features of smart phone Apps, in order to satisfy the personal autonomy and customized service, and thus improve the services and quality as a whole. c. Accommodate the system onboard and marketing activities, to attract investors’ eyes and engage them to trade, and promote products and e-trading system. d. Manage social media platform, timely provide relevant stock market information and irregularly add new service functions, interact with the social media members in order to increase the willingness of members to become customers. (2) General financial product business a. Promote brokerage of foreign securities transactions and increase the proportion of bond trading to enhance income. b. Strive for the accounts from the institutional customers, to improve the institutional business. c. Enhance the depth and breadth of the client base of each branch, and hold client seminars intensively. d.For the high-net-asset potential customers, visit them with the marketing-assisting staff, to enhance the trust of the customers and address the issues, as well as catch the opportunities of order-placing. e. Promote a greater variety of mutual funds and ETF. Persuade customers to trade on the firm’s integrated platform, and meet customer needs.
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(3) Proprietary Business a. Select stocks based on their fundamentals. Capitalize on the resources available at other affiliated companies to seek out growth stocks with a niche. b. Pursue stable and profitable model by conduct strategic hedging and execute lock-in-profit and stop-loss mechanisms. (4) Fixed-Income Commodity Business a. With the consideration that the interest rate is relatively low, and the capital cost is increasing gradually, the bonds market in Taiwan is not optimistic. Therefore, in terms of the operation, the Company will focus on the balanced development of government bonds, corporate bonds and convertible corporate bonds. b. Increase the weighting of convertible bonds in the firm’s investment portfolio to better balance equity and debt holdings. c. Further increase fee income by strengthening the transaction of matching government bonds and convertible bond asset swaps. (5) Innovative Product Business a. Cultivate financial engineering talent and strengthen their capacity for product design, thereby fully meeting customer needs. b. Consolidate the status quo while further enhancing the firm’s market visibility for warrants and other structured products; promote the firm’s credibility by word of mouth and bolster its public image. c. Continue to develop better-rounded hedging. (6) Capital Market Business a. IPO:Through case selection meetings, publicly listed companies with excellent operation are carefully selected to be the subject for leading underwriting and supporting underwriting. b. SPO: Underwrite or co-underwrite the CBs and rights offers of credible listed companies; increase the underwriting quota to boost earnings. c.Emerging stock: Select individual stocks of robust finance and competitiveness in the portfolio in pursuance of capital gain. d. Financial Counseling: Consolidate the resources rendered available by both new and existing customers for creation of opportunities for strategic alliances and M&As, thereby generating new business and enhancing fee income. e. Portfolio Management: Strengthen risk management and continue to monitor the performance of target companies. Special meetings will be held to map out underwriting and stockholding strategies.
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4. Waterland Venture Capital (1) In terms of prospective investment, priority will be given to Pre-IPO cases in emerging stock market focusing on smart machinery, biotechnology, artificial intelligence and high value-added service industry. In the meantime the post-investment risk management is enhanced. (2) Focus strategic investments on projects with strategic relevance or synergies to other WFH affiliates. (3) Give priority to new investment in projects in their expansion or maturity phase, which are supposed to take about 60% of the total; formative and seminal projects are to take 40% of the total. (4) Taking liquidity into consideration, the firm invests about 40% of its funds in companies that have gone public (of which some 80% are registered on the Emerging Stock board), with the remaining 60% going toward unlisted stocks, private placements, and a handful of listed stocks. 5.1.5 Industry Overview 1. Financial Holdings To assist the upgrade and transformation of financial industry in Taiwan, FSC has established the “Financial Development Action Plan” in 2018 in order to establish goals and strategies for various aspects of financial industry and financial technology. In addition, plans related to the financial holding industry includes the amendment of the “Regulations Governing the Investing Activities of a Financial Holding Company”, and the regulations on the controlling interest required to be acquired by financial holding company investing in other financial holding company, insurance company and securities firm for the first time is relaxed, which provides the opportunity for collaboration with shareholding before merger. Furthermore, to assist banks in coping with the digital development and international expansion, the establishment of internet-only bank is permitted, and it is expected to achieve the catfish effect. The capital threshold is NTD 10 billion, and the same supervisory standards that are identical to those with physical banks will be adopted. Moreover, to encourage financial innovation, “Financial Technology Development and Innovative Experimentation Act” has been implemented officially on April 30, 2018. FSC estimated that 10 financial innovative experimentation applications will be filed annually within 3 years. Consultation and guidance mechanism is provided for frontend stores and backend operators before the experimentation, and assistance on the post-experimentation matching and career guidance is provided. Up to the end of January 2019, FSC has already approved three applications to enter into sandbox, including the experimentations for the telecommunication mobile identification certification service, migration labor cross-border remittance services etc. In the future, the Company and subsidiaries will continue to pay attention to all financial policy permissions of the
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competent authority, and will also develop new businesses in order to head toward the multi-core business with balanced development. 2. Bills Finance In 2018, the global economic growth slowed down, and among the developed countries, the US demonstrated the most stable economic growth. In addition, with the continuous interest hike, the global fund market shifted, and conditions of the capital outflow and fluctuation in new emerging countries became severe. Due to the trade conflict between China and US, the international financial market was under correction. Furthermore, as the central banks of main countries in Europe and Japan etc. still continued to implement the quantitative easing policy, the economic performance of different countries varied from one another. Regarding the domestic market, companies are mostly conservative in investment and since the environment of interest rate still remains low, the competition among operators in the banking and bills industry is still severe. For bills firms, the year of 2019 will still be a challenging year. In addition, facing the financial environment with economic uncertainty, along with the impact of the increase of real property credit risk, the loan business of commercial paper guarantee and bonds business of the bills firms will become more challenging. 3. Securities Recently, FSC actively promotes the innovative development of financial technology, and the under the multiple effects from the financial industry upgrade to the innovation of financial technology operators, the Company aims to construct a supervisory path considering both the implementation of innovation and management of risks, thereby creating an interactive and friendly financial technology eco-environment based on the core of “Responsible and Innovation, in light of sharing the financial technology outcome with the general public. In terms of the stock trading, to drive the stock market energy, the competent authority further reduces the day trade tax from half to 1.5/1000, and includes the securities dealing of securities firm into the applicable subject, thereby driving the growth of TWSE/TPEx average daily trading volume in 2018 to exceed 20% and to reach NTD 165.3 billion. In addition, to construct a more complete and sound futures market, Taiwan Futures Exchange has launched new products in 2018, including GBP to USD, AUD to USD foreign exchange futures and Brent Crude futures etc. The new measures adopted include the futures market dynamic price stabilization measures, increase of seller margin after 0206 event by 20%, and the electronic futures being included into the night trading applicable commodity and options commodity listing sequence adjustment. In 2017, the total trading volume of the futures market is approximately 270 million lots. In 2018, it exceeds 300 million lots, indicating the trading volume exceeding 200 million lots for 5 consecutive years. With the night trading and US Dow Jones futures commodities launched in the market, investors can perform hedging operation such that the trading volume is driven to increase rapidly. The ratio of night trading over daily trading exceeding 20% becomes common phenomena. After the electronic futures index is added for
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the night trading in November, it further drives the trading volume of futures to increase. Regarding the improvement of trading system for internalization, the continuous trading for the stock market has been confirmed to be implemented in March 2020. The TWSE will launch the “Simulation Platform” in March 2019, and investor will have a period of one year to experience the system in order to become familiar with the new trading rules. The information disclosure method and price stabilization measures are also re-designed, and a complete market educational promotion plan is established in order to assist all of the securities firms and investors to make sufficient preparations. 4. Venture Capital The traditional industries in Taiwan have competed in the global market for numerous years, and the surviving companies are the ones with outstanding performance with extremely stable profit earnings; therefore, these companies are the focus for the future venture capital investment. In addition, biotech and semi-conductor related industries are closely related to artificial intelligence and Big Data, such that they are of unique and innovative characteristics. As long as they are equipped with special operations and profit models, they are able to demonstrate leaping type of growth out of the original framework, which are also the key focus for the future development of venture capital. Furthermore, the government lists the budget of NTD 39.8 billion for industry innovation plans in 2019, plus the amount of NTD 22.1 billion for prospective fundamental constructions, the total comes to NTD 61.9 billion. Therefore, there will still be guiding fund entering into the new industrial innovative fields, such that greater investment opportunities ought to be generated. 5.1.6 Research and Development 1. The Company (1) Research and development expenditure and outcome thereof in last two years Expenditure: NTD 1.03 million in 2017, NTD 2.61 million in 2018. Outcome: a.In response to the government's internet-only bank policy planning, the Company consults with the external advisors to provide assistance with the establishment of relevant operational plan, and applies business license with the competent authority. b.Arrange employees to participate in the professional courses of legal compliance, corporate governance and financial technology etc., in order to increase professional knowledge and skills of employees. c. Maintenance of financial holding group risk control software and system. (2) Future research and development plan a.Consult external advisors to provide assistance on the establishment of financial innovative solutions for internet-only bank.
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b. Encourage employees to participate in training courses in order to strengthen their professional skills and competency. c. Cooperate with the development of financial technology (FinTech), and establish feasible information solutions for the Group. In the future, the estimated investment amount in the research and development plan is approximately NTD 10.85 million. 2. IBFC (1) Research and development expenditure and outcome thereof in last two years Expenditure: NTD 2.51 million in 2017, NTD 2.15 million in 2018. Outcome: a. Interest rate financial derivatives Regarding the competent authority’s permission on the interest rate and exchange financial derivatives one after another, including the interest rate swap, interest rate futures, interest rate swaption, bond futures, bond option, interest rate option and convertible bond asset swap trading, through active planning and participation of IBFC, it has been able to obtain the approval of the competent authority to open and conduct businesses: in 2014, IBFC opened the foreign currency interest rate futures hedge trading; in 2015, IBFC further planned and constructed the non-deliverable forward completely; and in 2017, cope with the competent authority’s permission on relevant exchange and interest rate derivatives businesses, IBFC actively constructed relevant trading system in order to take advantage of market fluctuations and to increase the number of profit sources. In the future, under the foundation of the existing businesses, IBFC will actively develop more diverse financial products and hedging tools in order to complete trading and increase profit. b. Non-guarantee commercial paper joint underwriting In 2018, the company signed the domestic production enterprises non-guarantee commercial paper FRCP case for NTD 11 billion, and bank-guaranteed commercial paper FRCP case for NTD 18.048 billion, in order to expand the spreads and increase profit. In the future, the company will continue to expand such business in order to maintain the leading position in the industry. (2) Future research and development plan a. The “Financial Technology Development and Innovative Experimentation Act” has been implemented on April 30, 2018, and IBFC will actively develop FinTech, and focus on the development of businesses complying with the long-term development of the company. In addition, IBFC will participate in various new businesses developed by the Bills Finance Association, and will also seek the competent authority’s permission on the services provided by bills finance companies.
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b. Relevant business trainings and preparations for the trading, credit check and extension, internal control, legal compliance and risk control etc. are implemented for employees. In addition to encouraging employees to participate in training courses and seminars organized by professional institutions, the company will continue to increase the internal online educational training system courses. In the future, the estimated investment amount in the research and development plan is approximately NTD 3.01 million. 3. Waterland Securities (1) Research and development expenditure and outcome thereof in last two years Expenditure: NTD 14.06 million in 2017, NTD 2.88 million in 2018. Outcome: Construct or self-develop LINE broadcasting/order placement system, securities ledger system, securities online account opening and manual account with addition of electronic account opening system, IBFC branch proprietary business system, new fund sales system, financial institution performing due diligence review system (CRS) system, KYC and enhanced customer review function system, contract/agreement management system, construction of EIP entrance website and electronic form system, sub-brokerage operation award system, corporate department securities lending operation system function adjustment, OSU international securities service-brokerage service and loan service system. (2) Future research and development plan a. Strengthen network fundamental construction, improve information security management. b. Construct securities, futures cloud smart system, assist the development of electronic trading business. c. Cooperate with the Stock Exchange in the continuous trading matching system planning in order to adjust relevant trading system. In the future, the estimated investment amount in the research and development plan is approximately NTD 36 million. 4. Waterland Venture Capital (1) Research and development expenditure and outcome thereof in last two years Expenditure: NTD 150 thousand in 2017, NTD 55 thousand in 2018. Outcome: Construct the inventory management system (software)-IFRS version. (2) Future research and development plan a. Revise the inventory management system (software) and reports/forms. In the future, the estimated investment amount in the research and development plan is approximately NTD 100 thousand.
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5.1.7 Long-term and Short-term Development 1. The Company Short-term: (1) Integrate financial holding group resources, strengthen core business, improve all affiliate operation performance, and reduce impacts of financial market fluctuation on the business. (2) Actively establish the internet-only bank solution, provide innovative services that are convenient and secured to customers. (3) Strengthen and rigorously comply with all financial service operational rules, thoroughly execute legal compliance. (4) Cope with the development of financial technology; develop innovative businesses with subsidiaries in order to provide financial services at a greater extent. Long-term: (1) Strengthen core business, expand asset management scale, and increase group's long-term business operation synergy. (2) Properly utilize company resource, reasonably allocate capital, increase fund utilization effectiveness. (3) Stably expand financial holding business territory, head toward core business balanced development, and fulfill corporate corporate responsibilities, and actively contribute to society. 2. International Bills Finance Corporation Short-term: (1) Continue to establish roots in the core business of bills, bonds and fixed-income products, improve market position and leading ability. (2) Dedicated in the adjustment of loan structure, and increase the foreign currency bonds percentage share in the revenue, in order to increase the overall profit. (3) Adjust loan structure and optimize loan quality in order to diversify credit risks. (4) Cultivate trading professional talents; develop new type of interest products. (5) Establish complete information, legal compliance management system, and implement risk control. Long-term: (1) Continue to improve operation performance, seek stable profit growth. (2) Strengthen customer service function, improve service quality and efficiency. (3) Cope with the development of diversity of financial technology product, transform into a trader for fixed-income products.
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(4) Integrate financial holding company resources, strengthen market competitiveness, and exploit financial holding synergy. 3. Waterland Securities Short-term: (1) Develope legal entity service for brokerage business, and improve the completeness and rooting of the product lines of funds, sub-brokerage, insurance, warrant, ELN etc. in order to increase the diverse business revenue. (2) Cooperate with the group’s overall development strategy; continuously increase the operation performance of the subsidiaries of futures and investment consulting. (3) Strengthen proprietary hedge operation strategy and performance, integrate and construct stable profiting model, seek absolute return. (4) Carefully select quality underwriting cases, provide complete underwriting guidance and financial consulting services to customers, and increase market share. (5) Utilize group resources, exploit business synergy through core customer strategy, and provide comprehensive financial management services. Long-term: (1) Provide integrated services and diverse products, expand sales channels under the long-term stable business strategy, and continuously develop the business in balance with growth. (2) Cope with the trend of large, professional and international securities; seek merger or strategic alliance opportunities with securities in order to expand the brokerage market scale. (3) Through the development of the integration synergy of re-investment enterprises and group resources, increase profitability and strengthen market competitiveness. (4) Continuously improve and optimize information infrastructure, and increase information system performance. 4. Waterland Venture Capital Short-term: (1) Intelligent machinery, bio-tech and medical, artificial intelligence and high value-added service businesses are the key investment focuses. (2) Short-term investment will seek the investment opportunities of IPO (including auction), SPO, CB, etc.
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Long-term: (1) Cope with the the industry development trend to continuously adjust investment portfolio. (2) Through the customer foundation and industry analysis experience constructed by Guo Want International Leasing Corp. in China, provide Chinese market references to the venture capital. 5.2 Trans-industry and Cross-selling Effectiveness In 2018, through the channels of the subsidiaries of notes/bills and securities, the sale of the Paradigm Trust series of funds is approximately NTD 10.5 billion, and in the future, it will continue to promote securities and fixed-income products through channels and the customer basis in order to increase the asset management scale. 5.3 Market and Sales Overview The Company is a financial holding company, and the business items refer to the investment and management of invested enterprises, and the main revenue is from the investment income of subsidiaries. The market of subsidiaries and their company business overview are described as follows: 5.3.1 Sales (Service) Region The product sales scope of IBFC includes the domestic market, and the customers of fixed-income products of International Bills notes/bills and bonds are mainly domestic legal entities and Finance natural persons. Presently, there are a total of 9 business Corporation outlets, including headquarters and branches in various regions of Taiwan. The main products and services of Waterland Securities include the brokerage service, futures trading auxiliary service, margin purchase and short sales of securities, dealer Waterland service, capital market service, fixed-income product service, Securities Co., Ltd. stock transfer agency service. The services are all provided for domestic areas. Presently, there are a total of 25 business outlets, including headquarters and branches in various regions of Taiwan. Waterland Venture Investment projects are mainly domestic industries. Capital Co., Ltd.
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5.3.2 Future Supply and Demand in the Market 1. Bills market In view of the high uncertainty in the international political and economic conditions in 2019, the factor of output gap still exists in the economy in Taiwan, and the market anticipates that the Central Bank in Taiwan lacks the criteria and urgency for raise of interest rate; therefore, the interest rate is likely to be maintained unchanged this year. In addition, the planned bond issuance amount for the government bonds this year is far less than the matured amount of NTD 485.3 billion. It is predicted that under the protection of limited issuance of bonds, the operation of the bonds in Taiwan will continue to be handled with care in a rigorous manner in order to adopt the method of acceptance at high levels. In addition, depending upon the financial condition of spreads change and the yielding cost etc., position will be adjusted and controlled. In December 2018, US Federal Reserve raised the interest rate by 0.25% as expected; however, the meeting records this time indicated that most of the officials considered that the inflation outlook was still low and the global economic growth was uncertain. For further interest increase, patience and flexibility shall be maintained, and the position has been turned to the dove faction. In addition, the European Central Bank has not made any adjustment in the interest rate, and it is predicted that it will only consider whether to increase the interest rate at least after the summer of this year. As for the Central Bank of Japan, it still maintains the easing policy. Accordingly, it can be predicted that as the international major central banks consider the economic downside risks, they will slow down the interest rate normalization and will reduce the risk of significant increase of yield interest rate. Regarding the foreign currency corporate bond market, after the overall credit charge experiences significant expansion from last year, it relatively converges in recent period. Based on the consideration of Federal Reserve’s slowing pace in the raise of interest rate and the market risk preference recovery, it is expected that bonds with higher rating will still have rooms for greater performance. The global funding continues to be abundant, and the TAIEX is relatively high, and the exchange rate fluctuation can also affect the foreign investments moving in and out of the TWSE. Despite that the trade war between China and US creates business opportunities for Taiwanese enterprises and also attracts funds to return to Taiwan for construction of factories, nonetheless, the trade war information aspect impact may increase. In addition, the issue of debts in China, such as the real estate bubble may cause financial crisis, and the balance sheet reduction in US will all increase the financial market fluctuation risk. 2. Securities market To simulate the trading of financial commodities, at the beginning of 2018, Taiwan Futures Exchange launches the near-month, next-near-month and cross-month contract for difference for the Taiwan Stock Index Futures and Mini
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Taiwan Stock Index Futures. In November, it further expands to all domestic stock index futures commodities, and electronic futures are included into the applicable commodities for night trading. In addition, TPEx enhances the promotion of bond ETF, green bond development, and the 2018 bond ETF market issuance scale has exceeded 40% of the overall ETF market of our nation. In 2018, under the policy promotion by the competent authority and the expansion of fluctuation of US stock market, the TWSE/TPEx trading volume increases, and the futures market trading lots also reached new heights. In addition, the number issued warrants of the securities market also surpasses the number in 2017. The competent authority continues to promote diverse new commodities. In June 2018, the competent authority announced the establishment of “Regulations Governing the Issuance of Exchange Traded Notes by Securities Firms” to permit securities firms with qualification to issue exchanged traded notes (ETN). The ETN related system of the TWSE will be online in April 2019, such that the securities market product lines will be more diverse in the future in order to satisfy the demands of various types of investors. To cope with the development of financial technology, securities firms shall gradually provide the service allowing the public to complete the opening of securities account and ledger account at once in order to increase the account opening efficiency, saving the procedures for the public to open new bank accounts for trading of stocks. Secondly, the percentage of investors under the age of 30 years old in our nation to invest in the trading in Taiwan stock market is only 5.8%. To attract young groups to gradually enter the capital market, FSC plans to open the Odd-Lot Trading in order to provide inclusive financial services that are friendlier to young people. In addition, Continuous Trading is confirmed to be implemented in March 2020, and in March 2019, TWSE also launches the simulation platform to provide use experience to users and to become familiar with the new trading rules. In June, it is expected to test trading in order to allow the securities firms to test the trading system. In general, the market openness and appropriateness supervision have become the development trend for the financial market. Due to the low interest rate environment in our nation, it drives the financial demands of the domestic investors to increase significantly. Providing diverse investment commodities and convenient order placement method will become the key factors to attract customers and to expand the business scale of securities firms. 3. Venture capital market The government's new policy lists the biomedical, green energy technology, smart machinery, national defense aerospace and Asian Silicon Valley etc. as the five major innovation plans. In addition, along with the new agriculture, digital economy, cultural and creative industry etc., the policy introduces resources in order to create opportunities to attract resources and funds for station in the market and create opportunities in derived investment. In addition, it is focused on the smart machinery that has achieved complete development from the past history in
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Taiwan and has accumulated high energy in the development as the main focus for investment projects. Since the machinery industry chain work distribution is complete, there is a great chance for an overall upgrade under the guidance of the policy. 5.3.3 Operating Target 1. IBFC (1) Estimated guaranteed issues of commercial paper of NTD 866 billion. (2) Estimated underwriting commercial paper of NTD 1.6 trillion. (3) Estimated trading of various types of bills of NTD 4 trillion. (4) Estimated trading of various types of bonds of NTD 3.011 trillion. 2. Waterland Securities (1) Estimated brokerage business trading volume of NTD 1.719 trillion. (2) Estimated margin trading average balance of NTD 11 billion. (3) Estimated short selling average balance of NTD 1.964 billion. (4) Estimated proprietary business operating profit of NTD 180 million. 3. Waterland Venture Capital The estimated increased long-term investment amount is NTD 150 million. For matured industries with excellent structure, in the environment of violent changes, the percentage of cases with the expansion period and maturity period being underestimated is adjusted to 60%. In addition, the ratio for the investment in the development of companies at the startup period and seed period is continued to be increased to 40%. For this part, the government plans a budget of NTD 39.8 billion for the 2019 industry innovation plan, and with the addition of NTD 22.1 billion for prospective fundamental constructions, the total comes to NTD 61.9 billion. As a result, there will still be guiding fund entering the market, such that it ought to generate greater investment opportunities.
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5.3.4 Favorable and Unfavorable Factors in the Long Term 1. IBFC Favorable factors: (1) Competitiveness of direct financial products is superior to indirect financial products, and bills underwriting business continues to grow stably. (2) Continue the innovation of business to enter different markets, provide diverse products with increased competitiveness. (3)Government actively promotes the innovative industries of green energy technologies, national defense and aerospace etc. Seek innovative industry new cases to improve interest spread and diversify the lending risk. (4) With medium and long term interest rate hike outlook, it drives the medium and long term loan demands from enterprises, and FRCP business opportunities emerge. (5) The Central Bank M2 annual increase rate target is 2.5%-6.5%, which is higher than the economic growth rate. For the entire year of 2018, the reserve currency average annual increase is 5.61%, which is higher than 5.04% of the previous year. The market fund is of an easing state. Unfavorable factors: (1) To push bills finance corporations to return to the substance of broker and trader, the competent authority aims to prevent bills finance corporations to bear excessive credit risk, the guarantee multiple limit is still low, and the lending resource is limited. (2) Domestic real estate market is declining, the difficulty in seeking secured real estate property lending and borrowing business with high profitability is increased. (3) With the implementation of the newly amended Money Laundering Control Act, the legal compliance cost is increased, which in term, affects the willingness of enterprises in interacting with new financial institutions; therefore, the development of new customers becomes more difficult. (4) Market financing channels are diverse, banks are actively seeking enterprise loan business, and use low interest rate and competitive price to seek customer business relationships, which affects the expansion of the bills guarantee business, and the short-term competitive situation is not improving. (5)Greater financial market fluctuation increases the difficulty in inventory management and liquidity operation.
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2. Waterland Securities Favorable factors: (1) Extend the day trade tax reduction period and relax the applicable scope: To stimulate the domestic securities market, the policy of reduction of day trade tax by half is to be extended to the end of 2021, and the applicable subject includes securities dealers, and the investment limit for commercial banks to invest in domestic OTC stocks as well as the scope of reinvestment in venture capital business and foreign securities dealing business are also relaxed, which are expected to have certain benefits to the operation of securities firms. (2) Continuous product development and expansion of business: As the competent authority continues to open the commodities of ETF, exchange traded notes (ETN) and fixed income securities etc., it will also extend various limitations on the professional international bonds and overseas bonds business. In addition, the Financial Technology Development and Innovative Experimentation Act provides a secured environment for the research and trial of financial technology while achieving the management of the financial market order and consumer protection at the same time. (3) The New Southbound Policy to expand overseas business: FSC encourages financial institutions to extend business beyond Taiwan and to create regional indicator securities firms, and the overseas office establishment application examination standard for securities firms are relaxed. Furthermore, to cooperate with the new southbound policy of the Executive Yuan, securities firms are encouraged to develop business in the Association of Southeast Asian Nations and also organizes business invitation seminars in order to promote Taiwanese enterprises to return to Taiwan and to list their company stocks in Taiwan stock market, thereby activating and increasing the spatial market internationalization level in our nation. Unfavorable factors: (1) Legal system establishment lags behind the speed of product innovation: For the financial business operators, it is necessary to repetitively submit applications, explanations to the financial supervisory unit for product innovation, internationalization or integrated marketing etc., such that products and services can only be launched onto the market when there is absolutely no dispute; consequently, early market development opportunities can be lost. (2) High similarity among operators of the same industry in the market: The main source of income for domestic securities firms relies in the traditional brokerage business, and the securities firms are of high similarity to each other, which causes the high fluctuation in the capital market and difficulties to operators in the investment operation; consequently, the investment profit fluctuation is increased.
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(3) Increase of cost due to investment in financial technology equipment: Due to the significant increase of the trading frequency and information processing volume, the competent authority actively promotes the financial technology policy, which will cause the increase of the investment in the IT software/hardware equipment update and information security maintenance etc. 3. Waterland Venture Capital Favorable factors: (1) Liaise to other companies with fund demands and high growth in nature through the referral of subsidiaries in the group. (2) Cooperate with the subsidiary, Guo Want International Leasing Corp., in China, seek quality cases in Mainland China, and use the financing and investment method to perform case assessment and investment. Unfavorable factors: Insufficient quality case quantity in the domestic region is related to the industrial structure adjustment, the domestic market lacks new emerging industry investment opportunities with outstanding potentials. Consequently, most of the venture capitals are heading toward the matured individual cases at the medium and late phases, such that it is not expected to have excessive return.
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5.4 Human Resources 5.4.1 Basic Information
Data as of Year 2017 2018 April 30, 2019 Employees 1,311 1,327 1,339 Number of Staff for Specific Administration Support 6 6 6 Employees Total 1,317 1,333 1,345 Average Age 46.72 47.38 47.76 Average Years of Service 11.51 11.87 11.91 Ph.D. 0.38 0.30 0.22 Masters 16.70 17.70 18.44 Education Bachelor’s Degree 66.90 65.72 65.20 Senior High School 15.87 16.13 15.99 Below Senior High School 0.15 0.15 0.15 CPA 7 9 7 Senior Securities Specialist 785 770 774 Securities Specialist 797 789 806 Bill Finance Specialist 207 200 201 Securities Investment Trust 512 505 504 and Consulting Specialist Financial Planning Personnel 199 194 194 Basic Lending Personnel 108 109 110 Advanced Lending Personnel 4 3 4 Bank Internal Control Personnel 147 142 144 Trust Operation Personnel 465 463 464 Futures Specialist 859 850 848 Basic Foreign Exchange Personnel 36 32 33 Proficiency test for foreign exchange Professional 10 6 6 transaction Certificates Asset securities basic proficiency test 29 24 25 and Bond Specialist 75 68 68 Number Stock Affairs Specialist 41 38 38 of Holders Internal Auditor 2 2 2 FRM 15 13 13 Securities Analyst 31 30 30 Futures Analyst 14 13 13 Wealth Management Personnel 425 424 424 Securities Internal Audit Personnel 198 198 198 Attorney 2 2 3 Margin purchase and short sale personnel 223 223 223 Life insurance specialist 868 866 861 Property insurance specialist 577 579 575 Investment-type insurance commodity 489 491 491 specialist Foreign-currency non-investment type 389 392 391 insurance specialist Note: The number of employees excludes the concurrent employees
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5.4.2 Employee Continuing Education and Training To encourage employees to improve job skills and to actively participate in various seminars and trainings, the Company allows employees to select courses held by the Taiwan Academy of Banking and Finance, Securities and Futures Institute as well as associations of banks, securities, futures and investment trust etc. according to their job duty needs. Auditing and legal compliance personnel also participate in the continuing education for auditing and legal compliance related courses annually for a certain number of hours according to the regulations. The expenses are covered by the Company in full. In addition, for employees actively participate in the continuing education to obtain professional licenses based on the needs of the current duties or future job functions, the Company also provides subsidies. The internal of the company organizes business seminars according to the needs and also encourages employees to participate in external speeches or seminars. The 2018 employee educational training expense of the Company and all subsidiaries is at the total of NTD 7.12 million. The courses of top 10 training hours are as follows: Training Number of Course Name Organizer hours trainees On-job training for sales personnel Taiwan Securities Association 6,178.5 418 Personal Information Protection Act/ Money Laundering Control Various certification institutions 3,801 788 Act/ Other relevant laws (legal compliance) Regulations and products of mutual Taiwan Securities Association 3,284 548 fund On-job training for futures Chinese National Futures Association 2,952 398 practitioners Taiwan AI Academy technical Academia Sinica 2,320 5 leader class Qualification for wealth Taiwan Securities Association 588 24 management business Taiwan Securities Association/ Taiwan Internal audit seminar courses 454.5 60 Academy of Banking and Finance Securities & Futures Institute/Taiwan Academy of Banking and Financial courses 431 80 Finance/Accounting Research and Development Foundation Taiwan Securities Practice of foreign exchange Association/Securities & Futures 369 123 derivatives Institute/Taiwan Academy of Banking and Finance Fintech, AI and Cyber security, etc. Various certification institutions 340 48
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5.4.3 Working Environment and Employee Personal Safety The Company provides excellent office environment as well as safe and healthy working place to employees. In the office, central air conditioning system and sufficient lighting equipment are installed in order to provide comfortable working space. Emergency evacuation routes and exits are provided at the office floors, and elevator equipment is maintained periodically. In addition, fire equipment is also installed and access security control is implemented in order to ensure the security of the office area. The Company also assigns dedicated person to participate in the labor safety and health management personnel on-job training in order to assist the company in establishing a safe and appropriate working environment. In addition, the Company establishes the “Emergency Countermeasure Handbook” and installs emergency first-aid facilities of AED (Automated External Defibrillator) to adopt emergency actions whenever necessary in order to ensure the personal safety of the employees of the Company. The Company establishes the “Employee Welfare Subsidy Guidelines” to provide subsidies to the employee health examinations and recreational travels in order to promote the physical and mental balance development of employees. 5.5 Corporate Social Responsibility and Ethical Behavior 5.5.1 Corporate Social Responsibility Waterland Financial Holding Group treats the CSR as one of the core values of the Company, and fulfills the corporate responsibilities for the society by implementing the CSR as the internal corporate culture. In addition to providing complete and professional financial services to customers, the Company further assists enterprises in successful business, stable growth, provides aids to the industry upgrade in order to gain profit, thereby feeding back to the shareholders and the general public. To actively participate in the social welfare activities, Waterland Financial Holding Group established the “Waterland Charity Foundation” (hereinafter referred to as the “Foundation”) with the fund provided by IBFC in November 1998, specialized in the handling of assistance to disadvantaged groups in the society, provide assistance of fund resources etc. in order to implement the concept of long-term society giving back and to fulfill the social responsibility as a corporate citizen. In recent years, in addition to the original fund accrued interest and property return, the Company and IBFC provide further donation annually in order to allow the Foundation to expand the scope of social welfare affairs in order to service greater disadvantaged groups. In addition, through the visits performed by employees of the Group and horizontal contacts with the social welfare units, subjects in actual needs of help and care are discovered in order to effectively implement the handling of welfare affairs. To effectively integrate the corporate public welfare resources, the members
Operational Highlights 135
of the board of directors of the Foundation are mainly concurrently held by the directors of the Company, in order to discuss and determine the annual welfare donation principles, budget and supervise as well as manage the donation outcome and execution of the budget. To continuously support the Foundation personnel performing the social environment and cultural living quality to clearly understand the feedback outcomes through their participation and assistance, the Foundation establishes a dedicated website (http://ibfc.org.tw/) in order to publish the historical financial statement information and donation outcome, as well as allowing contributors to individually verify the historical donation amounts and status. We believe that through the communication via the Foundation website, kind-hearted persons and the Foundation can cooperate jointly in the social welfare and in the care of disadvantaged groups. In addition, to fulfill CSR and to achieve economy, environment and society improvements, in order to achieve the objective of sustainable development, the Company has established the “Corporate Social Responsibility Best Practice Principles” for the compliance of all employees, and regularly produces ‘Corporate Social Reponsibility’ report for the review of the public. 5.5.2 Ethical Conducts Waterland Financial Holding Group upholds the ethical, transparent and responsible management principles, and establishes proper government governance and risk control mechanism in order to perform commercial activities in a fair and transparent method. To actively and effectively implement the concept of ethical management, the internal regulations and operations have been established as follows: 1. The “Code of Ethical Conduct” is established, and directors, managerial officers and employees are all incorporated into the regulations, such that conducting/receiving bribery is prohibited, illegal political contribution is prohibited, inappropriate welfare donation or sponsorship is prohibited, unreasonable gifts and treats or other illegal benefits are prohibited. In case of any violation, the violator shall be punished according to the “Employee Work Rules” of the Company depending upon the severity of the violation. 2. The board of directors and management level also actively implement the ethical management, and properly execute it in the internal management and external commercial activities. The board of directors further bears the due care of a prudent administrator to supervise the prevention of unethical conducts in the Company as well as reviews its implementation effectiveness at any time and performs continuous improvement. 3. Establish whistleblowing system “Regulations for Handling Whistle-Blowing Cases”, stipulate confidentiality mechanism, and for subjects being reported, Audting Department is assigned to accept reports and conduct investigation. In
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addition, protection related measures are also adopted for the reporters such that they are protected from any improper disposal due to reporting. 4. To enhance the information disclosure: The Company has established the Chinese/English website, and the website address is: http://www.waterland-fin.com.tw, to provide regular or irregular financial and service related information. The Company also reports various financial service information and corporate governance operation status on the “Market Observation Post System” in order to implement the public disclosure and transparency of information. In addition, the Company further leads the industry to disclose all donation events to the external on the website of the Company in order to prevent any illegal benefit transfer. 5.6 Number of Employees of Non-supervisory Roles, Annual Average Welfare Expense of Employees and Difference with the Previous Year For the number of employees not taking supervisory roles in the Company and main subsidiaries of IBFC, Waterland Securities, Waterland Venture Capital etc., there are a total of 1,244 employees in 2018, an increase of 12 employees in comparison to the total number of 1,232 employees in 2017. In 2018, the employee average welfare expense is NTD 987 thousand per person, a decrease of 0.5% in comparison to NTD 992 thousand in 2017. 5.7 IT Infrastructure 5.7.1 The Company
1. Configuration and maintenance of main information system hardware and software The Company’s system mainly adopts the IBM mainframe configuration to handle the human resource and accounting operations. In addition, for the needs of risk management, server architecture is integrated with the group risk management information, institutional group database and interested party database. Database for AML and Counter-terrorism is also constructed. The office is also installed with information equipment of personal computers, notebook computers and printers etc. in order to satisfy the needs of routine process operations. 2. Emergency backup and safety protective measures To cope with emergency situations and information data recovery, the Company performs information system interruption backup drills and personal computer data check twice a year. The main computer equipment also cooperates with the vendor’s periodic maintenance in order to comply with the requirements for computer facility management, disaster prevention, fire prevention and uninterrupted power supply etc. The main information data is backed up periodically and stored in the bank’s safe deposit boxes for remote storage.
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3. Future development and procurement plan Based on the Fintech and cyber security current status, the Company establishes feasible information solutions for the Group. 5.7.2 International Bills Finance Corporation 1. Configuration and maintenance of main information system hardware and software IBM RS/6000 mainframe is used to provide a stable and fast operation platform; and develop customer relationship data storage system, bills central depository clearing-settlement system, CBC interbank funds transfer system, interbank remittance system, customer service management system. Foreign currency bond transaction system is newly installed. In addition, to cope with various financial product evaluation, risk control and construction of risk management system, as well as to cooperate with the transaction and management requirements, a multi-dimensional statistical analysis platform is established. 2. Emergency backup and safety protective measures The headquarters is installed with same-site real time backup operation mainframe and cabinet shock absorption equipment. The Banqiao branch is installed with the remote backup center in order to be used as the operation backup for all business units, and field drills are performed according to the plan. The UPS is installed in headquarters and branches for emergent power supply. 3. Future development and procurement plan (1) Stengthen IT planning for AML and Counter Terrorism projects. (2) Study feasible IT solution based on the development of Fintech and Financial Regulatory Sandbox. (3) Improve software and hardware for cyber security. (4) Upgrade database. 5.7.3 Waterland Securities 1. Configuration and maintenance of main information system hardware and software The Waterland Securities information equipment mainly includes the securities trading system, futures trading system, bonds trading system, sub-brokerage trading system, electronic transaction system, personnel, salary and financial data system. The mutual backup method of management for the two north and south regional centers is adopted, and the Information Department is in charge of managing the planning and maintenance in order to ensure the normal operation of the information system. 2. Emergency backup and safety protective measures In addition to the installation of firewall, anti-virus system, the environmental control system and remote surveillance system are established in order to ensure the security of the information system and network. In addition, the “Information Security Management Guidelines” is also established, which includes the
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requirements for the items of network security, data protection, operating system personnel, operation procedure, various important data and program backup as well as remote storage etc. Furthermore, according to the level of importance and different scenarios, emergency measures are established in order to ensure the continuous operation of the information system and to ensure the security of the company data. 3. Future development and procurement plan To cope with the future business needs and upgrade service, software/hardware system upgrades will be performed for the new system of continuous matching of securities. In addition, to cope with the development trend of FinTech, Waterland Securities APP and relevant mobile device applications are developed in house in order to provide services of greater diversity to customers. Network attack protection system is constructed to enhance the information security management. Mainframe log management system is constructed to enhance the protection management of sensitive data. 5.7.4 Waterland Venture Capital 1. Configuration and maintenance of main information system hardware and software Accounting operating system and financial product inventory management system are periodically updated and maintained. 2. Emergency backup and safety protective measures Remote backup plan is already established to prevent loss of data due to regional disasters. 3. Future development and procurement plan The video conference equipment of the Waterland Venture Capital and the subsidiary Guo Want International Leasing Corp. are improved in order to enhance the contact and management between the companies. 5.8 Labor Relations 5.8.1 Employee Welfare Measures In addition to the national health insurance and labor insurance for the employees of the Company and subsidiaries according to the laws, the Company and subsidiaries also plan the employee group insurance, various subsidies, three holiday bonuses, professional license subsidy, travel and gathering activities etc. At the year end, year-end bonuses are issued depending upon the employee performance. In addition, performance bonuses and employee remunerations are also issued according to the earning of the Company and the employee performance.
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5.8.2 Retirement System and Implementation Status It is handled according to relevant regulations of the Labor Standards Act and Labor Pension Act, or relevant retirement system is established. The Company establishes the Labor Pension Supervisory Committee according to the Labor Standards Act, and sets aside 7% of average salary for those who are applicable for labor old-system pension into Bank of Taiwan on a monthly basis, and for those who are applicable for new-system, the Company also appropriates 6% of their salary into the personal account of Bureau of Labor Insurance according to the Labor Pension Act. 5.8.3 Labor-Management Agreement and Various Employee Benefit Protection Measures Status To protect the rights and benefits of employees, the Company explicitly specifies the salary issuance standard, working hours, rest day, leave, performance evaluation, reward/punishment, transfer, retirement and pension etc. Related requirements are specified in the Work Rules, and are disclosed publicly after reporting to the competent authority for approval. In addition, to provide a working environment free of sexual harassment for employees and to maintain the gender equality, the Company also establishes the “Regulations for Sexual Harassment Control Measures, Complaint and Disciplinary Handling”, and sets up the Sexual Harassment Complaint Handling Committee in charge of matters related to sexual harassment complaints, investigation and resolution etc. The Company also periodically convenes the labor-management meeting, and listens and values employees’ opinions through various channels of labor-management meetings and e-mails etc. in order to achieve sufficient communication between the labor and management, to promote harmonious and prosperous labor-management relationship. 5.8.4 For the year of 2018 and Up to the Printing Date of the Annual Report, the Loss due to Labor-Management Disputes, Current and Possible Future Estimated Amount and Countermeasures. 1. The Company: None 2. IBFC None 3. Waterland Securities Case of ○○ Chen: ○○ Chen claimed to have annual leave not yet taken completely, and filed a lawsuit to request for the payment of wage at an amount of NTD 110.2 thousand. The court judgment of the first instance ruled in favor of Waterland Securities. ○○ Chen is currently in the process of appealing to the court of second instance. If the case
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enters into the second instance, the company will continue with the lawsuit in order to protect the rights and benefits of the company. 4. Waterland Venture Capital None 5.9 Important Contracts 5.9.1 The Company
Agreement Counterparty Period Major Contents Restrictions Professional 1. Insurance company: Starting from 1. Liabilities of directors, supervisors liability insurances Taiwan Fire & September 6, and important employees for directors, Marine Insurance Co., 2018, 12:00PM to 2. Company’s compensation liability supervisors and Ltd. September 6, 3. Company’s securities important 2. Policy holder: 2019, 12:00 PM indemnification liability None employees Waterland Financial 4. Company’s employment Holding Co., Ltd. indemnification liability 5. The insurance coverage includes the Company and affiliates House tenancy 1. Landlord: Starting from The Company rented the real estate contract Shin Kong Life February 1, 2014 from Shin Kong Life Insurance Co., Insurance Co., Ltd. to January 31, Ltd. and located at 4F, No. 167, None 2. Tenant: 2020 Section 2, Nanjing East Road, Taipei Waterland Financial City, as the office of the Company. Holding Co., Ltd.
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5.9.2 International Bills Finance Corporation
Agreement Counterparty Period Major Contents Restrictions House tenancy 1. Landlord: Starting from IBFC rented the real estate from contract Shin Kong Life Insurance February 1, 2014 Shin Kong Life Insurance Co., Co., Ltd. to January 31, Ltd. and located at 9F~11F, No. None 2. Tenant: 2020 167, Section 2, Nanjing East International Bills Finance Road, Taipei City, as the office of Corp. (IBFC) IBFC. House tenancy 1. Landlord: Starting from IBFC rented the real estate from contract Shin Kong Life Insurance July 1, 2016 to Shin Kong Life Insurance Co., Co., Ltd. January 31, 2020 Ltd. and located at 2F-Area A, None 2. Tenant: No. 167, Section 2, Nanjing East International Bills Finance Road, Taipei City, as the office of Corp. (IBFC) IBFC. Cross-selling International Bills Finance Signed on Cross-selling contract Corp. (IBFC) December 27, None Waterland Securities Co., Ltd. 2011 Cross-selling International Bills Finance Signed on May Cross-selling profit sharing contract- Corp. (IBFC) 25, 2012 agreement None addendum Waterland Securities Co., Ltd.
5.9.3 Waterland Securities
Agreement Counterparty Period Major Contents Restrictions Contract 1. Loan lending From March 24, Waterland Securities Co., Ltd. Credit rating: bank/Issuance company: 2016 to March entrusted IBFC for the Fitch Ratings Ltd. Waterland Securities Co., 24, 2019, for a certification and underwriting of (Taiwan) assigns Ltd. period of 3 years commercial papers at a total long-term credit raking 2. Certification, underwriting amount of NTD 500 million, above the grade of institution: and signing contracts with the A-(twn) (inclusive) International Bills Finance transaction counterparties Corp. (IBFC) Agreement 1. Loan lending From March 24, Waterland Securities Co., Ltd. Credit rating: bank/Issuance company: 2016 to March entrusted Union Bank of Fitch Ratings Ltd. Waterland Securities Co., 24, 2019, for a Taiwan for the certification and (Taiwan) assigns Ltd. period of 3 years underwriting of commercial long-term credit raking 2. Certification, underwriting papers at a total amount of NTD above the grade of institution: 50 million, and signing A-(twn) (inclusive) Union Bank of Taiwan contracts with the transaction counterparties Contract 1. Loan lending From June 2, Waterland Securities Co., Ltd. Credit rating: bank/Issuance company: 2016 to June 2, entrusted IBFC for the Fitch Ratings Ltd. Waterland Securities Co., 2019, for a certification and underwriting of (Taiwan) assigns Ltd. period of 3 years commercial papers at a total long-term credit raking 2. Certification, underwriting amount of NTD 500 million, above the grade of institution: and signing contracts with the A-(twn) (inclusive) International Bills Finance transaction counterparties Corp. (IBFC)
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Agreement Counterparty Period Major Contents Restrictions Agreement 1. Loan lending From June 2, Waterland Securities Co., Ltd. Credit rating: bank/Issuance company: 2016 to June 2, entrusted Union Bank of Fitch Ratings Ltd. Waterland Securities Co., 2019, for a Taiwan for the certification and (Taiwan) assigns Ltd. period of 3 years underwriting of commercial long-term credit raking 2. Certification, underwriting papers at a total amount of NTD above the grade of institution: 50 million, and signing A-(twn) (inclusive) Union Bank of Taiwan contracts with the transaction counterparties Agreement 1. Loan lending From April 27, Waterland Securities Co., Ltd. Credit rating: bank/Issuance company: 2018 to April 27, entrusted Ta Ching Bills Taiwan Ratings Corp. Waterland Securities Co., 2021, for a Finance Corporation for the assigns long-term credit Ltd. period of 3 years underwriting of commercial raking above the grade 2. Underwriting institution: papers at a total amount of NTD of twBBB+ (inclusive) Ta Ching Bills Finance 200 million, and signing Corporation contracts with the transaction counterparties Contract 1. Loan lending From January 28, Waterland Securities Co., Ltd. Credit rating: bank/Issuance company: 2019 to January entrusted IBFC for the Fitch Ratings Ltd. Waterland Securities Co., 27, 2022, for a underwriting of commercial (Taiwan) assigns Ltd. period of 3 years papers at a total amount of NTD long-term credit raking 2. Underwriting institution: 500 million, and signing above the grade of International Bills Finance contracts with the transaction A-(twn) (inclusive) Corp. (IBFC) counterparties Agreement 1. Loan lending From January 28, Waterland Securities Co., Ltd. Credit rating: bank/Issuance company: 2019 to January entrusted Union Bank of Fitch Ratings Ltd. Waterland Securities Co., 27, 2022, for a Taiwan for the underwriting of (Taiwan) assigns Ltd. period of 3 years commercial papers at a total long-term credit raking 2. Underwriting institution: amount of NTD 50 million, and above the grade of Union Bank of Taiwan signing contracts with the A-(twn) (inclusive) transaction counterparties Contract 1. Loan lending From March 22, Waterland Securities Co., Ltd. Credit rating: bank/Issuance company: 2019 to March entrusted IBFC for the Fitch Ratings Ltd. Waterland Securities Co., 21, 2022, for a underwriting of commercial (Taiwan) assigns Ltd. period of 3 years papers at a total amount of NTD long-term credit raking 2. Underwriting institution: 500 million, and signing above the grade of International Bills Finance contracts with the transaction A-(twn) (inclusive) Corp. (IBFC) counterparties Agreement 1. Loan lending From March 22, Waterland Securities Co., Ltd. Credit rating: bank/Issuance company: 2019 to March entrusted Union Bank of Fitch Ratings Ltd. Waterland Securities Co., 21, 2022, for a Taiwan for the underwriting of (Taiwan) assigns Ltd. period of 3 years commercial papers at a total long-term credit raking 2. Underwriting institution: amount of NTD 50 million, and above the grade of Union Bank of Taiwan signing contracts with the A-(twn) (inclusive) transaction counterparties 5.9.4 Waterland Venture Capital: None
Financial Information 143
VI. Financial Information
6.1 Five-Year Financial Summary
6.1.1 Consolidated Condensed Balance Sheet Unit: NT$ thousands Year Financial Summary for The Last Five Years (Note 1)
As of Mar.
31, 2019 2014 2015 2016 2017 2018 (Note 2)
Item Cash, cash equivalents,Central Bank 2,501,517 2,854,148 2,170,687 2,570,325 4,849,376 deposits and interbank loans Financial assets at fair 110,882,981 127,070,694 123,200,250 127,834,741 127,365,213 value through profit or loss Available-for-sale 79,904,562 102,316,875 103,914,636 106,886,402 - financial assets Equity instruments valuation profit or loss measured at fair value - - - - 110,585,462 through other comprehensive income Derivative financial assets - - - - - for hedging Bill and bond reverse 379,913 9,998 589,962 124,908 1,029,580 repurchase investments Receivables-net 18,234,771 15,740,911 15,073,595 21,756,556 21,516,822 Current tax assets 763,012 851,436 488,767 488,533 54 Assets held for sale-net ------Discounts and loans-net - - - - - Reinsurance contract - - - - - asset-net Held-to-maturity financial - 987,991 988,462 - - assets Equity investment using 1,511,790 1,588,668 1,618,287 1,689,547 1,691,762 the equity method-net Restricted assets - - - - - Other financial assets-net 4,492,762 4,884,159 4,552,218 5,248,103 7,707,662 Property and 1,938,474 1,920,318 1,903,896 1,865,985 1,827,765 equipment-net (Note 3) Investment property -net - - - - - Intangible assets-net 463,330 366,123 364,019 220,263 224,925 Deferred tax assets-net 59,398 110,489 96,821 116,048 94,294 Other assets 1,117,710 1,479,000 1,210,981 1,071,320 1,093,008 Total assets 222,250,220 260,180,810 256,172,581 269,872,731 277,985,923 Deposits from the Central - - - - - Bank and banks
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Year Financial Summary for The Last Five Years (Note 1)
As of Mar.
31, 2019 2014 2015 2016 2017 2018 (Note 2)
Item Due to the central bank 13,803,765 12,947,067 18,505,752 37,745,689 28,718,410 and banks Financial liabilities at fair 267,634 269,914 235,128 340,581 1,085,929 value through profit or loss Derivative financial - - - - - liabilities for hedging Bill and bond repurchase 155,083,329 193,195,917 183,998,860 170,581,478 183,195,381 liabilities Commercial papers 10,139,173 7,900,802 8,211,458 11,231,353 11,924,017 payable Payables 6,064,201 7,458,154 6,706,110 9,720,550 11,133,576 Current tax liabilities 257,066 190,741 177,103 230,155 255,859 Liabilities related to assets - - - - - classified as held for Sale Deposits and spot - - - - - exchange payable Bonds payable - - - - - Preferred stock liabilities - - - - - Other financial liabilities 1,253,045 1,438,599 1,453,999 1,713,829 3,422,476 Reserves for liability 1,419,899 1,447,804 1,399,410 1,475,377 1,462,576 Deferred tax liabilities 20,051 30,732 21,081 58,104 40,587 Other liabilities 293,839 920,019 431,166 847,040 626,355 Before - 188,602,002 225,799,749 221,140,067 233,944,156 241,865,157 Total distribution liabilities After 189,366,838 226,495,635 222,628,408 235,742,488 (Note 4) distribution Equity attributable to shareholders of the 29,581,458 30,353,501 30,934,703 32,308,422 32,435,973 parent Before 26,873,652 27,664,862 27,460,748 27,866,659 28,198,659 Capital distribution stock After 27,664,862 28,360,748 27,866,659 28,198,659 (Note 4) distribution Capital surplus 7,544 7,544 100,068 122,240 122,240 Before 2,851,273 2,842,712 3,542,751 4,007,829 3,624,106 Retained distribution earnings After 1,295,228 1,450,939 1,648,499 1,877,497 (Note 4) distribution Other equity interest 334,223 645,859 147,381 469,817 649,091 Treasury stock (485,234) (807,476) (316,245) (158,123) (158,123) Non-controlling interest 4,066,760 4,027,560 4,097,811 3,620,153 3,684,793 Before 33,648,218 34,381,061 35,032,514 35,928,575 36,120,766 distribution Total equity After 32,883,383 33,685,174 33,544,173 34,130,243 (Note 4) distribution Note 1: The financial data of each year is audited and certified by CPA. Note 2: The financial data up to March 31, 2019 is not yet reviewed by CPA; therefore, it is not disclosed. Note 3: Asset revaluation has not been performed in each year. Note 4: Up to the annual report printing date, the 2018 earning distribution proposal has not yet be resolved by the shareholder’s meeting.
Financial Information 145
6.1.2 Consolidated Condensed Statement of Comprehensive Income Unit: NT$ thousands Year Financial Summary for The Last Five Years (Note 1) As of Mar. 31, 2019 2014 2015 2016 2017 2018 (Note 2) Item Interest income 2,933,572 2,880,943 2,929,092 2,870,269 3,034,931 Less: Interest expenses (1,063,139) (1,041,210) (889,159) (1,012,522) (1,229,985) Net interest income 1,870,433 1,839,733 2,039,933 1,857,747 1,804,946 Net non-interest income 2,985,605 3,099,933 3,275,325 4,485,003 3,783,687 Net revenue 4,856,038 4,939,666 5,315,258 6,342,750 5,588,633 Bad debt expenses and provision for guarantee (80,720) (259,460) (51,084) (372,757) (1,392) reserve Insurance liability - ---- Operating expenses (2,703,225) (2,708,364) (2,619,787) (2,953,947) (2,944,802) Profit(loss) from continuing 2,072,093 1,971,842 2,644,387 3,016,046 2,642,439 operation before tax Income tax expense (263,727) (377,296) (445,772) (472,230) (489,024) Net income from continuing 1,808,366 1,594,546 2,198,615 2,543,816 2,153,415 operation Profit(loss) from discontinued - ---- operation - Net income (Loss) 1,808,366 1,594,546 2,198,615 2,543,816 2,153,415 Other comprehensive income 132,010 238,775 (543,700) 340,485 (499,341) (income after tax) Total comprehensive income 1,940,376 1,833,321 1,654,915 2,884,301 1,654,074 Net income attributable to shareholders of the parent 1,732,798 1,563,259 2,110,209 2,370,784 2,021,559 Net income attributable to 75,568 31,287 88,406 173,032 131,856 non-controlling interest Comprehensive income attributable to Shareholders 1,848,175 1,859,122 1,593,333 2,681,767 1,514,961 of the parent Comprehensive income attributable to 92,201 (25,801) 61,582 202,534 139,113 non-controlling interest Earnings per share (Note 3) 0.61 0.55 0.76 0.85 0.72 Note 1: The financial data of each year is audited and certified by CPA. Note 2: The financial data up to March 31, 2019 is not yet reviewed by CPA; therefore, it is not disclosed. Note 3: For earning converting into capital increase or capital reserve converting into capital increase, during the calculation of the earning per share of common shares for the previous years, retroactive adjustment has been made according to the ratio of the capital increase, but the issuance period of the capital increase is not yet considered. 6.1.3 Auditors’ Opinions from 2014 to 2018
Year Accounting Firm CPA Audit Opinion 2014 PwC Taiwan Chien-Hong Chou, Hsien-I Chen No reserved opinion 2015 PwC Taiwan Chien-Hong Chou, Hsien-I Chen No reserved opinion 2016 PwC Taiwan Shu-Mei Chi, Hsien-I Chen No reserved opinion 2017 PwC Taiwan Shu-Mei Chi, Hsien-I Chen No reserved opinion 2018 PwC Taiwan Shu-Mei Chi, Hsien-I Chen No reserved opinion
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6.2 Five-Year Financial Analysis
Year Financial Analysis for the Last Five Years (Note 1) As of Mar. 31, 2019 2014 2015 2016 2017 2018 (Note 2) Item Total assets turnover (times) 0.02 0.02 0.02 0.02 0.02 Bank subsidiary’s loan to deposit ratio - - - - - Bank subsidiary’s NPL ratio - - - - - Operating Bill finance subsidiary’s NPL ratio 0.25 0.26 0.01 0.39 0 performance Average revenue per employee (NT$ 3,301 3,411 3,623 4,074 3,524 ‘000) Average profit per employee (NT$ 1,229 1,101 1,499 1,634 1,358 ‘000) Return on total assets (%) 1.20 1.02 1.14 1.29 1.14 Return on stockholders' equity (%) 5.48 4.69 6.33 7.17 5.94 Profitability Profit ratio (%) 37.24 32.28 41.36 40.11 38.53 Earnings per share (NT$) 0.61 0.55 0.76 0.85 0.72 Debt to Asset Ratio (%) 84.86 86.79 86.32 86.69 87.01 Financial Debt to Equity Ratio (%) 560.51 656.76 631.24 651.14 669.60 structure Double Leverage Ratio (%) 110.67 110.55 110.10 106.87 107.35 According to Article 41 of the Act (Note3) (Note3) (Note3) (Note3) (Note 3) Operating leverage 1.09 1.18 1.05 1.15 1.04 Leverage Financial leverage 1.01 1.01 1.01 1.01 1.01 Growth on Asset (%) 1.49 17.07 (1.54) 5.35 3.01 Growth Rate Growth on Profit (%) 25.74 (4.84) 34.11 14.05 (12.39) Cash flow ratio (%) (1.87) 1.98 (2.50) (8.50) 5.47 Cash flow Cash flow adequacy ratio (%) (122.13) (223.60) (308.84) (622.02) (189.08) Cash flow satisfied ratio (%) 725.75 2,954.11 (107,317.45) 8,500.34 (3,552.45) Market share in terms of Asset (%) 0.53 0.57 0.53 0.51 0.50 - Market share in terms of Equity (%) 1.14 1.10 1.04 0.97 0.98 Business Market share of Bank subsidiary’s - - - - - Scale deposit (%) Market share of Bank subsidiary’s loan - - - - - (%) Subsidiaries’ CAR based on each
business’s regulation (%) International Bills Finance Corporation 15.47 16.08 14.90 15.23 14.11 Waterland Securities Co., Ltd. 406.65 397.02 434.07 332.87 328.86 Qualifying Capital of Subsidiaries (NT$
million) International Bills Finance Corporation 23,520 24,487 25,086 26,017 26,040 Waterland Securities Co., Ltd. 7,218 7,301 7,199 6,459 6,642 Waterland Venture Capital Co., Ltd 1,561 1,368 1,380 1,384 1,405 Capital Financial Holdings’ Net Qualifying Adequacy 25,527 26,495 27,205 28,718 28,709 Capital (NT$ million) Regulatory Capital Requirement for
Subsidiaries (NT$ million) International Bills Finance Corporation 12,160 12,180 13,467 13,666 14,762 Waterland Securities Co., Ltd. 2,662 2,759 2,488 2,911 3,030 Waterland Venture Capital Co., Ltd 954 952 1,044 1,152 1,115 Total Regulatory Capital Requirement 14,776 14,880 16,086 16,661 17,847 of the Group (NT$ million) Financial Holdings’ CAR (%) 172.76 178.06 169.12 172.36 160.86
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Year Financial Analysis for the Last Five Years (Note 1) As of Mar. 31, 2019 2014 2015 2016 2017 2018 (Note 2) Item According to Article 46 of the Financial Holding Company Act, the total amount or ratio (NTD million) of the lending, endorsement or other 135,245 204,660 194,765 217,490 220,013 - transactions provided by all of the subsidiaries to the same natural person, same related party or same affiliate shall be disclosed. Analysis of financial ratio differences for the last two years. (Not required if the difference does not exceed 20%) 1. At the end of 2018, the ratio of non-performance loan of bills finance company was reduced due to the excellent quality of loan lending. 2. At the end of 2018, the asset growth rate decreased due to the reduction of the financial assets at fair value through profit of loss and the marginal receivables. 3. In 2018, the profit growth rate decreased due to the asset-backed commercial paper (ABCP) lawsuit of the bills subsidiary at the Taiwan High Court reached a settlement in December 2017, and the settlement amount of NTD $565,000 was entered as the income of 2017; therefore, no income was listed for this item in 2018. 4. In 2018, the cash flow ratio and cash flow adequacy ratio increased, but the cash flow satisfied ratio changed from positive to negative, and this was due to the reduction of the financial asset at fair value through profit or loss, and the increase of the bills under repurchase agreement and bond liability, affecting the cash provided by (used in) operating activities. Note 1: The financial data of each year is audited and certified by CPA. Note 2: The financial data up to March 31, 2019 is not yet reviewed by CPA; therefore, it is not disclosed. Note 3: The competent authority has not yet specified the upper and lower limits of the financial ratio according to Article 41 of the Financial Holding Company Act. Note 4: The calculation equations of various calculation items are described as follows: 1. Management capacity (1) Total assets turnover ratio = Net revenue / Average total assets. (2) Subsidiary bank loan-to-deposit ratio = Subsidiary bank total loan / Total deposit. (3) Subsidiary bank non-performing loans ratio = Subsidiary bank total non-performing loan / total loan. (4) Subsidiary bills company non-performing loan ratio = Non-performing loan / (Non-performing loan + guaranteed CP balance). (5) Average operating revenue per employee = Net revenue / Total number of employees. (6) Average earnings per employee = Net operating profit after tax / Total number of employees. 2. Profitability (1) Return on asset = [Earnings after tax + Interest expense × (1 − Interest rate)] / Average total assets. (2) Return on equity = Earnings after tax / Average net equity. (3) Net profit margin = Earnings after tax / Net revenue. (4) Earning per share = (Earnings attributable to shareholders of parent company – Preferred stock dividends) / weighted average number of shares outstanding. 3. Financial structure (1) Debt to total assets ratio = Total debt / Total assets. (2) Debt to net assets ratio = Total debt / Net equity. (3) Financial holding company double leverage ratio = Equity investment / Net worth performed according to Paragraph 2 of Article 36 and Article 37 of this Act. 4. Leverage (1) Operating leverage = (Net revenue − Variable expense) / Earnings before tax. (2) Financial holding company financial leverage = (Earnings before tax + Interest expense) / Earnings before tax. 5. Growth rate (1) Asset growth rate = (Current year total assets − Last year total assets) / Last year total assets. (2) Earning growth rate= (Current year earnings before tax − Last year earnings before tax) / Last year earnings before tax. 6. Cash flow (1) Cash flow ratio = Cash flows from operating activities / (Due to banks and drafts + Commercial papers payable + Financial liabilities at fair value through income statement + Bills and bonds sold under repurchase agreements + Accounts payable in 1 year). (2) Net cash flow adequacy ratio = Net cash flows from operating activities in the last 5 Years / (Capital expenditure + Cash dividends) in the last 5 Years.
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(3) Cash flow satisfied ratio = Cash flows from operating activities / Cash flows from investing activities. 7. Operating scale (1) Asset market share = Total assets / Total assets of all financial holding companies. (2) Equity market share = Total equities / Total equities of all financial holding companies. (3) Deposit market share of bank subsidiary = Total deposits / Total deposits of all financial institutes which can operate deposits and loans business. (4) Loan market share of bank subsidiary = Total loans / Total loans of all financial institutes which can operate deposits and loans business. 8. Capital adequacy (1) Group’s qualifying net capital = Financial holding company’s qualifying capital + (Financial holding company shareholding ratio × Qualifying capital of each subsidiary) − Required deduction items according to the regulations. (2) Group’s statutory total capital requirement = Financial holding company’s statutory capital requirement + Financial holding company shareholding ratio × Statutory capital requirement of each subsidiary. (3) Group’s capital adequacy ratio = Group’s qualifying net capital / Group's statutory capital requirement. Note 5: Calculation equation for earnings per share: 1. It is calculated based on the weighted average number of outstanding common shares. 2. For cash capital increase or treasury stock transactions, the circulation period has been considered in order to calculate the weighted average number of shares. 3. For earning converting into capital increase or capital reserve converting into capital increase, during the calculation of the earning per share for the previous year and semi-annually, retroactive adjustment has been made according to the ratio of the capital increase, but the issuance period of the capital increase is not yet considered.
Financial Information 149
6.3 Audit Committee’s Report for the Year 2018
To: The General Meeting of Shareholders as of year 2019
March 25, 2019
The board of directors of the Company has prepared the 2018 business report, consolidated financial statement and earnings distribution proposal, in which the consolidated financial statement has been audited and certified by
CPA Shu-Mei Chi, and CPA Sian-Yi Chen of PricewaterhouseCoopers Taiwan. The aforementioned business report, consolidated financial statement and earnings distribution proposal have been completely reviewed by the Audit Committee, considering it to be of conformity, and the consents of the entire members are obtained. Accordingly, report is prepared as disclosed above according to Article 14-4 of the Securities and Exchange Act and Article 219 of the Company Act.
Waterland Financial Holdings Convener of Audit Committee: Wang, Yao-Shing
6.4 Financial Statements for the Year 2018 Please refer to pages 191~329. 6.5 For 2018 and Up to the Printing Date of this Annual Report of the Company and Affiliates, Any Occurrence of Financial Difficulties Affecting the Financial Status of the Company. None
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VII. Review of Financial Conditions, Financial Performance, and Risk Management
7.1 Analysis of Financial Status
Unit: NT$ thousands Year Difference Analysis for difference 2017 2018 Amount % exceeding Item 20% (Note) Cash and cash equivalents 27,614 13,914 13,700 98.46% (Note 1) Fair value through other comprehensive income financial assets 78,179 - 78,179 - (Note 2) Bill and bond reverse repurchase investments 2,695,265 930,000 1,765,265 189.81% (Note 3) Receivables-net 120,414 123,362 (2,948)-2.39% - Current tax assets - 488,497 (488,497) -100.00% (Note 4) Equity investments using the equity method-net 34,740,306 34,509,986 230,320 0.67% - Other financial assets-net - 18,554 (18,554) -100.00% (Note 2) Property and equipment-net 2,074 2,233 (159) -7.12% - Intangible assets-net 182 348 (166)-47.70% - Deferred tax assets-net 313 266 47 17.67% - Other assets-net 10,197 8,512 1,685 19.80% - Total Assets 37,674,544 36,095,672 1,578,872 4.37% - Due to the Central Bank and banks - - - - - Commercial paper payable 4,996,224 3,138,202 1,858,02259.21% (Note 5) Payables 74,159 473,052 (398,893)-84.32% (Note 4) Current tax liabilities 165,726 173,546 (7,820) -4.51% - Provisions for employee benefits 2,451 2,450 10.04% - Deferred tax liabilities 11 - 11 - Total Liabilities 5,238,571 3,787,250 1,451,321 38.32% (Note 5) Capital stock 28,198,659 27,866,659 332,000 1.19% - Capital surplus 122,240 122,240 - - - Retained Earnings 3,624,106 4,007,829 (383,723) -9.57% - Other Adjustments 649,091 469,817 179,274 38.16% (Note 6) Treasury stock (158,123) (158,123) - - - Total Stockholders' Equity 32,435,973 32,308,422 127,551 0.39% - Note: Analysis and explanation for change of ratio increase/decrease: (analysis and explanation are provided for change of ratio increase/decrease over 20% and the amount of change exceeding NTD 10 million) (1) Cash and cash equivalents: Due to business needs, cash and cash equivalents increased. (2) Financial assets at fair value through other comprehensive income/other financial assets: For the financial assets carried at cost in 2017, the re-classification of IFRS9 was applied
Review of Financial Conditions, Financial Performance, and Risk Management 151
to the financial assets at fair value through other comprehensive income in 2018 for the first time, consequently, the financial assets at fair value through other comprehensive income in 2018 was increased, but the other financial assets were decreased. (3) Bills and bonds purchased under resell agreements: The Company received the cash dividend paid by the subsidiaries, and purchased the bonds under repurchase agreement yield, such that the investment in the bills and bonds purchased under resell agreements was increased. (4) Current tax assets/Accounts payable: The Company and the subsidiaries of IBFC and Waterland Venture Capital adopt the link tax consolidated calculation and declaration of income tax. Since the National Taxation Bureau returned tax for 2012 and 2013 in 2018, the current income tax assets and accounts payable were reduced. (5) Commercial paper payable/Total liabilities: For the distribution of cash dividends, commercial papers are issued, such that the commercial paper payable and total liabilities were increased. (6) Other equity: Since the financial assets at fair value through other comprehensive income of subsidiaries recognized under equity method had not realized the profit increase, consequently, other equity was increased.
7.2 Analysis of Financial Performance
Unit: NT$ thousands Year Difference Analysis for 2018 2017 difference Amount % Item (Note) Revenue 2,211,621 2,568,248 (356,627) -13.89% - Expenses and loss (218,612) (222,464) (3,852) -1.73% - Net income before tax 1,993,009 2,345,784 (352,775) -15.04% - Net income 2,021,559 2,370,784 (349,225) -14.73% - Note: Analysis and explanation for change of ratio increase/decrease in last two years: (analysis and explanation are provided for change of ratio increase/decrease over 20% and the amount of change exceeding NTD 10 million) Since the change of ratio increase/decrease of each item has not reached 20%, analysis and explanation are exempted.
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7.3 Analysis of Cash Flow 7.3.1 Cash Flow Analysis for 2018 Year 2018.12.31 2017.12.31 Difference Item Cash Flow Ratio 34.44% 36.87% -6.59% Cash Flow Adequacy Ratio 75.38% 76.48% -1.44% Cash Flow Satisfied Ratio -241165.61% 143.48% -168183.08% Note: For the calculation of cash flow related ratios, the RS bills and bonds purchased are treated as the cash equivalents. Analysis and explanation for ratio of change increase/decrease: The cash flow satisfied ratio in 2018 decreased, and it was due to the return from capital reduction of the invested company under equity method in 2017 at amount of NTD 929,381 thousand, hence a net cash in-flow in investment activity. In 2018, there was no such occurrence; hence net cash out-flow in investment activity. 7.3.2 Liquidity Analysis for 2018 Unit: NT$ thousands Cash and Cash Net Cash Flow Cash Surplus Leverage of Cash Deficit Equivalents, from Operating Cash Outflow (Deficit) Beginning of Year Activities (3) Investment Financing (1)+(2)-(3) (1) (2) Plans Plans 27,164 2,031,349 2,040,290 18,223 - -
1. Analysis of current year cash flow change: (1) Operating activities: The activities mainly refer to the expected collection of cash dividends issued by subsidiaries under equity method, and the expiration of RS bills and bonds. (2) Investment activities: The activities mainly refer to the expected increase of investment under equity method. (3) Financing activities: The activities mainly refer to the issuance of cash dividends to shareholders. 2. Analysis on remedy for estimated cash shortage and liquidity: Not applicable.
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7.4 Major Capital Expenditure Items There were no major capital expenditures for the Company in 2018. 7.5 Investment Policy in the Year 2018, Main Causes for Profits or Losses, Improvement Plans and Investment Plans for the Coming Year 7.5.1 Investment Policy To establish the medium and long term investment strategies and to manage reinvestment enterprises as well as to promote investment management functions, the Company establishes the “Investment Policy” and “Reinvestment Enterprise Management Regulations”. The Investment Policy uses the niche type financial holding company as the long-term business development objective, and uses the direct financial business as the core business. The development scope of the investment enterprises include banks, bills financial enterprises, insurance enterprises (including insurance agent and broker), securities enterprises (including securities investment trust enterprises and securities investment consulting enterprises), futures enterprises, venture capital enterprises (including management consulting enterprises) etc. In addition to the aforementioned investment scope, the Company may also invest in other financial related enterprises under the premises of complying with the aforementioned investment principles. 7.5.2 Major Reason for Profit or Loss 1. For the reinvested company, IBFC, the net income of 2018 is NTD 1.895 billion, a decrease of 15.81% from the net income in 2017. This is mainly due to that the lawsuit of asset-backed commercial paper (ABCP) of the company reached settlement in December 2017, and acquired the settlement amount of NTD 565 million. There is no such gain in 2018. 2. For the reinvested enterprise Waterland Securities, the net income after tax of 2018 is NTD 324.6 million, and the earnings per share (EPS) is NTD 0.43. This is mainly resulted from the significant growth of day trading amount in the brokerage business market from 2017, such that the brokerage handling fee income is NTD 1.237 billion, margin trading interest income is NTD 520.3 million, an increase of 11.13% and 17.17% from 2017 respectively. New financial product and fixed income product businesses also indicate profits. However, the performance of the underwriting and proprietary businesses are weaker than expected. In addition, for the futures proprietary business, the trading profit indicates a multiple time of growth, and the earning exceeds the forecast estimate. 3. Reinvested company, Waterland Venture Capital, has a relatively higher investment percentage in information technology, optoelectronics and precision machinery in 2018, and the performance of Waterland Venture Capital in the capital market is considered great. In addition, with the earning of RMB 11.46
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million from the reinvestment in the Guo Want Leasing Corp. in China; therefore, the net income for the entire year is NTD 97.82 million. 7.5.3 Improvement Plan To improve the financial holding operation performance and to increase the earnings of subsidiaries, in the future, the Company will continue to enhance the investment management of subsidiaries, and implement policy execution under the risk control mechanism in order to improve the management effectiveness. IBFC will root in the domestic potential industries and strengthen the existing customer relationship, as well as enhance the business risk management in order to achieve substantial revenue as well as maintain the market position and leading ability. Under the rigorous risk control in the future, Waterland Securities will utilize flexible proprietary trading strategies in order to achieve greater effectiveness in the utilization of funds and to properly use the Group’s resources in order to exploit business synergy based on the core customer strategies. In addition, the sales channel is to be expanded along with diverse product sales promotion in order to provide comprehensive financial management services to general and institutional customers. Furthermore, business strategies will be planned according to the deregulation status on the securities business by the competent authority in order to increase the source of profit. It is expected that through stable operation strategies, the overall business performance can be increased and drives the growth for sustainable operation. Regarding Waterland Venture Capital, it will mainly focus on the strategic investments along with the aids of the financial investments. In terms of the strategic investment, it will focus on projects with strategic meaning or synergy to other subsidiaries of the financial holding. For the financial investment projects, it will actively eliminate individual stock without sound fundamentals in order to implement the risk control thoroughly. 7.5.4 Investment Plans for the Coming Year Regarding the investment plan for 2019, the Company will continue to integrate the Group’s resources. Furthermore, in response to the government’s internet-only bank policy and planning, the Company will establish relevant financial innovative business with strategic cooperative partner to apply for business license with the competent authority, and it is expected to complete the construction of cash flow platform, expand business scope and head toward the multi-core business with balanced development.
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7.6 Analysis of Risk Management 7.6.1 Risk Management Organizational Structure and Policy 1. The Company (1) Risk management organizational structure The board of directors of the Company approves the risk management policy, and the senior management level executes the policy approved by the board of directors by establishing procedures capable of identifying, evaluating, monitoring and controlling various types of risks. The Company establishes (a) Audit Committee, under the board of directors, and responsible for supervising the effective implementation of internal control and manage the control of existing or potential risks of the Company; (b) Operational Development Committee, under the board of directors, and responsible for the medium and long term business development and fund planning for the Company, review of business objectives and budget of subsidiaries, and responsible for coordinating major business events among subsidiaries and the supervision of business performance of subsidiaries; (c) Compliance & Legal Department, a Vice President is designated to act as the Chief Compliance Officer, and responsible for the planning, management and execution of legal compliance system; (d) Risk Management Department, responsible for monitoring the exposure status of various risks, and review the establishment and execution of risk management mechanism of each subsidiary; and (e) Auditing Department, responsible for periodically auditing various business risks. The risk management organizational structure of the Company is as follows:
(2) Risk management policy The risk management policy of the Company covers the objectives, scope and management procedures etc., and various risk management principles and limits are established according to different nature of various types of risks. The
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Company establishes the Risk Management Guidelines. Through clear authorization, hierarchical responsible regulations and risk cap setting, the Company and subsidiaries establish the risk management procedures and execution guidelines for relevant businesses in order to control various types of risks. 2. International Bills Finance Corporation (1) Risk management organizational structure The board of directors of IBFC is the highest decision making unit for the risk management, and the senior management level executes the policy approved by the board of directors by establishing procedures capable of identifying, evaluating, monitoring and controlling various types of risks, and periodically reports to the board of directors. It establishes (a) Legal Compliance Office, responsible for the planning, execution, management and tracking evaluation matters of legal compliance affairs; (b) Risk Management Committee, responsible for reviewing the risk management policy, asset liability management allocation and overall business risk evaluation, monitoring and control; (c) Risk Management Office, responsible for monitoring the exposure status of various types of risks; (d) Credit Department, responsible for reviewing of lending and investment businesses; (e) Credit and Business Review Committee, responsible for reviewing the credit risk cases of the operating business; and (f) Each business unit is the basic execution unit for the risk management. The risk management organizational structure of IBFC is as follows:
(2) Risk management policy The risk management policy of IBFC includes the internal and external operation environment changes and board of directors’ authorization scope, revision of relevant regulations and risk caps; promotion of integrated risk
Review of Financial Conditions, Financial Performance, and Risk Management 157
management system in order to effectively manage various financial risks, and establishment of risk management procedures and guidelines etc. for relevant businesses according to the Risk Management Guidelines of IBFC. 3. Waterland Securities (1) Risk management organizational structure The risk management organizational structure of IBFC includes the board of directors, Risk Management Committee, board of directors’ auditing office, risk management office, legal compliance office, financial department and various business units etc., and their responsibilities are as follows: a. The board of directors is the highest decision making unit for risk management, which approves the risk management policy and risk appetite, and bears the final responsibility for risk management. b. The Risk Management Committee is directly under the board of directors, and the independent director shall act as the convener to execute the risk management policy and guidelines approved by the board of directors, and the assessment, monitoring and control etc. of the overall operation risks. c. The auditing office is directly under the board of directors, and performs periodic or special audit related operation procedures in order to ensure the continuous effective implementation of the internal control system, and to submit reports to the board of directors and Audit Committee periodically. d. The risk management office is directly under the President, and is responsible for the planning and execution of control mechanism for market risk, credit risk and market liquidity risk etc. e. The legal compliance office is directly under the President, and is responsible for the planning and execution of legal risks control mechanism and legal compliance system. f. The Financial Department is directly under the President, and is responsible for the planning and execution of control mechanism for fund liquidity risk and asset liability risk. g. Each business unit is responsible for the planning and execution of the risk management mechanism for its business, execution and reporting of internal control procedures, as well as control matters related to IBFC and interested party transactions.
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The risk management organizational structure of Waterland Securities is as follows:
(2) Risk management policy a. To implement the risk management of Waterland Securities, to promote the sound operation of Waterland Securities and all subsidiaries, the Waterland Securities establishes the “Risk Management Policy and Guidelines”, which is approved by the board of directors and is used as the basis for the execution of risk management procedures of Waterland Securities and all subsidiaries. The Waterland Securities risk management policy covers risk management objectives, risk management scope, risk management procedure and risk management organization etc. b. When Waterland Securities performs various businesses, it shall comply with the laws and shall identify, assess and control relevant risks in order to control possible risks within a reasonable and acceptable level, such that the most optimal configuration of risk and return can be achieved, and an appropriate own capital adequacy ratio can be maintained. c. Various types of risks involved during the performance of businesses by Waterland Securities and all subsidiaries shall be incorporated into the scope of risk management, including but not limited to market risk, credit risk, operation risk, legal risk and liquidity risk etc. 4. Waterland Venture Capital (1) Risk management organizational structure The board of directors of the Waterland Venture Capital is the highest decision making unit for risk management, and the senior management level
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executes the policy approved by the board of directors by establishing procedures capable of identifying, evaluating, monitoring and controlling various types of risks. Waterland Venture Capital establishes (a) Investment Review Committee, responsible for reviewing and assessing cases before investment; (b) Fund Management Committee, responsible for reviewing the current short-term available fund status; (c) Audit Office, responsible for periodically audits various business risks; (d) Risk Management Department, responsible for monitoring the exposure status of various risks; (e) Administration Department, responsible for the planning and execution of fund liquidity risk control mechanism; and (f) Investment Department, as the basic execution unit for risk management. The risk management organizational structure of Waterland Venture Capital is as follows:
(2) Risk management policy The risk management policy of Waterland Venture Capital includes the execution of investment cases requiring the approval of the Investment Review Committee and board of directors before the execution. In addition, to provide guidance to investment business and risk management, the internal rules and regulations of the short-term available fund management rules and direct investment operation management regulations etc. are established in order to govern the long and short term fund utilization. Furthermore, the operation regulations of risk management regulations and risk management guidelines are established according to the risk management guidelines of the Company.
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7.6.2 Method for Assessing and Controlling Various Risks and Risk Exposure Quantification Information 1. General Periodic Disclosures (1) IBFC A. Strategies and Procedures a. Credit risk IBFC’s credit risk management policy includes the early credit assessment, hierarchical management and post-event credit monitoring as well as measures for effectively reducing risk exposure. IBFC establishes appropriate risk limit through clear authorization and hierarchical responsibility regulations in order to prevent credit risks from over concentration. In addition, credit second-review system is established in order to discover any possible credit issues early and to reduce the occurrence of default. Furthermore, various types of credit enhancement tools are periodically assessed, monitored and managed. The credit risks of lending, various transactions and purchase of securities are consolidated for management, and the transaction status of lending and various authorization amounts are periodically monitored to determine whether they are handled according to relevant requirements. b. Liquidity risk Assess allocation plans are established according to the laws and regulations, fund purposes and its liquidity and profitability. The assets and liabilities are prevented from over concentration, and the fund source diversity shall be maintained in order to control the liquidity risk. The liquidity risk management report is provided periodically, including the fund source, fund utilization, financing gap analysis etc. In case of encountering unusual changes in financing gap, appropriate improvement measures shall be adopted according to the “Fund Procurement and Emergency Responsive Handling Guidelines” in order to maintain the securities for fund procurement. c. Market risk (including interest rate, equity, foreign exchange and instrument risks) According to the annual market risk management objectives approved by the board of directors of IBFC, the individual risk limit and the handling solutions for reaching loss limit are established for the main financial instruments in order to obtain a balance in the expected profit of various financial instruments and the risk tolerance. In addition, various business rules, control indicators, part valuation are established and new type of financial instrument business handling regulations etc. are developed in order to be used as the basis for executing risk management. Market risk management report is provided periodically in
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order to be used as a reference for monitoring the market risk and developing market risk management strategies. d. Operational risk Establish rigorous internal control system, and through the internal audit and legal compliance systems, reduce the probability of occurrences with operational risk. Each trading and operation personnel shall establish the independent operation procedures for the front desk transactions and backend settlement according to job duties in order to implement the operation risk management thoroughly. Each business unit shall comply with relevant internal control systems, business rules and regulations as well as the emergency responsive plans etc. in order to perform duties, and shall also perform self-audits on a monthly basis. When the internal operation of each unit is subject to the occurrences with operational risk event requiring reports, the “Operational Risk Reporting Form” shall be completed and submitted for approval. B. Organization and structure of relevant risk management system The board of directors is the highest decision making unit for the credit risk management, and the management level executes the policy approved by the board of directors by establishing procedures capable of identifying, evaluating, monitoring and controlling credit risk, and periodically reports to the board of directors. In addition, Risk Management Committee is established to be in charge of the review of risk management policy, asset and liability management allocation and the assessment, monitoring and control of overall business operation risks. Credit and Business Review Committee is established under the President, which is in charge of the review of credit risk management cases. Audit Office is established and is responsible for auditing various business risks. Risk Management Office is established and is responsible for the monitoring of risk portion and degree of concentration. Credit Department is established and is responsible for the stipulation of relevant rules and regulations for credit risk, review of credit risk cases and supervision on overdue cases. C. Scope and Characteristics of Risk Report and Assessment System a. Credit risk The assessment scope includes the possible future non-performance risk of the debtors or issuance holding portions or transaction counterparties. IBFC has established customer relationship management (CRM) database as a multi-dimensional data base for broadly collecting the operation and financial status etc. of the borrowers. In addition, an early warning system is also established to obtain the customer latest status. Furthermore, the lending second-review ratio is also increased in order to periodically review the lending risk. Various types of business
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statistical charts and risk management reports are prepared and submitted to the management level. In addition, reports to the competent authority are also made periodically according to the regulations. Lending risk prizing principle is developed, and differential pricing is adopted according to the default risk and collateral recovery rate in order to balance the expected loss and receivable profits. Each year, pressure test is performed to assess the potential impacts on IBFC during the occurrence of extreme events in order to provide reference to the management level during the establishment of credit risk strategies. In case of occurrence of major unfavorable incident in the customers, the major incident reporting mechanism is established in order to timely adopt countermeasures. b. Liquidity risk The assessment scope includes appropriateness of IBFC’s various fund utilizations (mainly include bills, bonds, interbank loans, bank deposit and bills, bonds with reverse repo agreement held) and fund sources (mainly include bills, bonds with repo agreement and interbank loans and financing with other financial institutions). To effectively control the liquidity risk, various fund utilization and source management principles are established and the financing gap limit is specified. In cases where there is a need to exceed the limit due to business needs, it is necessary to report to the President of IBFC for signing approval, and prompt adjustment and improvement shall be made. c. Market risk (including interest rate, equity and commodities risks) The assessment scope includes the risks associated with the possible decrease of market values of the holding portion of various financial instruments due to market price or interest rate fluctuation. For the transaction purpose and various financial positions provided for sale, IBFC performs fair value evaluation on a daily basis and monitors whether relevant transactions are handled within the risk limit authorized. In addition, sensitivity analysis, value at risk (VaR) model is established to plan effective risk return decisions. Market risk assessment reports are prepared periodically and submitted to the management level. The content of the report includes various market risk portions, unrealized earnings, derivatives analysis and relevant risk limit etc. d. Operational risk The assessment scope includes whether the design of the front desk transaction, middle desk risk control, backend settlement and delivery duties has considered the work allocation and responsibility balance. To effectively control the operational risk, each unit shall complete the “Operational Risk Management Monthly Report” on a monthly basis in
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order to continuously track and manage the operational risk events already reported but not yet closed. The risk management unit shall report the operational risk management status to the Risk Management Committee and the board of directors in order to be used as reference for operational management decision making. In addition, each unit shall perform self-audit and report to the Audit Office on a monthly basis. The Audit Office shall perform field audits at each unit at least every half year, and shall track and control the required improvement matters according to the auditing status. D. Hedging and policy for reducing risks, and strategies and procedures for monitoring the continuous effectiveness of hedging and mitigation tools. a. Credit risk Revise relevant internal codes according to internal and external operational environment changes According to the regulatory requirements and risk diversification principles, establish credit risk management codes. Control the guarantee, endorsement of short-term bills provided to one identical enterprise and the total amount of the holding of short-term bills, bonds issued by one identical enterprise and the financial derivative transactions therewith. Regulate the credit risk of the transaction counterparties of financial derivatives. Regulate the credit risk on the corporate bonds held. Establish the risk caps for the bills/bonds, stocks issued by financial institutions and bills/bonds, interbank loan, deposit, purchased term deposit slip etc. guaranteed by such financial institutions. Adjust lending structure, diversify business lending risk Establish the lending total balance limit for one single business. Further regulate the application limit and routine management precautions for real estate business. Control the lending risk for the same affiliate Establish the lending level management limit for the same affiliate, periodically assess its financial credit status, monitor customers with credit downgrade in order to control risks. Be aware of the control and diversification of collaterals Establish the unsecured lending limit and various collateral lending limits, periodically assess the guarantee and liquidity of collaterals.
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b. Liquidity risk Regulate the total limit of the bills, expiration of RP bonds, underwriting and secondary purchase, deposit from interbank loan and bond purchase in each business day, and the financing gap limits within 30 days, 90 days and 180 days, in order to diversify the fund source time period, such that proper liquidity can be maintained. In case of encountering unusual changes in the financing gap, report to the President of IBFC shall be made, and appropriate improvement measures shall be adopted in order to maintain the security of fund procurement. c. Market risk (including interest rate, equity and commodities risks) Utilize the derivative transactions, control the position risks in order to achieve the objective of hedging. Through the operation of the hedging tools to achieve the control of one single bond or a group of bond combinational interest rate risk without the change of the entire position of the original bond spot. In addition, the measures of reducing positions can be adopted to reduce the possible impacts caused by the occurrence of market risk. Cost-benefit analysis shall be performed on the hedging measures first, and after hedging, effectiveness shall be continued to be monitored in order to seek the most optimal configuration of risk and return. d. Operational risk Enhance employee training to allow employees to understand possible occurrence of loss and impacts on the financial status. Improve the reasonability, computerization of operation procedures and operation management mechanism in order to reduce the probability of event occurrence. (2) Waterland Securities A. Strategies and Procedures a. Business Risk Before the opening or handling new type of businesses, each business unit shall establish relevant business rules, and the content shall include various types of risk analysis, risk limits and risk mitigation measures etc. possibly involved, for reporting to the Risk Management Committee for review and submitting to the supervisor with authority for approval in order to proceed accordingly. The risk management procedure includes the four stages: risk identification, assessment, monitoring and reporting etc. Each unit (including front desk, middle desk and backend) shall be able to identify and assess various risks related to performing risks in order to establish
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appropriate business management regulations and rules accordingly, including but not limited to the setting of clear hierarchical responsible approval levels and relevant risk limits, in order to enhance early management. Establish risk control mechanism in each transaction system in order to enhance the risk monitoring and centralized management. Each unit shall generate various daily management reports, and shall submit to the senior management level according to the procedure in order to thoroughly implement the post-event management. b. Market risk According to the operation scale and risk tolerance, Waterland Securities establishes appropriate market risk management mechanism, including but not limited to relevant hierarchical authorization regulations, risk diversification principle, transaction amount and risk limit setting, loss and rights stopping regulations, exceeding limit handling procedure and exemption management principle etc. c. Credit risk According to the operation scale and risk tolerance, Waterland Securities establishes appropriate credit risk management mechanism, including but not limited to relevant hierarchical authorization regulations, risk diversification principle, setting of handling amount and risk limit, disposal of collaterals, exceeding limit handling procedure and exemption management principle etc. d. Operational risk According to the operation scale and risk tolerance, Waterland Securities establishes appropriate operational risk management mechanism, including but not limited to relevant hierarchical authorization regulations, front desk/middle desk/backend operation independence principle, financial asset price verification, valuation model verification, control of transaction with interested parties, internal control system self-assessment operation and loss reporting mechanism etc. e. Liquidity risk According to the operation scale and risk tolerance, Waterland Securities establishes appropriate liquidity risk management mechanism, including but not limited to relevant hierarchical authorization regulations, capital cost control and asset and liability allocation management etc. f. Legal risk According to the operation scale and risk tolerance, Waterland
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Securities establishes appropriate legal risk management mechanism, including but not limited to relevant contract review procedure and legal compliance system etc. B. Organization and structure of relevant risk management system a. Business Risk The board of directors of Waterland Securities approves the risk management policy and guidelines. The Risk Management Committee, Audit Office of board of directors, Risk Management Office, Financial Department, Legal Compliance Office and all business units perform the routine risk management according to the risk management policy and guidelines, various risk management regulations or rules, internal control system and risk management procedure etc., as well as periodically perform internal control self-assessment and legal compliance self-assessment operation, in order to ensure the effectiveness of the internal control system and to reduce the operational risk. b. Market risk Risk Management Committee is established to integrate the operation of market risk management levels, and is responsible for the review of market risk appetite, including the setting of market risk acceptance goal, adjustment and early warning handling, as well as assessment, monitoring and control of market risk. Investment Decision Committee is established and is in charge of the review of investment policy and dynamic adjustment of amounts of transaction (or handling) of each transaction related units within the authorized limit approved by the board of directors. The transaction related unit is responsible for the planning and execution of its business market risk management mechanism, and is staffed with the internal risk control personnel in order to monitor the exposure status of market risk of their unit. In case of discovery of major risk exposure such that there is a likelihood of endangering the sound operation of their unit, they shall report to the unit supervisor immediately and inform the Risk Management Office. The Risk Management Office is independent from the business unit and the transaction activity for the exercise of authorities, and it is responsible for the planning and execution of the market risk management mechanism, as well as monitoring the exposure status of market risk, including the items of total positions, total risk equivalents values, transaction amount, risk limit, risk concentration, risk value and stop of loss and rights mechanism etc.
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c. Credit risk Risk Management Committee is established to integrate the operation of credit risk management levels, and is responsible for the review of credit risk appetite, including the setting of credit risk acceptance goal, adjustment and early warning handling, as well as assessment, monitoring and control of credit risk. The backend personnel of the business unit are responsible for the credit checking operation on the accounts of transaction counterparties. The supervisor with authority reviews the risk level of the transaction counterparties, and set up the handling amount and risk limit of the transaction counterparties according to the hierarchical regulations and credit classification rules. The business unit is responsible for the planning and execution of its business credit risk management mechanism, and is staffed with the internal risk control personnel in order to monitor the exposure status of credit risk of their unit. In case of discovery of major risk exposure such that there is a likelihood of endangering the sound operation of their unit, they shall report to the unit supervisor immediately and inform the Risk Management Office. The Risk Management Office is independent from the business unit and the transaction activity for the exercise of authorities, and it is responsible for the planning and execution of the credit risk management mechanism, as well as monitoring the exposure status of credit risk, including the items of total positions, total risk equivalents values, transaction amount, risk limit, risk concentration, pre-settlement risk and overall financing margin ratio etc. d. Operational risk Risk Management Committee is established to integrate the operational risk management level operations, and is responsible for the establishment and execution of the operational risk management guidelines, in order to assess, monitor and control operational risk through the mechanism of operational risk database etc. The business units are responsible for the planning and execution of business operational risk management mechanism, and perform internal control system self-assessment operation through the execution and reporting of the operational risk management and internal control procedure, including the control of the transactions with interested parties and loss reporting mechanism etc., in order to reduce the probability of occurrences with operational risk. The Audit Office of board of directors is independent from the business units and transaction activities to exercise its authorities, and it performs
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periodic or special auditing related operation procedures, including the audits on items of transaction confirmation, delivery settlement, transactions with interested parties, information security, personnel responsibility allocation and report preparation etc. e. Liquidity risk Risk Management Committee is established to integrate the operation of liquidity risk management levels, and is responsible for the review of liquidity risk appetite, including the setting of liquidity risk acceptance goal, adjustment and early warning handling, as well as assessment, monitoring and control of liquidity risk. The business units are responsible for the planning and execution of its business liquidity risk management mechanism, and are staffed with the internal risk control personnel in order to monitor the exposure status of liquidity risk of their unit. In case of discovery of major risk exposure such that there is a likelihood of endangering the sound operation of their unit, they shall immediately report to the unit supervisor and inform the Financial Department and Risk Management Office. The Financial Department and Risk Management Office are independent from the business units and transaction activities to exercise their authorities. The Financial Department is responsible for the planning and execution of the fund liquidity risk and asset/liability risk etc. control mechanism. The Risk Management Office is responsible for planning and execution of the market liquidity risk control mechanism. f. Legal risk Risk Management Committee is established to integrate the legal risk management level operations, and to assess, monitor and control legal risk. Each department and office of the headquarters and each branch are staffed with legal compliance personnel in order to handle legal compliance affairs for their units. The legal compliance unit and all unit legal compliance personnel shall obtain the latest status of laws and regulations, and shall coordinate and communicate with relevant units in order to ensure that all operation and management rules are updated in a timely manner and according to relevant laws, such that all operational activities comply with the regulatory requirements. Documents signed by transaction counterparties shall be submitted to the legal personnel or legal counsel for review, and shall be executed after the approval according to the signing-off procedure in order to prevent loss caused by failure of compliance of relevant laws, contract
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being devoid of legal effect, omission of clauses or insufficient requirements etc. C. Scope and Characteristics of Risk Report and Assessment System a. Business Risk During the performing of any business, the statutory limit and internally specified limit for such business shall not be exceeded. In cases where relevant unit fails to comply with requirements, detailed explanation and improvement plan shall be submitted and reported to the Risk Management Committee or board of directors according to regulations. The Audit Office of the board of directors, Legal Compliance Office, Risk Management Office, Financial Department and relevant business units shall periodically report the business execution status or risk management report to the senior management level, Risk Management Committee or board of directors. The internal risk control personnel of the business unit monitor the exposure status of various risks of their units. In case of any discovery of major risk exposure such that there is a likelihood of endangering the sound operation of the Company, the event occurrence unit shall immediately request the Risk Management Committee to establish strategies and to adopt appropriate measures, as well as report to the Company according to the regulations. The internal risk control personnel of the business unit prepare the business risk autonomous checklist for their units, and after the approval of the unit supervisor, it is submitted to the Risk Management Office for incorporating into the risk management summary report in order to submit it to the President. b. Market risk Risk Management Office monitors the condition of use of the market risk limit on a daily basis, and through the tools of sensitivity analysis, risk value (use the historical simulation method, and the confidence intervals are 95% and 99%), scenario analysis and stress test etc. in order to simulate the possible changes of market risk positions under market fluctuation, and provide it to the senior management level for reference on a daily basis. c. Credit risk Risk Management Office monitors the condition of use of the credit risk limit on a daily basis, and through the tools of various position returnees (according to the type of institutions, type of industry and type of group etc.), margin purchase and short sale of securities level, regular trading of securities level, individual margin ratio, securities business loans and
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unrestricted purpose loan business level, pre-settlement risk and scenario analysis etc. in order to control credit risk and to provide it to the senior management level for reference on a daily basis. d. Operational risk Each business unit performs the routine risk management for its unit, periodically implements the internal control system self-assessment operation. In addition, through the middle desk and backend unit performing mechanisms of the financial asset price verification, valuation model verification and information security etc., the Audit Office of the board of directors periodically or specially audits relevant operation procedures in order to ensure the effectiveness of the internal control system. The operational risk team of the Risk Management Committee performs statistical analysis on the information of the event type, event cause and amount of loss etc. from the operational risk database, in order to summarize and prepare operational risk management report on a quarterly basis for submission to the President and Chairman. In addition, the report is submitted to the Risk Management Committee and board of directors semi-annually in order to be used as the reference for operation management decision making. e. Liquidity risk The business unit examines the liquidity of financial assets through the transaction system and relevant reports. The Financial Department controls fund liquidity risk through relevant reports and fund stress test etc. on a daily basis. The Risk Management Office controls the market liquidity risk through the real-time online security control system and relevant reports. f. Frequency of risk reports The daily reports include the risk management summary report, risk returnee report, risk limit examination summary table, daily own capital adequacy ratio calculation report, integrated risk value report, investment combination position single-day profit/loss scenario analysis, stress test report, inventory position summary table, purchase (sale) equity risk management daily report, interest rate exchange risk management daily report, bond option risk management daily report, structured product daily report, credit transaction concentration daily report, margin purchase and short sale of securities level control summary table, regular transaction of securities level control summary table, margin ratio change scenario analysis, securities business loan and unrestricted purpose loan business level control limit table, fund procurement table, short-term loan maturity statement, commercial paper short-term statement, long-term loan maturity statement, commercial paper (FRCP) statement and bank limit use condition daily
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report etc. The monthly reports include risk asset report, risk limit use status summary table, risk management indicator summary table, control of transaction with interested party other than lending summary table, market risk value, asset/liability maturity date time-limit structure analysis table and interest rate sensitive asset/liability analysis table etc. D. Hedging and policy for reducing risks, and strategies and procedures for monitoring the continuous effectiveness of hedging and mitigation tools In case of encountering situation of financial market violent changes and business strategy changes etc., relevant business unit and the risk management unit shall jointly establish and assess the appropriateness of relevant risk limit; in addition, when it is considered necessary, relevant risk limit shall be revised, and reported to the Risk Management Committee and submitted to the supervisor with authority for approval in order to proceed accordingly. a. Market risk Determine interest rates, exchange rates and relevant target asset price trends according to the economy status, in order to utilize appropriate derivative transactions to avoid exposed risks. For example, during the purchase of bond spot, the bond option or interest rate swap can be used for hedging, and the interest rate sensitivity can be monitored daily. Through reducing the position held or other measures to reduce the market risk exposure level. For example, during the issuance of call warrants, the purchased underlying stocks and the call warrants issued by others can be used to perform dynamic hedging, and use Delta Neutral as the operation principle in order to monitor the hedging differential ratio on a daily. Where an individual financial asset is evaluated to reach the stop loss standard according to the current day closing price (or fair value), unless the law or Waterland Securities specifies otherwise, stop loss shall be forcefully completed within three trading days. When the current year accumulated total loss reaches the annual loss limit, the trading unit shall stop all new transactions, and the event occurrence unit shall submit written report within one business day after the event occurrence to the Chairman for approval in order to execute it accordingly, and shall also report to the latest session of Investment Decision Committee meeting. In cases where the market risk limit is exceeded, the event occurrence unit shall submit detailed explanations and improvement plan to the latest session of Risk Management Committee meeting.
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b. Credit risk Utilize the credit rating management to set up the credit rating limit for self-owned positions. Set up transaction limit and credit limit according to the credit status of the transaction counterparty, monitor the pre-settlement risk and credit exposure status on a daily basis. For the transaction counterparty with increasing risk, measures of reducing its transaction limit, credit limit, restriction on new positions or request for increases of collaterals etc. are adopted. For trading asset of high risk, adopt the margin trade control and brokerage purchase amount rating limit control measures in order to reduce the risk exposure condition. Monitor the condition of use of the margin ratio of each stock, margin purchase and short sale of securities rating limit, regular trading of securities rating limit, securities business loan and unrestricted purpose loan business rating limit etc. on a daily basis. In cases where the credit risk limit is exceeded, the event occurrence unit shall submit a detailed explanation and improvement plan to the latest session of Risk Management Committee meeting. c. Operational risk Through the measures of periodic implementation of internal control system self-assessment operation and employee’s application of fidelity guarantee insurance etc. to reduce or mitigate operational risk. The Audit Office of the board of directors performs the auditing duties, including periodic and special audits, examination and assessment of information, communication of result and subsequent follow-up etc., as well as submits report to the board of directors and Audit Committee periodically in order to reduce the probability of occurrences with operational risk. The operational risk team of the Risk Management Committee performs relevant statistical analysis on the information of event type, event cause and amount of loss etc., and prepares reports periodically for submission to the senior management level in order to be used as references for improving internal control procedures. d. Liquidity risk Utilize the assets/liabilities allocation management, diversify the liquidity risk and prevent overly concentration at one single financial instrument or reliance on one single financial insurance institution. Through fund reporting mechanism to ensure the correctness and immediacy of liquidity management. In cases where the liquidity risk limit is exceeded, the event occurrence
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unit shall submit detailed explanation and improvement plan to the latest session of the Risk Management Committee meeting. (3) Waterland Venture Capital A. Strategies and Procedures a. Market risk: Through the management mechanisms of limit management, investment review and stop loss etc. to control market risk. b. Transaction counterparty risk: None. c. Business risk: Shall prevent issues in liquidity, assets and liabilities shall not be overly concentrated, and shall maintain the diversity of the fund source. B. Organization and structure of relevant risk management system The risk management unit periodically assesses the risk, and the Investment Business Department shall also perform self-assessment in order to reduce the operational risk. C. Scope and Characteristics of Risk Report and Assessment System a. Market risk: Establish the investment amount upper limit for various types of financial instruments, and also establish the interest rate sensitive assets/liabilities gap indicator. b. Transaction counterparty risk: None. c. Business risk; Establish the liquidity risk and assets/liabilities maturity date gap indicator. The risk management unit of Waterland Venture Capital provides various types of financial asset statements during the weekly fund management review meeting, prepares monthly risk management report for submission to the senior management level, and periodically reports to the board of directors. D. Hedging and policy for reducing risks, and strategies and procedures for monitoring the continuous effectiveness of hedging and mitigation tools Waterland Venture Capital does not engage in any activities related to financial derivatives.
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2. Risk exposure quantification information (1)International Bills Finance Corporation A. Credit risk capital charge and risk-based asset amount December 31, 2018 Unit：NT$ thousand Required Risk Risk Weighted Item Charge Asset Sovereigns and their central banks (A) 0 0 Non-central government public sector entities (B) 96 1,198 Banks (including multilateral development banks) (C) 239,258 2,990,725 Corporates (including securities and insurance firms)(D) 8,693,850 108,673,128 Retail-Lending (E) 36,074 450,925 Equity investments (F) 0 0 For the credit extended to the parent company or subsidiary, or lending with the securities issued by the parent company 0 0 or subsidiary as the collateral (G) Other assets (H) 40,710 508,873 Total (I)＝(A)＋(B)＋(C)＋(D)＋(E)＋(F)＋(G)＋(H) 9,009,988 112,624,849
B. Operational risk capital charge and risk-based asset amount December 31, 2018 Unit：NT$ thousand Risk Required Risk Charge Risk Weighted Asset Operational Risk 487,369 6,092,109 Total 487,369 6,092,109
C. Market risk capital charge and risk-based asset amount December 31, 2018 Unit：NT$ thousand Risk Required Risk Charge Risk Weighted Asset Interest Rate Risk 4,845,555 60,569,434 Equity Risk 402,052 5,025,648 Foreign Exchange Risk 16,817 210,216 Commodities Risk 0 0 Options (Simplified Approach) 0 0 Total 5,264,424 65,805,298
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D. Liquidity risk including the analysis of assets and liabilities maturity December 31, 2018 Unit：NT$ million Carrying Value Due in Item Total 181 days to 30 days 31~90 days 91~180 days After 1 year 1 year Asset 208,696 68,930 44,495 15,993 9,016 70,262 Liability 210,706 159,480 24,341 1,016 0 25,869 Gap (2,008) (90,550) 20,154 14,978 9,016 44,394 Cumulative Gap (2,008) (90,550) (70,396) (55,418) (46,402) (2,008)
(2)Waterland Securities A.Capital adequacy ratio December 31, 2018 Unit：NT$ thousand Item Value Net eligible capital (E) 6,642,454 Market risk-weighted assets (A) 1,193,375 Credit risk-weighted assets (B) 492,665 Operational risk-weighted assets (C) 333,791 Total risk-weighted assets (D)=(A)+(B)+(C) 2,019,831 Own capital adequacy ratio=(E)/(D) 329%
B.Market risk December 31, 2018 Unit：NT$ thousand Item Risk-weighted assets 1.Interest rate risk 600,013 2.Stock warrants risk 401,747 3.Foreign exchange risk 179,608 4.Commodities risk 12,007 Total 1,193,375
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C.Credit risk December 31, 2018 Unit：NT$ thousand Item Risk-weighted assets 1. Repurchase agreement 50,114 2. Credit trading (complex method) 48,244 3. Money lending in connection with securities business (total calculation method) 51,004 4. OTC derivatives 773 5. General trading counterparty risk in brokerage trading (total calculation method) 235,366 6. Concentration of trading counterparty in brokerage trading 5,748 7. Accumulated four days of brokerage of foreign securities market in securities trading amount 827 8. On-balance-sheet transactions 100,589 Total 492,665
D.Operational risk December 31, 2018 Unit：NT$ thousand Item Risk-weighted assets Weighted average annual gross profit margin 333,791
E.Liquidity risk December 31, 2018 Unit：NT$ million Carrying Value Due in Item Total 181 days to 30 days 31~90 days 91~180 days After 1 year 1 year Asset 26,963 12,988 885 528 1,266 11,296 Liability 24,415 21,222 2,110 770 113 200 Gap 2,548 (8,234) (1,225) (242) 1,153 11,096 Cumulative Gap 2,548 (8,234) (9,460) (9,701) (8,548) 2,548
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7.6.3 Impacts on the finance and business of the Company due to domestic/foreign important policies and changes of laws, and the countermeasures 1. For changes in domestic or foreign important polices and laws, relevant department personnel of the Company and subsidiaries perform pre-analysis and assessment of the impacts on various businesses, and timely adjust the the internal relevant business strategies and operation procedures in order to cope with the changes of relevant policies or laws. 2. To encourage the financial service industry and relevant industries in the application of innovative technologies, to increase financial service efficiency, quality and popularity, the Legislative Yuan passed the third reading on the “Financial Technology Development and Innovative Experimentation Act” on December 29, 2017, promulgated by the President on January 31, 2018, and officially set for implementation on April 30, 2018 by the Executive Yuan. The content of the provisions includes the application, examination, supervision and management of financial technology innovative experimentation, consumer protection related procedures, and experimentation period regulation adjustment. In addition, except that the Money Laundering Control Act, Counter-Terrorism Financing Act and relevant laws, decrees and administrative rules cannot be excluded, the rest of regulations, decrees or administrative rules as well as relevant administrative liabilities of applicants etc. may be excluded. Furthermore, to cope with the digital service development trend and to satisfy consumer needs, FSC announced the policy for the permission on the establishment of internet-only bank on April 26, 2018, and also amended parts of the provisions of the “Standards Governing the Establishment of Commercial Banks” and “Regulations Governing Investments in Other Enterprises by Commercial Banks” on November 14, 2018, as well as announced relevant instructions on the application for the establishment of internet-only bank, specifying the application acceptance time and the required application documents for applicants. During the application for the establishment, business items can be applied at the same time. In addition to the application of suitable business items according to Article 71 of the Banking Act, applicants may also apply for (1) money trust business; (2) credit card business; (3) electronic payment business, at the same time. For applicants planning for the internet-only bank application and the foreign exchange business related to businesses approved by FSC, such applicants may submit application to the Central Bank according to relevant regulations for foreign exchange business after the approval for establishment is obtained from FSC. The Company and subsidiaries will continue to pay attention to all financial policy permissions of the competent authority, and will also develop new businesses in order to head toward the multi-core business with balanced development, in order to become a professional and efficient financial service group.
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3. To strengthen the anti-money laundering and counter terrorism financing mechanism, and to cope with the 2018 Asia/Pacific Group on Money Laundering (APG) on the third round of mutual accreditation on our nation, FSC establishes the “Regulations Governing Anti-Money Laundering of Financial Institutions”, “Regulations Governing Reporting on the Properties or Property Interests and Locations of Designated Sanctioned Individuals or Entities by Financial Institutions” and other administrative rules and autonomous regulations etc. according to the “Money Laundering Control Act’, “Counter-Terrorism Financing Act” along with the consideration of the 40 recommendations announced by the Financial Action Task Force (FATF). In addition, to strengthen the financial institutions’ execution of anti-money laundering and counter terrorism financing operations, FSC also establishes the “Regulations Governing Internal Audit and Internal Control System of Anti-Money Laundering and Countering Terrorism Financing of Banking Business and Other Financial Institutions Designated by the Financial Supervisory Commission”. The Board of Directors prioritize AML and Counter-Terrorism works in the Group, and The Company and subsidiaries have already established various internal control measures according to relevant regulations and have implemented such control measures thoroughly. The Group also continues relevant training to improve related expertise and deepens AML and Counter-Terrorism culture, and consequently implements it. 4. To prevent tax payers to use financial information confidentiality to conceal income or assets at foreign financial institutions in order to avoid tax payment burden, the Ministry of Finance have reviewed the execution information exchange of countries and international peer examination standards provided by the economic collaboration and development organization as well as the Common Reporting Standard for Automatic Exchange of Financial Account Information in Tax Matters (CRS) announced by such organization, in order to establish the “Regulations Governing the Implementation of the Common Standard on Reporting and Due Diligence for Financial Institutions” on November 16, 2017. The financial institutions in our nation will perform checking on the non-R.O.C. tax payer citizen accounts, followed by conducting tax-purpose financial account information exchange with the participating countries in order to establish consistent international standards and to increase the cross-nation mutual collaboration benefit. All subsidiaries under the Company will perform the tax-purpose financial account information exchange due diligence review starting in 2019, and after the review, the obligation for reporting to the competent authority of taxation will be fulfilled. 7.6.4 Impacts on the finance and business of the Company due to changes in technology and industry, and the countermeasures The Company considers stable business as the priority for the operation, and also emphasizes risk control during the development of business and increases in profit. Utilize information technology, develop secured internet environment and increase operational efficiency and quality. As the industry undergoes rapid
Review of Financial Conditions, Financial Performance, and Risk Management 179
changes, regardless of lending cases, financing cases or investment cases, the content of an individual case becomes complicated day after day. In case of occurrence of unfavorable events, customer and industry latest status is obtained timely through the customer database, the risk exposure amount is reduced, and all subsidiaries are supervised to perform dynamic adjustments on relevant businesses in order to cope with the impacts caused by the changes in the industry. Regarding the information security risk, the Company has conducted inspections on the network equipment, server equipment, network security, software/hardware security setting and personal information protection etc., and no material operational risks are found. 7.6.5 Impacts on the Company due to the Company’s or subsidiaries’ image changes, and the countermeasures In cases where the images of the Company and subsidiaries are subject to negative changes, it may affect the views of customers on the Company such that their intention for business relationship with the Company can be reduced. For any false reports related to the financial status or business of the Company and subsidiaries made by the mass media, the Company shall announce material information immediately to provide clarification and explanation, or the spokesperson shall provide explanation to the public. When it is considered necessary, emergency responsive team shall be formed to prevent the event from spreading and expansion, as well as to reduce the unfavorable impacts to the minimum in order to protect the rights and benefits of the Company and shareholders. The Company and all subsidiaries shall maintain the rights and benefits of the shareholders, customers and employees with the best effort; in addition, the Company and all subsidiaries shall also actively feed back to the society, fulfill corporate responsibility, enhance corporate governance and improve corporate image. IBFC donates funds to establish the “Waterland Charity Foundation” specialized in the handling of assistance to disadvantaged groups in the society, provide assistance of fund resources etc. in order to implement the concept of long-term society feedback and to fulfill the social responsibility as a corporate citizen. 7.6.6 Expected benefit, possible risk and countermeasure for merger and acquisition The Company performs M&A activities based on the primary objective of increasing the rights and benefits of the shareholders. Through M&A, the business scope can be expanded, and asset scale, sales channels as well as market share are all increased in order to achieve the benefits such as cross-selling etc. During M&A, it is also possible to face the issues of improper target, market premium price too high, or difficulty in integration due to corporate culture difference after merger, loss of outstanding talents, gaps in relevant working experience, business synergy fails to reach the expected level etc. Therefore, it is
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necessary to perform careful assessment during the process, to conduct due diligence, and entrust professional institution to perform the assessment depending upon the needs in order to reduce the risk of failure and loss to the minimum. 7.6.7 Risk encountered due to business centralization and the countermeasure The business scope of the subsidiaries of the Company include financial professional fields of bills, securities and venture capital etc., and the Company uniformly develops bills/bonds trading, lending, securities transaction and investment businesses in order to head toward the diverse development, thereby reducing the risks generated due to business concentration. The Company also establishes the transaction upper limits for the lending of one individual customer or group or securities trading business in order to further reduce the risk of business concentration. In addition, through M&A and integrated marketing among subsidiaries, the Company is able to achieve the diversification of the business or profit concentration risk. The credit extension of the subsidiary, IBFC, is mainly in the guarantee service, and to diversify the lending risk and the credit risk management including services other than lending, it has established the “Credit Risk Management Regulations” in order to regulate the credit limit by business type, collateral type, same enterprise, same affiliate, interested party etc., such that it is able to continuously monitor the effectiveness and to seek most optimal configuration for risk and return. The revenue of the brokerage business of the subsidiary, Waterland Securities, has more than 60% concentrated in the handling charge income and the interest income accounts for approximately more than 20% of the brokerage business revenue. The former income value is subject to impacts of the market total transaction fluctuation, and the later income value can be increased/decreased due to market status. To reduce the risk generated due to business concentration, the brokerage business unit not only follows the regulations of the competent authorities but also demands the thorough implementation of standard operation procedures for various aspects of business risk control, and complies with the risk management system, establishes various business limits as well as establishes relevant risk control mechanisms, in order to rigorously execute the internal control system and to reduce the operational risk. Another subsidiary, Waterland Venture Capital, is a professional venture capital company, and the industry and amount of the investment cases are of diversification, such that there is no risk of business concentration. 7.6.8 Impacts, risks and countermeasures when directors or shareholders with shareholding percentage exceeding 1% transfer or sell large quantity of shares Norwares Co., Ltd. became the largest shareholder of the Company; the
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shares were acquired from its controlling company ‘Norwares Overseas Inc.’ The transaction is between the same related parties, hence such change does not affect the Company’s operation. The Company’s shareholders follow legal procedures to elect directors and independent directors in the shareholders’ general meeting, and directors perform duties by relevant regulations, which is under the governance of competent authority. 7.6.9 Impacts, risks and countermeasures of change in management rights The Company is not subject to any change of management rights in 2018. 7.6.10 Litigation or non-litigation cases with results possibly having major impacts on the rights and benefits of the shareholders or securities price of the Company 1. The Company: None. 2. International Bills Finance Corporation: None 3. Waterland Securities (1) Due to the case where customer, ○○ Yi, at Dunbei Branch of Waterland Securities engaged in the credit default of Pihshiang stocks, Waterland Securities suffered the damage for an amount of NTD 28,377,793. After Waterland Securities filed lawsuit to claim compensation, the first-instance judgment ruled unfavorable to Waterland Securities, but the second-instance judgment ruled remand to the Taipei District Court. Waterland Securities won the case on April 25th, 2019. (2) Due to the case where customer, ○○ Chu, at Dunbei Corporate Branch of Waterland Securities engaged in the credit default of Pihshiang stocks, Waterland Securities suffered the damage for an amount of NTD 42,302,000. After Waterland Securities filed lawsuit to claim compensation, the first-instance judgment of Taipei District Court ruled in favor to Waterland Securities completely on January 11, 2019. The case is currently at second-instance in High Court. (3) Due to the case where the customer ○○ Lee of the Brokerage Department (originally as Luzhou Branch) of Waterland Securities engaged in credit default of Howarm stocks, Waterland Securities suffered the damage for an amount of NTD 14,371,958, and the customer failed to make repayment according to the contract. Waterland Securities has lawsuit to claim compensation on June 28, 2018, and the case is current pending the first instance of the Taipei District Court for trial. (4) Due to the case where the customer ○○ Lai of the Brokerage Department (originally as Luzhou Branch) of Waterland Securities engaged in credit
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default of Howarm stocks, Waterland Securities suffered the damage for an amount of NTD 6,757,766, and the customer failed to make repayments according to the contract. Waterland Securities has lawsuit to claim compensation on June 28, 2018, and the case is current pending the first instance of the Taipei District Court for trial. 4. Waterland Venture Capital: None. 5. Directors, presidents, substantial responsible person of the Company and subsidiaries, or major shareholders holding exceeding 1% and their affiliates: None. 7.6.11 Other significant risks and countermeasures 1. Information security management status of the Company: The Company has completed the “Information Security Event Reporting System” in order to facilitate each company in the Group to report events of cyber attack, illegal intrusion, service interruption, virus infection and equipment abnormality etc. In addition, the Company will continue to construct the “Information Security Platform” in order to be used for matters of information security event reporting, information security technical analysis and the promotion of information security policies of the competent authority etc. for enterprises in the Group.
Review of Financial Conditions, Financial Performance, and Risk Management 183
7.7 Emergency response mechanism 7.7.1 Emergency response regulations 1. The Company establishes the “Group Operation Emergency Response Countermeasures” to clearly specify the command system and countermeasures for the Company and subsidiaries during occurrence of major incidents. According to the emergency handling policy and procedure, “Operation Emergency Response Task Force” is established. Depending upon the level and nature of the event occurred, a task force is formed by all department supervisors in order to perform analysis and assessment on various solutions of emergency handling, and to obtain the latest status update, provide proposal or submit revised countermeasure plans in order to satisfy actual needs. 2. For incidents of natural disasters, fire alarm or infectious diseases etc., such events are handled and reported according to relevant regulations specified in the “Disaster Emergency Countermeasure Handbook”. In addition, irregular drills and educational training courses are organized depending upon the needs in order to improve personnel’s responsive ability and emergency awareness, such that the impact of major incidents on the business operation of the Company is reduced. 7.7.2 Major incident reporting management 1. To improve the management performance of the Company on affiliates and to strengthen the risk control of the Company and subsidiaries, “Affiliate Report Management Guidelines” is established in order to specify the events and timing required to be notified by each subsidiary, thereby establishing an appropriate reporting management process. 2. Establish an emergency contact reporting system, member formation and responsibilities according to the “Group Operation Emergency Response Countermeasures” and “Disaster Emergency Countermeasure Handbook” in order to ensure the smoothness of the reporting system and to increase the efficiency of the reporting process. 7.8 Other significant incidents None
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VIII. Special Disclosure
8.1 Information of Affiliated Enterprises
8.1.1 Consolidated Business Report of Affiliated Enterprises 1. Organizational Chart of Affiliated Enterprises
December 31, 2018 Waterland Financial Holding Co., Ltd. NT$ in thousands HK$ in thousands US$ in thousands
Waterland Venture Capital International Bills Finance Waterland Securities Co., Co., Ltd. Corp. Ltd. Stake ：100% Stake：100% Stake：58.09% Number of shares held： Number of shares held： Number of shares held： 154,000,000 shares 1,809,000,000 shares 435,660,057 shares Investment amount： Investment amount： Investment amount： NT$ 1,540,000 NT$ 21,249,131 NT$ 4,322,776
Paradigm Asset Management Waterland Futures Co., Ltd. Waterland Securities Waterland Securities (BVI) Co., Ltd. (Note 1) Stake：99.88% Investment Consulting Co., Co., Ltd. Stake: 100% Number of shares held： Ltd. Stake：100% Number of shares held: 59,930,244 shares Stake：100% Number of shares held： 41,000,000 shares Investment amount： Number of shares held： 5,581,620 shares Investment amount: NT$ 586,831 9,000,000 shares Investment amount：
NT$ 1,071,625 Investment amount： US$ 5,582 NT$ 115,803
Note1: On April 11, 2018, FSC approved the change of the Chinese IBF Financial Holding Co., Waterland Securities (HK) name of “Paradigm Asset Management Co., Ltd.” to “Waterland Ltd. Co., Ltd. (Note2) Paradigm Asset Management Co., Ltd.”, and the base date of Stake ：100% Stake：100% such change is June 1, 2018.On January 31, 2019, the board of Number of shares held： Number of shares held： directors’ special meeting of the Waterland Securities Co., Ltd. 30,100 shares 43,000,000shares Investment amount： passed the resolution on the disposal of the 80% of shareholding Investment amount： USD$ 30,100 of the (Waterland) Paradigm Asset Management Co., Ltd., and it HK$ 43,000 was approved by FSC on February 27, 2019. The transaction was completed on March 4, 2019. Note2: The Board of Directors for Waterland Securities has passed a resolution on August 24, 2012 to dissolve or dispose of Guo Want International Waterland Securities (HK). It is now undergoing the dissolution Leasing Corp. and settlement procedures. Stake：100% Investment amount： USD$ 30,000
Special Disclosure 185
2. Information on Affiliated Enterprises December 31, 2018 NT$ in thousands HK$ in thousands US$ in thousands Date of Company Address Paid-in Capital Business Activities Inception Certification and underwriting of short-term bills Brokerage and proprietary trading of short-term bills Guarantee and endorsement of short-term bills Acting as agent for interbank call loans Advisory services on corporate finances Proprietary trading of government bonds Certification and underwriting of financial debentures 2F/9-11F, Proprietary trading of financial debentures International No.167, Sec. 2, NT$ Financial derivatives sanctioned by the regulatory Bills Finance 1977/01/05 Nanjing E. Rd., authority Corporation Taipei, 18,090,000 Proprietary trading of corporate bonds Taiwan(R.O.C.) Investments in equity related commodities Proprietary trading of bonds and securitized products (Limited to fixed-income securities ) at business outlets Proprietary trading of foreign currency bonds Convertible bond asset swap (CBAS) services Cross-selling in conjunction with WFH affiliates Brokerage of securities transactions on the centralized market Brokerage of securities transactions at business outlets Financing for margin lending and short sales Proprietary trading of securities on the centralized market 15F, No.188, Waterland Proprietary trading of securities at business outlets Sec. 5, Nanjing Securities 1990/02/02 NT$ 7,500,000 Underwriting of securities E. Rd., Taipei, Co., Ltd. Brokerage of foreign securities transactions Taiwan(R.O.C.) Serving as agent of stock affairs Services on trading of equity-related futures Services on short-dated bills Proprietary trading of equity-related futures Equity advisory services Other equity-related operations sanctioned by the regulatory authority Waterland 8F-6, No.188, Direct provision of capital to investees Venture Sec. 5, Nanjing Provision of management expertise and consultative 2004/07/09 NT$ 1,540,000 Capital Co., E. Rd., Taipei, services to investees Ltd. Taiwan(R.O.C.) Waterland Securities investment advisory services 7F-7, No. 188, Securities Discretionary investment services Sec. 5, Nanjing Investment 1996/12/27 NT$ 90,000 Other operations sanctioned by the regulatory E. Rd., Taipei, Consulting authority Taiwan(R.O.C.) Co., Ltd. 8F, No. 188, Futures brokerage Waterland Sec. 5, Nanjing Futures investment advisory services Futures Co., 1993/11/23 NT$ 600,000 E. Rd., Taipei, Futures proprietary trading Ltd. Taiwan(R.O.C.) Waterland Portcullis General investment business 2008/08/15 US$ 5,582 Securities TrustNet
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Date of Company Address Paid-in Capital Business Activities Inception (BVI) Co., Chambers,P. O. Ltd. Box 3444, Road Town, Tortola, British Virgin Islands Room 211, 2F, Securities brokerage business, proprietary trading No.499, Wing business and underwriting business Waterland Hing Industrial Securities Building, Castle 2008/10/13 HK$ 43,000 (HK) Co., Peak Road, Lai Ltd. Chi Kok, Kowloon, Hong Kong Paradigm 5F,No. 6, Sec. 3, Securities investment trust services Asset Minquan E. Rd., Futures Trust Services Management 2001/12/25 Taipei, Taiwan NT$ 410,000 Securities investment advisory services Co., Ltd. (R.O.C.) Discretionary investment services Other services sanctioned by the regulatory authority IBF Portcullis General investment business Financial TrustNet Holding Co., Chambers, P.O. Ltd. 2012/01/19 Box 3444, Road US$ 30,100 Town, Tortola, British Virgin Islands Guo Want 26F, Building 4, Financial leasing International Nanjing Leasing Leasing Financial City, Procurement of leased property from abroad Corp. 2012/05/23 No.248, Lushan US$ 30,000 Leased property residual value disposal and Road, Jianye maintenance District, Nanjing Counseling for leasing transactions; non-financing 210019,China guarantee
Special Disclosure 187
3. Directors, Supervisors and Presidents of Affiliates December 31, 2018 Shares Held by the Shares Held by the Entity Representative Entity Company Position Representative (Note 1) Represented Stake Number of Stake Number of Shares (%) Shares (%) Chairman Chi-Lin Wea 0 0 Director Chung-Hui Yeh 0 0 Michael Y.J. Director 0 0 Ding Director I-Kun Chan 0 0 Director Michael Chen 0 0 Director Chao-Feng ChenWaterland 0 0 International Director Wen-Ching YangFinancial 1,809,000,000 100 0 0 Bills Finance Independent Holding Co., Fei Tang 0 0 Corporation Director Ltd. Independent Yeong-Chyan 0 0 Director Wu Supervisor Nai-Rong Chi 0 0 Tzu-Chiang Supervisor 0 0 Wang Supervisor Ying Wu 0 0 President Yen-Lang Chiu - - - - - Chairman Steven Hung 0 0 Vice Chairman Ho Chih-Chiang 0 0 Director Mu-Chuan Lan 0 0 Waterland Michael Y.J. Director Financial 435,660,057 58.09 0 0 Ding Holding Co., Director Yen-Mao Lin 0 0 Ltd. Director Cheng-Feng Shih 0 0 Director Chang-Yi Chen 776,566 0.10 Director Kuo-Li Lai 0 0 Mega International Director Hsiu-Ling Wu 77,311,248 10.31 0 0 Commercial Bank Waterland Bank of Director Yun-Peng Chang 37,026,460 4.94 0 0 Securities Co., Kaohsiung Ltd. The Shanghai Commercial & Director Kuo-Kuei Peng 35,175,137 4.69 0 0 Savings Bank, Ltd. Huang-Chuan - Director - - - - Chiu Independent - Chuang-Yuan Li - - - - Director Independent Jui-Hsiang - - - - - Director Huang Independent - Hsiao-Chen Lin - - - - Director Hsiang-Wen President - - - - - Wang
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Shares Held by the Shares Held by the Entity Representative Entity Company Position Representative (Note 1) Represented Stake Number of Stake Number of Shares (%) Shares (%) Chairman Kuan-Ju Chen 0 0 Michael Y.J. Director 0 0 Ding Waterland Waterland Financial Director Chao-Feng Chen 154,000,000 100 0 0 Venture Capital Holding Co., Director Teng-Ke Wu 0 0 Co., Ltd. Ltd. Supervisor Kang-Jung Chan 0 0 Supervisor Chao-Kuo Chou 0 0 President Ju-Shan Liu - - - - - Yang-Kuang Chairman 0 0 Waterland Chen Waterland Securities Director Chao-Feng Chen 0 0 Securities Co., 9,000,000 100 Investment Director Kuan-Ju Chen 0 0 Ltd. Consulting Co., Supervisor Mei-Chuan Li 0 0 Ltd. Supervisor Hsiu-Lin Ping 0 0 President Po-Wen Wang - - - - - Chairman Steven Hung 0 0 Waterland Hsiang-Wen Director Securities Co., 59,930,244 99.88 0 0 Wang Waterland Ltd. Director Kuan-Ju Chen 0 0 Futures Co., Supervisor Kang-Jung Chan - - - - - Ltd. Supervisor Hui-Lun Tsai - - - - - Supervisor Yao-Tien Shih - - - - - President Tzu-Chi Li - - - - - Director Steven Hung 0 0 Waterland Waterland Hsiang-Wen Securities(BVI) Director Securities Co., 5,581,620 100 0 0 Wang Co., Ltd. Ltd. Director Kuo-Kuang He 0 0 Hsiang-Wen Director Waterland 0 0 Wang Waterland Securities (BVI) 43,000,000 100 Director Kuo-Kuang He 0 0 Securities (HK) Co., Ltd. Director Shih-Lung Chen 0 0 Co., Ltd. Director Shih-Lung Chen - - - - - President Chairman Wu-Chung Kao 0 0 Director Hsiu-Lin Ping 0 0 Waterland Paradigm Asset Director Hui-Lun Tsai 41,000,000 100 0 0 Securities Co., Management Director Yen-Mao Lin 0 0 Ltd. Co., Ltd. Supervisor Tien-Shang Fan 0 0 Supervisor Chi-Chung Chen 0 0 President Christina Peng - - - - - Michael Y.J. Director 0 0 Ding IBF Financial Director Andrew Chiu Waterland 0 0 Holding Co., Wen-Chuan Venture Capital 30,100 100 Director 0 0 Ltd. Hung Co., Ltd. Director Tainyi Luor 0 0 Director Kuan-Ju Chen 0 0
Special Disclosure 189
Shares Held by the Shares Held by the Entity Representative Entity Company Position Representative (Note 1) Represented Stake Number of Stake Number of Shares (%) Shares (%) Chairman Ju-Shan Liu 0 0 Director Andrew Chiu 0 0 IBF Financial Guo Want Director Tainyi Luor 0 0 Holding Co., - 100 International Wen-Chuan Director Ltd. 0 0 Leasing Corp. Hung Supervisor Milton Huang 0 0 President Chun-Hsin Liu - - - - - Note 1: The shares held by a representative include the shares held by his/her spouse and minor children.
4. Operating Performance of Subsidiaries December 31, 2018 NT$ in thousands RMB$ in thousands US$ in thousands HK$ in thousands Net EPS Income (in Paid-in Total Stockholders’ Operating Operating Company Currency Total Assets (Loss) dollar) Capital Liabilities Equity Revenue Profit (After (After tax) tax) International Bills Finance NTD 18,090,000 231,442,068 203,192,201 28,249,867 2,923,499 2,311,567 1,895,169 1.05 Corporation Waterland Securities Co., NTD 7,500,000 37,970,333 29,169,455 8,800,878 2,269,277 307,616 324,597 0.43 Ltd. Waterland Venture Capital NTD 1,540,000 2,229,418 824,890 1,404,528 148,103 98,109 97,825 0.64 Co., Ltd. Waterland Securities Investment NTD 90,000 109,073 8,204 100,869 54,964 191 982 0.11 Consulting Co., Ltd. Waterland NTD 600,000 4,116,726 3,364,456 752,270 250,494 12,896 25,733 0.43 Futures Co., Ltd. Waterland Securities (BVI) USD 5,582 710 0 710 0 0 0 0 Co., Ltd. Waterland Securities (HK) HKD 43,000 6,307 204 6,103 0 0 -252 -0.006 Co., Ltd. Paradigm Asset Management Co., NTD 410,000 447,457 26,383 421,074 113,807 -44,851 -44,558 -1.09 Ltd. IBF Financial USD 30,100 119,103 86,306 32,797 9,200 2,494 1,731 - Holding Co., Ltd. Guo Want International RMB 186,734 818,039 592,777 225,262 68,002 15,588 11,465 - Leasing Corp. Note 1: Waterland Securities (BVI) Co.,Ltd. share par value is USD$1. Note 2: Waterland Securities (HK) Co., Ltd. share par value is HKD$1.
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8.1.2 Consolidated Financial Statements (Please refer to pages 191~329) 8.1.3 Affiliation Report The Company is not a subordinate company of another company as described in the Chapter of Affiliated Enterprises of the Company Act. 8.2 Private Placement Securities in the Most Recent Years None 8.3 Shares in the Company Held or Disposed of by Subsidiaries in the Most Recent Years None 8.4 Other events requiring further explanation None 8.5 For 2018 and up to the printing date of the annual report, occurrence of events having material impact on shareholders' rights and interests or securities prices according to Subparagraph 2, Paragraph 3, Article 36 of Securities and Exchange Act In the board of director’s extraordinary meeting held on January 8th, 2019, a resolution was made for joint venture with Rakuten Bank, Ltd. and Rakuten Card Co., Ltd. to set up an internet-only bank. The Company’s stake is 49%, and chairman or the one he designates is authorized to sign joint venture contracts, set up internet-only bank, and conduct necessary administrative procedure to competent authority. The joint venture is to be permitted by the competent authority.
2018 Consolidated Financial Report 191
Appendix: 2018 Consolidated Financial Report
Waterland Financial Holding Co., Ltd. Declaration on Consolidated Financial Statements of Affiliated Enterprises
March 25, 2019
According to ‘Criteria Governing Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises’, the Company is not required to provide consolidated financial statements of affiliated enterprises, as affiliates shall be included in that financial report are identical with those included in the consolidated financial statements with subsidiaries which is edited following IFRS 10, and all related information is disclosed in the aforementioned financial statements.
Declared by
Waterland Financial Holding Co., Ltd.
Chairman of the Board of Directors: Chi-Lin Wea
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REPORT OF INDEPENDENT ACCOUNTANTS TRANSLATED FROM CHINESE
PWCR18004368 To the Board of Directors and Shareholders of Waterland Financial Holdings
Opinion We have audited the accompanying consolidated balance sheets of Waterland Financial Holdings Co., Ltd. and its subsidiaries (the “Group”) as at December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, of changes in equity and of cash flows for the years then ended, and 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 at December 31, 2018 and 2017, 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 Financial Holding Companies”, “Regulations Governing the Preparation of Financial Reports by Publicly Held Bills Finance Companies”, “Regulations Governing the Preparation of Financial Reports by Securities Issuers”, “Regulations Governing the Preparation of Financial Reports by Securities Firms”, “Regulations Governing the Preparation of Financial Reports by Futures Commission Merchants” and the International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations, and SIC Interpretations as endorsed by the Financial Supervisory Commission. Basis for opinion We conducted our audits in accordance with the “Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants”, “Regulations Governing Auditing and Certification of Financial Statements of Financial Institutions by Certified Public Accountants” and generally accepted auditing standards in the Republic of China (ROC GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the Code of Professional Ethics for Certified Public Accountants in the Republic of China (the “Code”), and we have fulfilled our other ethical responsibilities in accordance with the Code. 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 of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole and, in forming our opinion thereon, we do not provide a separate opinion on these matters. Key audit matters for the Group’s consolidated financial statements of the current period are as follows:
2018 Consolidated Financial Report 193
Provision for guarantee obligation of financial guarantee contracts Description For the accounting policy for provision for guarantee obligation of financial guarantee contracts, please refer to Note 4(14) of the financial statements; for critical accounting judgements, estimates and key sources of assumption uncertainty, please refer to Note 5(2) of the financial statements; as of December 31, 2018, provision for guarantee obligation was NTD $1,284,508 thousand； for disclosure of the financial statement line item, please refer to Note 6(16) of the financial statements. The subsidiary, IBFC’s provision for guarantee obligation of financial guarantee contracts is based on the measurement of expected credit losses (“ECLs”) under International Financial Reporting Standards 9 (“IFRS 9”), ‘Financial instruments’. The Company also sets out relating policy and adopts modelling to ensure the provision is recognised in a proper manner. Modelling and parameter assumptions are adopted with reference to actual loss rate in the past years and yearly macro-economic projections in terms of business cycle released by government agencies. If the credit risk of debtors has not been significantly increased since initial recognition, 12-month ECLs is recognised. If the credit risk of debtors has been significantly increased since initial recognition, lifetime ECLs is recognised after taking into consideration factors such as any adverse changes resulted from debtors’ repayment history, industrial information related to payment overdue and the collateral’s value. In addition, in accordance with “Regulations Governing the Procedures for Bills Finance Companies to Evaluate Assets, Set Aside Loss Reserves, and Handle Non-Performing Credit, Non-Accrual Loans, and Bad Debt” and related regulations, after off-balance-sheet credit assets are classified according to the status of their loan collaterals and length of time in arrears, provision for guarantee obligation is calculated based on amount of each classification and their respective fixed rates, to provide guarantee obligation at a sufficient and appropriates amount. Since the measurement of guarantee obligation of financial guarantee contracts involves subjective judgment and numerous assumptions and estimates, we have included provision for guarantee obligation of financial guarantee contracts as one of the key audit matters in our audit.
How our audit addressed the matter Procedures we conducted in response to specific aspects of the above-mentioned key audit matter are summarized as follows: 1. Understood and assessed the reasonableness of the policies, internal control, and modelling and processing procedures related to the provisioning of guarantee obligation. 2. Assessed whether the indicators scaling the significant increase of credit risk are reasonable; selected samples and reviewed to confirm that the classification and calculation are both accurate. 3. Assessed whether the modelling and parameter assumptions are justifiable, for instance, to evaluate the historical loss figures and forward-looking economic factors are properly adopted, and updated on a regular basis. 4. Tested a selection of appraisal reports on debtors’ collateral to assess whether the point in time of estimated future cash flows and assumptions are reasonable and whether the calculation is accurate.
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5. Sampled and tested information on debtors’ time in arrears and status of collaterals for financial guarantee contracts, and confirmed the completeness of the reports and the appropriateness of the logic for classifications; sampled and tested the appropriateness of provisions that were calculated according to classifications and respective fixed rates as stipulated under “Regulations Governing the Procedures for Bills Finance Companies to Evaluate Assets, Set Aside Loss Reserves, and Handle Non-Performing Credit, Non-Accrual Loans, and Bad Debt”. Fair value measurement of unlisted stocks without active market Description For the accounting policy for unlisted stocks without active market (shown as ‘financial assets at fair value through other comprehensive income’), please refer to Note 4(6)(8) of the financial statements; for critical accounting judgements, estimates and key assumption uncertainty, please refer to Note 5(2) of December 31, 2018, the unlisted stocks without active market held by International Bills Finance Corp. was NTD $2,276,597 thousand and was shown as ‘financial assets at fair value through other comprehensive income’ (Level 3 fair value). In lack of an active market, the fair value of the unlisted stocks held by the group. was determined using valuation method. Management measured the fair value by using comparable listed companies in market approach or net assets value approach. The main assumption of market approach is the latest published price to book ratio of comparable listed companies in similar industries, which the calculation is based upon, and discounts on market liquidity or risk particularity. Main assumption of net assets value approach is to assess the total value of individual assets and obligation to reflect the value as a whole. Abovementioned estimation of fair value involves various assumptions and material unobservable inputs which has high uncertainty and relies on the subjective judgment of management. Any changes in judgements and estimates may affect the ultimate result of accounting estimates and have an impact on the financial statements of the Group. Thus, we have included the fair value measurement of unlisted stocks without active market as one of the key audit matters in our audit. How our audit addressed the matter
Procedures we conducted in response to specific aspects of the above-mentioned key audit matter are summarized as follows: 1. Sampled to understand and assess the reasonableness of the policies, internal control, and models for fair value measurement and approval procedures related to the fair value measurement of unlisted stock. 2. Sampled to assess whether the management adopts valuation techniques widely adopted in the industry. 3. Sampled to assess whether the management adopts reasonable parameters from comparable companies. 4. Sampled to examine the inputs and formula in valuation models and to agree supporting documentation with reference information.
2018 Consolidated Financial Report 195
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 Financial Holding Companies”, “Regulations Governing the Preparation of Financial Reports by Publicly Held Bills Finance Companies”, “Regulations Governing the Preparation of Financial Reports by Securities Issuers”, “Regulations Governing the Preparation of Financial Reports by Securities Firms”, “Regulations Governing the Preparation of Financial Reports by Futures Commission Merchants” and the International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations, and SIC Interpretations as endorsed by the Financial Supervisory Commission, 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 audit committee, are responsible for overseeing the Group’s financial reporting process. Auditor’s 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 auditor’s 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 ROC GAAS 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 ROC GAAS, 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
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concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s 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 auditor’s 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. 6. Obtain sufficient appropriate audit evidence regarding the financial information of the 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 of the current period and are therefore the key audit matters. We describe these matters in our auditor’s 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.
Chi, Shu-Mei Chen, Hsien-I For and on behalf of PricewaterhouseCoopers, Taiwan March 25, 2019
------The accompanying consolidated financial statements are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices in the Republic of China governing the audit of such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying consolidated financial statements and report of independent accountants are not intended for use by those who are not informed about the accounting principles or auditing standards generally accepted in the Republic of China, and their applications in practice. As the financial statements are the responsibility of the management, PricewaterhouseCoopers cannot accept any liability for the use of, or reliance on, the English translation or for any errors or misunderstandings that may derive from the translation.
2018 Consolidated Financial Report 197
WATERLAND FINANCIAL HOLDINGS CO., LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2018 AND 2017 (Expressed in thousands of New Taiwan Dollars)
December 31, 2018 December 31, 2017 ASSETS Notes AMOUNT AMOUNT
Assets 11000 Cash and cash equivalents 6(1) and 7 $ 2,812,812 $ 2,562,952 11500 Due from the central bank and 6(2) call loans to banks 2,036,564 7,373 12000 Financial assets at fair value 6(3), 7 and 8 through profit or loss 127,365,213 127,834,741 12100 Available-for-sale financial 8 assets – net - 106,886,402 12150 Financial assets at fair value 6(5) and 8 through other comprehensive income 110,585,462 - 12500 Bills and bonds purchased 6(4) and 7 under resell agreements 1,029,580 124,908
13000 Receivables – net 6(6)(16) and 7 21,516,822 21,756,556 13200 Current income tax assets 6(20) 54 488,533 15000 Equity investments accounted 6(9) for under equity method – net 1,691,762 1,689,547 15500 Other financial assets – net 6(10), 7 and 8 7,707,662 5,248,103 18500 Properties and equipment - net 6(11) and 8 1,827,765 1,865,985
19000 Intangible assets – net 6(12) 224,925 220,263 19300 Deferred income tax assets 6(20) 94,294 116,048 19500 Other assets – net 6(13), 7 and 8 1,093,008 1,071,320
19999 Total Assets $ 277,985,923 $ 269,872,731
(Continued)
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WATERLAND FINANCIAL HOLDINGS CO., LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2018 AND 2017 (Expressed in thousands of New Taiwan Dollars)
December 31, 2018 December 31, 2017 LIABILITIES AND STOCKHOLDERS' Notes AMOUNT AMOUNT EQUITY Liabilities 21500 Due to the central bank and banks 6(2) and 7 $ 28,718,410 $ 37,745,689 22000 Financial liabilities at fair value through profit 6(3) or loss 1,085,929 340,581 22500 Bills and bonds sold under repurchase 6(4) and 7 agreements 183,195,381 170,581,478 22600 Commercial paper payable – net 6(14) and 7 11,924,017 11,231,353 23000 Payables 6(15) and 7 11,133,576 9,720,550 23200 Current income tax liabilities 255,859 230,155 Provisions 24620 Employee benefits provision 6(18) 171,937 191,955 24630 Provision for guarantee obligation 6(16) 1,284,508 1,276,508 24690 Other provisions 6(19) 6,122 6,914 25500 Other financial liabilities 6(17) 3,422,476 1,713,829 29300 Deferred income tax liabilities 6(20) 40,587 58,104 29697 Other Liabilities 626,355 847,040 29999 Total Liabilities 241,865,157 233,944,156 Equity attributable to owner of parent 31100 Share capital 6(21) 31101 Common stock 28,198,659 27,866,659 31500 Capital surplus 6(22) 31500 Share premium 122,240 122,240 Retained earnings 6(23) 32001 Legal reserve 1,640,034 1,403,011 32003 Special reserve 234,587 234,587 32011 Undistributed earnings 1,749,485 2,370,231 Other equity 32500 Other equity interest 649,091 469,817 32600 Treasury shares 6(24) (158,123) ( 158,123) 39500 Non-controlling interests 3,684,793 3,620,153 39999 Total Equity 36,120,766 35,928,575 TOTAL LIABILITIES AND EQUITY $ 277,985,923 $ 269,872,731
The accompanying notes are an integral part of these consolidated financial statements. Chairperson: Chi-Lin Wea President: Yu-Chia Ting Chief Accountant: Hui-Yu Kuo
2018 Consolidated Financial Report 199
WATERLAND FINANCIAL HOLDINGS CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017 (Expressed in thousands of New Taiwan Dollars, except, for earning per share)
Year ended December 31 2018 2017 Items Notes AMOUNT AMOUNT 41000 Interest income 6(5)(25) and 7 $ 3,034,931 $ 2,870,269 51000 Less: Interest expense 6(25) and 7 ( 1,229,985) ( 1,012,522) Net interest income 1,804,946 1,857,747 Net non-interest income 49800 Service fee and commission income, net 6(26) and 7 2,730,091 2,520,349 49820 Gain or losses on financial assets and financial liabilities at fair value 6(27) and 7 through profit or loss 449,080 843,445 49830 Realised gain on available-for-sale financial assets - 335,930 49835 Gains (losses) from sale of fair value through other comprehensive 6(5)(28) financial assets 244,618 - 49840 Realised gains on held-to-maturity financial assets 12(13) - 5,315 49870 Foreign exchange gains (losses) ( 46,965) 675 49880 Asset impairment losses 6(29) ( 11,517) ( 203,627) 49890 Share of profit or loss of associates and joint ventures accounted for 6(9) under equity method 97,788 101,670 49900 Other non-interest income 6(31) 225,115 235,818 49951 Rental income 7 75,415 78,168 49899 Other miscellaneous income, net 6(32) 20,062 567,260 Net profit 5,588,633 6,342,750 58100 Bad debt expenses, commitment and guarantee provision 6(16)(30) ( 1,392) ( 372,757) Operating Expense 58501 Employee benefit expenses 6(33) ( 1,994,852) ( 2,015,248) 58503 Depreciation and amortization 6(34) ( 92,376) ( 92,220) 58599 Other business and administrative expenses 6(35) ( 857,574) ( 846,479) 61000 Consolidated income from continuing operations before income tax 2,642,439 3,016,046 61003 Income tax expense 6(20) ( 489,024) ( 472,230) 69000 Consolidated net income 2,153,415 2,543,816 Items that will not be reclassified to profit or loss 69561 Remesurement of defined benefit plans $ 15,146 ( $ 16,753) 69567 Gains on valuation of investments in equity instruments measured at 6(5) fair value through other comprehensive income 41,413 - 69563 Share of other comprehensive income of associates and joint ventures accounted for under equity method-items that will not be reclassified to profit or loss ( 414) - 69569 Income tax relating to items that will not be reclasssified to profit or 6(20) loss ( 560) 2,847 Items that will be reclassified to profit or loss 69571 Exchange differences on translation of foreign financial statements ( 2,864) ( 67,835) 69572 Unrealised gains on available-for-sale financial assets - 421,202 69587 Losses from investments in debt instruments measured at fair value 6(5) through other comprehensive income ( 572,284) - 69575 Share of other comprehensive income of associates and joint ventures accounted for under equity method-items that will be reclassified to profit or loss ( 27,595) 29,353 69579 Income tax relating to items that will be reclassified to profit or loss 6(20) 47,817 ( 28,329) 69500 Other comprehensive income (net of tax) ( 499,341) 340,485 69700 Total comprehensive income $1,654,074 $ 2,884,301 Net Income Attributed to 69901 Attributed to stockholders of the Company $ 2,021,559 $ 2,370,784 69903 Attributed to non-controlling interests 131,856 173,032 $ 2,153,415 $ 2,543,816 Comprehensive income attributed to 69951 Attributed to stockholders of the Company $ 1,514,961 $ 2,681,767 69953 Attributed to non-controlling interests 139,113 202,534 $ 1,654,074 $ 2,884,301
Earnings Per Share 6(36) Basic and diluted earnings per share $ 0.72 $ 0.85
The accompanying notes are an integral part of these consolidated financial statements. Chairperson: Chi-Lin Wea President: Yu-Chia Ting Chief Accountant: Hui-Yu Kuo 200
WATERLAND FINANCIALHOLDINGS WATERLAND FINANCIAL HOLDINGS CO,. LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017 (Expressed in thousands of New Taiwan Dollars)
Equity attributable to owners of the parent Retained EarningsOther equity interest Unrealized gains or losses on financial Exchange Unrealized assets differences on gains or losses measured at translation of on fair value foreign available-for-sa through other Capital Special Unappropriated financial le financial comprehensive Treasury Non-controlling Common stock surplus Legal reserve reserve earnings statements assets income shares Total Interests Total equity For the year ended December 31, 2017 Balance at January 1, 2017 $ 27,460,748 $ 100,068 $ 1,191,990 $ 234,587 $ 2,116,174 ($ 24,477 ) $ 171,858 $ - ($ 316,245 ) $ 30,934,703 $ 4,097,811 $ 35,032,514 Appropriation of 2016 earnings Legal reserve - - 211,021 - ( 211,021 ) ------
Cash dividends - - - - ( 1,488,342 ) - - - - ( 1,488,342 ) - ( 1,488,342 ) Stock dividends 405,911 - - - ( 405,911 ) ------Net income for 2017 - - - - 2,370,784 - - - - 2,370,784 173,032 2,543,816 Other comprehensive income for 2017 - - - - ( 11,453 ) ( 44,811 ) 367,247 - - 310,983 29,502 340,485 Total comprehensive income - - - - 2,359,331 ( 44,811 ) 367,247 - - 2,681,767 202,534 2,884,301 Share-based payment - 22,172 ------158,122 180,294 - 180,294 Changes in non-controlling interests ------( 680,192 ) ( 680,192 ) Balance at December 31, 2017 $ 27,866,659 $ 122,240 $ 1,403,011 $ 234,587 $ 2,370,231 ($ 69,288 ) $ 539,105 $ - ($ 158,123 ) $ 32,308,422 $ 3,620,153 $ 35,928,575 For the year ended December 31, 2018 Balance at January 1, 2018 $ 27,866,659 $ 122,240 $ 1,403,011 $ 234,587 $ 2,370,231 ($ 69,288 ) $ 539,105 $ - ($ 158,123 ) $ 32,308,422 $ 3,620,153 $ 35,928,575 Effect of retrospective application and retrospective restatement - - - - ( 272,998 ) - ( 539,105 ) 1,223,025 - 410,922 67,229 478,151 Balance at 1 January after retrospective application 27,866,659 122,240 1,403,011 234,587 2,097,233 ( 69,288 ) - 1,223,025 ( 158,123 ) 32,719,344 3,687,382 36,406,726 Appropriation of 2017 earnings Legal reserve - - 237,023 - ( 237,023 ) ------Cash dividends - - - - ( 1,798,332 ) - - - - ( 1,798,332 ) - ( 1,798,332 ) Stock dividends 332,000 - - - ( 332,000 ) ------Net income for 2018 - - - - 2,021,559 - - - - 2,021,559 131,856 2,153,415 Other comprehensive income for 2018 - - - - 4,753 ( 10,998 ) - ( 500,353 ) - ( 506,598 ) 7,257 ( 499,341 ) Total comprehensive income - - - - 2,026,312 ( 10,998 ) - ( 500,353 ) - 1,514,961 139,113 1,654,074 Changes in non-controlling interests ------( 141,702 ) ( 141,702 ) Disposal of investments in equity instruments measured at fair value through other comprehensive income - - - - ( 6,705 ) - - 6,705 - - - - Balance at December 31, 2018 $ 28,198,659 $ 122,240 $ 1,640,034 $ 234,587 $ 1,749,485 ($ 80,286 ) $ - $ 729,377 ($ 158,123 ) $ 32,435,973 $ 3,684,793 $ 36,120,766
The accompanying notes are an integral part of these consolidated financial statements. Chairperson: Chi-Lin Wea President: Yu-Chia Ting Chief Accountant: Hui-Yu Kuo
2018 Consolidated Financial Report 201
WATERLAND FINANCIAL HOLDINGS CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017 (Expressed in thousands of New Taiwan Dollars)
2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax $ 2,642,439 $ 3,016,046 Adjustments Adjustments to reconcile profit (loss) Depreciation and amortisation 92,376 92,220 Interest expense 1,229,985 1,012,522 Interest income ( 3,034,931 ) ( 2,870,269 ) Dividend income ( 22,944 ) ( 150,880 ) Bad debt expenses, commitment and guarantee provision 1,392 372,757 Share-based payment - 30,573 Share of profit or loss of associates and joint ventures accounted for under equity method ( 97,788 ) ( 101,670 ) Loss on disposal of properties and equipment and deferred debits 537 ( 17,286 ) Impairment loss on assets 11,517 203,627 Changes in operating assets and liabilities Changes in operating assets Financial assets at fair value through profit or loss 1,749,464 ( 4,634,491 ) Available-for-sale financial assets - ( 2,549,304 ) Financial assets at fair value through other comprehensive income ( 4,290,426 ) - Bills and bonds purchased under resell agreements ( 904,672 ) 465,054 Held-to-maturity financial assets - 988,502 Receivables ( 94,303 ) ( 6,904,838 ) Other financial assets ( 2,936,112 ) ( 532,032 ) Other assets 2,046 109,948 Changes in operating liabilities Financial liabilities at fair value through profit or loss 745,348 105,453 Bills and bonds sold under repurchase agreements 12,613,903 ( 13,417,382 ) Payables 1,450,281 2,963,142 Employee benefit provision ( 4,872 ) ( 3,767 ) Other provision ( 792 ) ( 41,463 ) Other financial liabilities 1,708,647 259,830 Other liabilities ( 220,685 ) 415,874 Cash inflow (outflow) generated from operations 10,640,410 ( 21,187,834 ) Interest received 3,210,652 2,829,402 Dividend received 113,263 150,647 Cash dividends received from investments accounted for under equity method 70,961 58,923 Interest paid ( 1,266,222 ) ( 960,952 ) Income tax paid (refunded) 150,598 ( 398,301 ) Net cash flows from (used in) operating activities 12,919,662 ( 19,508,115 ) CASH FLOWS FROM INVESTING ACTIVITIES Increase in financial assets carried at cost - ( 182,901 ) Acquisition of properties and equipment (41,665 ) ( 171,965) Proceeds from disposal of properties and equipment 543 159,334 Decrease in operating guarantee deposits - 30,000 Decrease(increase) in clearing and settlement fund ( 545 ) ( 2,408 ) Decrease(increase) in refundable deposits ( 28,207 ) 4,353 Acquisition of intangible assets (19,401 ) ( 16,971) Increase in deferred debits ( 1,708 ) ( 9,554 ) (Increase)decrease of in certificates of deposit pledged (272,700 ) ( 39,386) Net cash flows used in investing activities ( 363,683 ) ( 229,498 ) (Continued)
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WATERLAND FINANCIAL HOLDINGS CO., LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017 (Expressed in thousands of New Taiwan Dollars)
2018 2017
CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in due to the Central Bank and banks ( 9,027,279 ) 19,239,937 Increase in commercial paper payable – net 692,664 3,019,895 Changes in non-controlling equity ( 141,702 ) ( 680,192 ) Transfer of treasury stocks - 157,724 Cash dividends ( 1,798,332 ) ( 1,488,342 ) Net cash flows (used in) from financing activities ( 10,274,649 ) 20,249,022 Foreign exchange adjustments ( 2,279 ) ( 111,771 ) Net increase in cash and cash equivalents 2,279,051 399,638 Cash and cash equivalents at beginning of year 2,570,325 2,170,687
Cash and cash equivalents at end of year $ 4,849,376 $ 2,570,325 The components of cash and cash equivalents Cash and cash equivalents reported in the statement of financial position $ 2,812,812 $ 2,562,952 Due from central bank and call loans to other banks qualified as cash and cash equivalents as defined by IAS 7 2,036,564 7,373 Cash and cash equivalents at end of reporting period $ 4,849,376 $ 2,570,325
Chairperson: Chi-Lin Wea President: Yu-Chia Ting Chief Accountant: Hui-Yu Kuo
2018 Consolidated Financial Report 203
WATERLAND FINANCIAL HOLDINGS AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017 (EXPRESSED IN thousands of New Taiwan dollars)
1. HISTORY AND ORGANISATION (1) Waterland Financial Holding Co., Ltd. (hereinafter referred to as “Waterland Financial Holding” or the “Company”) was incorporated. The Company and its subsidiaries (collectively referred herein as the “Group”) are primarily engaged in underwriting, certification as well as endorsements and guarantees of short-term bills; trading and underwriting securities such as commercial papers and bonds; consignment trading of securities; financing and short selling as well as lending and borrowing business of securities; trading as well as introducing brokerage services of futures; agency and leasing business of real estate and movables as well as venture capital business. (2) As of March 26, 2002, the Company was incorporated pursuant to the Financial Holding Company Act and the Company Law. In connection with the formation of the Company, the shares of International Bill Finance Corporation (hereinafter referred to as “IBFC”), Concord Securities Co., Ltd.and Dadong General Securities Co., Ltd. were exchanged for shares of the Company. The Company was listed on the Taiwan Stock Exchange on the same date with approval of the competent authority. The Company is primarily engaged in financial holding company business. (3) Concord Securities Co., Ltd.and Dadong General Securities Co., Ltd. merged with Waterland Securities Co., Ltd., in October 2002. Waterland Securities Co., Ltd. was the surviving entity (hereinafter referred to as “Waterland Securities”).
2. THE DATE OF AUTHORISATION FOR ISSUANCE OF THE CONSOLIDATED FINANCIAL STATEMENTS AND PROCEDURES FOR AUTHORISATION These consolidated financial statements were authorised for issuance by the Board of Directors on March 25, 2019.
3. APPLICATION OF NEW STANDARDS, AMENDMENTS AND INTERPRETATIONS (1) Effect of the adoption of new issuances of or amendments to International Financial Reporting Standards (“IFRS”) as endorsed by the Financial Supervisory Commission (“FSC”) New standards, interpretations and amendments endorsed by FSC effective from 2018 are as follows:
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Effective date by International Accounting New Standards, Interpretations and Amendments Standards Board Amendments to IFRS 2, ‘Classification and measurement of share-based payment transactions’ January 1, 2018 Amendments to IFRS 4, ‘Applying IFRS 9 Financial instruments with IFRS 4, Insurance contracts’ January 1, 2018 IFRS 9, ‘Financial instruments’ January 1, 2018 IFRS 15, ‘Revenue from contracts with customers’ January 1, 2018 Amendments to IFRS 15, ‘Clarifications to IFRS 15 Revenue from contracts with customers’ January 1, 2018 Amendments to IAS 7, ‘Disclosure initiative’ January 1, 2017 Amendments to IAS 12, ‘Recognition of deferred tax assets for unrealised losses’ January 1, 2017 Amendments to IAS 40, ‘Transfers of investment property’ January 1, 2018 IFRIC 22, ‘Foreign currency transactions and advance consideration’ January 1, 2018 Annual improvements to IFRSs 2014-2016 cycle - Amendments to IFRS 1, ‘First-time adoption of International Financial Reporting Standards’ January 1, 2018 Annual improvements to IFRSs 2014-2016 cycle - Amendments to IFRS 12, ‘Disclosure of interests in other entities’ January 1, 2017 Annual improvements to IFRSs 2014-2016 cycle - Amendments to IAS 28, ‘Investments in associates and joint ventures’ January 1, 2018 Except for the following, the above standards and interpretations have no significant impact to the Group’s financial condition and financial performance based on the Group’s assessment: IFRS 9, ‘Financial instruments’ A. Classification of debt instruments is driven by the entity’s business model and the contractual cash flow characteristics of the financial assets, which would be classified as financial asset at fair value through profit or loss, financial asset measured at fair value through other comprehensive income or financial asset at amortised cost. Equity instruments would be classified as financial asset at fair value through profit or loss, unless an entity makes an irrevocable election at inception to present subsequent changes in the fair value of an investment in an equity instrument that is not held for trading in other comprehensive income. B. The impairment losses of debt instruments are assessed using an ‘expected credit loss’ approach. An entity assesses at each balance sheet date whether there has been a significant increase in credit risk on that instrument since initial recognition to recognise 12-month expected credit losses or lifetime expected credit losses (interest revenue would be calculated on the gross carrying amount of the asset before impairment losses occurred); or if the instrument has objective evidence of
2018 Consolidated Financial Report 205
impairment, interest revenue after the impairment would be calculated on the book value of net carrying amount (i.e. net of credit allowance). The Company shall always measure the loss allowance at an amount equal to lifetime expected credit losses for trade receivables that do not contain a significant financing component. C. The amended general hedge accounting requirements align hedge accounting more closely with an entity’s risk management strategy. Risk components of non-financial items and a group of items can be designated as hedged items. The standard relaxes the requirements for hedge effectiveness, removing the 80-125% bright line, and introduces the concept of ‘rebalancing’; while its risk management objective remains unchanged, an entity shall rebalance the hedged item or the hedging instrument for the purpose of maintaining the hedge ratio. D. The Group has elected not to restate prior period financial statements using the modified retrospective approach under IFRS 9. For details of the significant effect as at January 1, 2018, please refer to Notes 12(13)B and C. E. Information relating to credit risk under IFRS 9 adoption since January 1, 2018 is provided in Note 12(4); Information relating to credit risk under International Accounting Standard 39 (‘IAS 39’) which was adopted before December 31, 2017 is provided in Note 12(13). F. The Group applied the modified retrospective approach in the adoption of IFRS 9. Relevant information as of December 31, 2018 and for the year then ended is disclosed in Note 6 and information as of December 31, 2017 and for the year then ended is disclosed in Note 12(13). (2) Effect of new issuances of or amendments to IFRSs as endorsed by the FSC but not yet adopted by the Group New standards, interpretations and amendments endorsed by the FSC effective from 2019 are as follows: y International New Standards, Interpretations and Amendments Accounting Amendments to IFRS 9, ‘Prepayment features with negative compe January 1, 2019 IFRS 16, ‘Leases’ January 1, 2019 Amendments to IAS 19, ‘Plan amendment, curtailment or settlemen January 1, 2019 Amendments to IAS 28, ‘Long-term interests in associates and joint January 1, 2019 ventures’ IFRIC 23, ‘Uncertainty over income tax treatments’ January 1, 2019 Annual improvements to IFRSs 2015-2017 cycle January 1, 2019 Except for the following, the above standards and interpretations have no significant impact to the Group’s financial condition and financial performance based on the Group’s assessment. The quantitative impact will be disclosed when the assessment is complete: IFRS 16, ‘Leases’ IFRS 16, ‘Leases’, replaces IAS 17, ‘Leases’ and related interpretations and SICs. The standard requires lessees to recognise a 'right-of-use asset' and a lease liability (except for those leases with terms of 12 months or less and leases of low-value assets). The accounting stays the same for lessors, which is to classify their leases as either finance leases or
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operating leases and account for those two types of leases differently. IFRS 16 only requires enhanced disclosures to be provided by lessors. In the first quarter of 2018, the Company reported to the Board of Directors that IFRS 16 has no material impact to the Group. The Company expects to recognise the lease contract of lessees in line with IFRS 16. However, the Group does not intend to restate the financial statements of prior period (collectively referred herein as the “modified retrospective approach”) and the effects will be adjusted on January 1,2019. (3) IFRSs issued by IASB but not yet endorsed by the FSC New standards, interpretations and amendments issued by IASB but not yet included in the IFRSs as endorsed by the FSC are as follows: Effective date by International Accounting New Standards, Interpretations and Amendments Standards Board Amendment to IAS 1 and IAS 8, ‘Disclosure Initiative-Definition of Material’ January 1, 2020 Amendments to IFRS 3, ‘Definition of a business’ January 1, 2020 To be determined by Amendments to IFRS 10 and IAS 28, ‘Sale or contribution of International assets Accounting between an investor and its associate or joint venture’ Standards Board IFRS 17, ‘Insurance contracts’ January 1, 2021 The above standards and interpretations have no significant impact to the Group’s financial condition and financial performance based on the Group’s assessment.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. (1) Compliance statement The consolidated financial statements of the Group have been prepared in accordance with the “Regulations Governing the Preparation of Financial Reports by Financial Holding Companies”, “Regulations Governing the Preparation of Financial Reports by Public Banks”, “Regulations Governing the Preparation of Financial Reports by Securities Issuers”, “Regulations Governing the Preparation of Financial Reports by Securities Firms”, “Regulations Governing the Preparation of Financial Reports by Futures Commission Merchants”, and IAS 34, ‘Interim Financial Reporting’ as endorsed by the FSC. (2) Basis of preparation A. Except for the following items, the consolidated financial statements have been prepared under the historical cost convention: (a) Financial assets and financial liabilities (including derivative instruments) at fair
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value through profit or loss. (b) Dadong General Securities Co., Ltd.Financial assets and liabilities at fair value through other comprehensive income/Available-for-sale financial assets measured at fair value. (c) Defined benefit liabilities recognised based on the net amount of pension fund assets less present value of defined benefit obligation. B. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5. C. In adopting IFRS 9 effective January 1, 2018, the Group has elected to apply modified retrospective approach whereby the cumulative impact of the adoption was recognised as retained earnings or other equity as of January 1, 2018 and the financial statements for the year ended December 31, 2017 were not restated. The financial statements for the year ended December 31, 2017 were prepared in compliance with International Accounting Standard 39 (‘IAS 39’) and related financial reporting interpretations. Please refer to Notes 12(13) for details of significant accounting policies and details of significant accounts. (3) Basis of consolidation A. Basis for preparation of consolidated financial statements: (a) All subsidiaries are included in the Group’s consolidated financial statements. Subsidiaries are all entities (including structured entities) controlled by the Group. The Group controls an entity when the Group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Consolidation of subsidiaries begins from the date the Group obtains control of the subsidiaries and ceases when the Group loses control of the subsidiaries. (b) Inter-company transactions, balances and unrealised gains or losses on transactions between companies within the Group are eliminated. Accounting policies of subsidiaries have been adjusted where necessary to ensure consistency with the policies adopted by the Group. (c) Profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the non-controlling interests. Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. (d) Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary (transactions with non-controlling interests) are accounted for as equity transactions, i.e. transactions with owners in their capacity as owners. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity. (e) When the Group loses control of a subsidiary, the Group remeasures any investment
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retained in the former subsidiary at its fair value. That fair value is regarded as the fair value on initial recognition of a financial asset or the cost on initial recognition of the associate or joint venture. Any difference between fair value and carrying amount is recognised in profit or loss. All amounts previously recognised in other comprehensive income in relation to the subsidiary are reclassified to profit or loss on the same basis as would be required if the related assets or liabilities were disposed of. That is, when the Group loses control of a subsidiary, all gains or losses previously recognised in other comprehensive income in relation to the subsidiary should be reclassified from equity to profit or loss, if such gains or losses would be reclassified to profit or loss when the related assets or liabilities are disposed of. B. Subsidiaries included in the consolidated financial statements: Ownership (%)
Name of investor Name of subsidiary Main business activities December 31, 2018 December 31, 2017
Brokerage and proprietary trading Waterland Financial International Bills Finance of short-term bills and bonds, 100.00% 100.00% Holding Corporation Underwriting, certification and guarantee of commercial papers
Brokerage of securities Waterland Financial Waterland Securities Co., proprietary trading, underwriting 58.09% 58.09% Holding Ltd.(Note 2) business, margin purchases and short selling of securities, etc Waterland Venture Capital Waterland Financial Co., Ltd. (“Waterland VC Venture capital business 100.00% 100.00% Holding ”) Principal activities include research Waterland Securities analysis commission, advice Waterland Securities 58.09% 58.09% Investment Consulting Co., provision for securities investment as Co., Ltd. Ltd. well as discretionary investment securities Waterland Securities 58.02% 58.02% Waterland Future Co., Ltd. Mainly engaged in futures business Co., Ltd. Paradigm Asset Management Co., Ltd. Waterland Securities 58.09% 58.09% (“Paradigm Asset Securities investment trust business Co., Ltd. Management”) (Notes 3， 4 and 5) Waterland Securities (BVI) Waterland Securities 58.09% 58.09% Co., Ltd. (“Waterland Holding company Co., Ltd. Securities (BVI)”) (Note 1) Waterland Securities (HK) Securities brokerage, proprietary Waterland Securities Co., Ltd. (“Waterland trading and underwriting co- 58.09% 58.09% (BVI) Co., Ltd. Securities (HK) ”) (Note organiser and other related 1) businesses IBF Financial Holding 100.00% 100.00% Waterland VC General investment business Co., Ltd.
Guo Want International IBF Financial Holding 100.00% 100.00% Leasing Corp. (“Guo Want Financial leasing business Co., Ltd. International Leasing”)
Note 1:In August, 2012 the Board of Directors of the subsidiary, Waterland Securities, resolved to authorise the chairman to handle the dissolution or disposal of the subsidiary, Waterland Securities (HK) Co., Ltd. which was reinvested through the subsidiary, Waterland Securities (BVI) Co., Ltd. in accordance with relevant regulations. As of December 31,
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2018, the liquidation has not been completed. Note 2:The Board of Directors of the subsidiary, Waterland Securities, resolved to reduce capital by $1.6 million and eliminated 160,000 thousand shares on July 21, 2017. The record date for capital reduction was October 31, 2017 as the shareholders resolved at the interim shareholder’s meeting on September 8, 2017. Note 3:The Board of Directors of the second-tier subsidiary, Paradigm Asset Management, in the capacity of shareholder’s meeting, resolved a capital reduction to offset company losses with amount of $57,869, eliminated 5,787 thousand shares and increase capital by issuing 3,000 thousand shares with a par value of $10 (in dollars) which amounted to $30,000 on November 9, 2017. The record date for capital reduction and increase was December 11, 2017 and December 12, 2017, respectively. Note 4:On June 1, 2018, Paradigm Taiwan was renamed “Paradigm Asset Management Co., Ltd.”. Note 5:On January 31, 2019, the Board of Directors of the subsidiary, Waterland Securities, resolved to dispose 80% of shares of Paradigm Taiwan Asset Management Co., Ltd., and transaction amount depend on the net asset value of each shares of Paradigm Asset Management Co., Ltd.’s CPA – Audited financial statement at December 31, 2018, multiplying the price by 1.1 times to sell 32,800 of shares of common stock to Jkos Network Co., Ltd and related counterparty. The transaction was approval for investigation by the Regulator on February 27, 2019.
C. Subsidiaries not included in the consolidated financial statements: None. D. Adjustments for subsidiaries with different balance sheet dates: None. E. Significant restrictions: None. F. Subsidiaries that have non-controlling interests that are material to the Group Non-controlling interests December 31, 2018 December 31, 2017 Principal place of Name of subsidiary business Amount Ownership (%) Amount Ownership (%) Waterland Securities Taiwan $ 3,684,793 41.91%$ 3,620,153 41.91% For the years ended 2018 and 2017, total comprehensive income attributable to the abovementioned non-controlling interests are $139,113 and $202,534, respectively. Summarised financial information of the subsidiaries is provided in Note 12(9).
(4) Foreign currency translation A. Functional and presentation currencyFunctional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in New Taiwan dollars, which is the Company’s functional and the Group’s presentation currency. B. Foreign currency transactions (a) Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such
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transactions are recognised in profit or loss in the period in which they arise. (b) Monetary assets and liabilities denominated in foreign currencies at the period end are re-translated at the exchange rates prevailing at the balance sheet date. Exchange differences arising upon re-translation at the balance sheet date are recognised in profit or loss. (c) Non-monetary assets and liabilities denominated in foreign currencies held at fair value through profit or loss are re-translated at the exchange rates prevailing at the balance sheet date; their translation differences are recognised in profit or loss. Non-monetary assets and liabilities denominated in foreign currencies held at fair value through other comprehensive income are re-translated at the exchange rates prevailing at the balance sheet date; their translation differences are recognised in other comprehensive income. However, non-monetary assets and liabilities denominated in foreign currencies that are not measured at fair value are translated using the historical exchange rates at the dates of the initial transactions. C. Translation of foreign operations The operating results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (a) Assets and liabilities for each balance sheet presented are translated at the closing exchange rate at the date of that balance sheet; (b) Income and expenses for each statement of comprehensive income are translated at average exchange rates of that period; and (c) All resulting exchange differences are recognised in other comprehensive income. (5) Cash and cash equivalents Cash and cash equivalents in the consolidated balance sheet includes cash on hand, demand deposit, time deposits, short-term highly liquid investments that are readily convertible to known amount of cash and subject to an insignificant risk of changes in value. In respect of the consolidated statements of cash flows, cash and cash equivalents include cash and cash equivalents shown in the consolidated balance sheet, due from the Central Bank and call loans to banks qualified as cash and cash equivalents as defined by IAS 7 and approved by FSC. (6) Financial assets at fair value through profit or loss Effective 2018 A. Financial assets at fair value through profit or loss are financial assets that are not measured at amortised cost or fair value through other comprehensive income. Financial assets at amortised cost or fair value through other comprehensive income are designated as at fair value through profit or loss at initial recognition when they eliminate or significantly reduce a measurement or recognition inconsistency. B. On a regular way purchase or sale basis, financial assets at fair value through profit or loss are recognised and derecognised using trade date accounting. C. At initial recognition, the Group measures the financial assets at fair value and recognises the transaction costs in profit or loss. The Group subsequently measures the financial assets at fair value, and recognises the gain or loss in profit or loss. D. The Group recognises the dividend income when the right to receive payment is established, future economic benefits associated with the dividend will flow to the Group
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and the amount of the dividend can be measured reliably. (7) Non-hedging derivatives Effective 2018 Non-hedging derivatives are initially recognised at fair value on the date a derivative contract is entered into and recorded as financial assets or financial liabilities at fair value through profit or loss. They are subsequently remeasured at fair value and the gains or losses are recognised in profit or loss. (8) Financial assets at fair value through other comprehensive income Effective 2018 A. Financial assets at fair value through other comprehensive income comprise equity securities which are not held for trading, and for which the Group has made an irrevocable election at initial recognition to recognise changes in fair value in other comprehensive income and debt instruments which meet all of the following criteria: (a) The objective of the Group’s business model is achieved both by collecting contractual cash flows and selling financial assets; and (b) The assets’ contractual cash flows represent solely payments of principal and interest. B. On a regular way purchase or sale basis, financial assets at fair value through other comprehensive income are recognised and derecognised using trade date accounting. C. At initial recognition, the Group measures the financial assets at fair value plus transaction costs. The Group subsequently measures the financial assets at fair value: (a) The changes in fair value of equity investments that were recognised in other comprehensive income are reclassified to retained earnings and are not reclassified to profit or loss following the derecognition of the investment. Dividends are recognised as revenue when the right to receive payment is established, future economic benefits associated with the dividend will flow to the Group and the amount of the dividend can be measured reliably. (b) Except for the recognition of impairment loss, interest income and gain or loss on foreign exchange which are recognised in profit or loss, the changes in fair value of debt instruments are taken through other comprehensive income. When the financial asset is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss. (9) Bills and bonds under repurchase or resale agreements Bills and bonds under repurchase or resale agreements are stated at the amount actually received from or paid to the counterparties. When transactions of bills and bonds with a condition of resale agreements occur, the actual payment shall be recognised in bills and bonds investment with resale agreements. When transactions of bills and bonds with a condition of repurchase agreements occur, the actual receipt shall be recognized in bills and bonds payable under repurchase agreements. Any difference between the actual payment/receipt and predetermined resale (repurchase) price is recognised in interest income or interest expense. (10) Receivables Effective 2018 A. Receivables include those originated and those not originated by the Group such as accounts receivable, notes receivable and other receivables. (a) Receivables overdue within six months shall be accounted for as accounts
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receivables. (b) During the period which guaranteed commercial papers are issued for, the collateral is subject to provisional attachment yet the borrower still pays the interest regularly. In order to extend a grace period for the borrower to apply for removal of such attachment, if such commercial paper matures without being presented immediately, the balance of the commercial paper shall be accounted for as notes receivable. (c) Other receivables represent receivables except for accounts receivable and notes receivable. B. Receivables are shown at net value with allowance for impairment losses assessed in accordance with IFRS 9 at balance sheet date. As for credit assets, allowance is provided at the higher of the aforementioned impairment loss assessed in accordance with IFRS 9 and the impairment losses assessed in accordance with “Regulations Governing the Procedures for Bills Finance Companies to Evaluate Assets, Set Aside Loss Reserves, and Handle Non-Performing Credit, Non-Accrual Loans, and Bad Debt”. C. Adjustments of loss allowance and provisions shall be made if there are collections of bad debts recovery. (11) Overdue receivables Effective 2018 Receivables overdue for longer than six months shall be accounted for as overdue receivables. Allowance is provided at the higher of the impairment losses assessed in accordance with “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing/Non-accrual Loan” and IFRS 9. Allowance is a valuation item under overdue receivables. (12) Impairment of financial assets Effective 2018 A. For debt instruments measured at fair value through other comprehensive income, lease receivables and financial guarantee contracts, at each reporting date, the Group recognises the impairment provision for 12 months expected credit losses if there has not been a significant increase in credit risk since initial recognition or recognises the impairment provision for the lifetime expected credit losses (ECLs) if such credit risk has increased since initial recognition after taking into consideration all reasonable and verifiable information that includes forecasts. On the other hand, for accounts receivable or contract assets that do not contain a significant financing component, the Group recognises the impairment provision for lifetime ECLs. The Group measures the expected credit impairment losses of financial instruments by reflecting the following items: (a) Unbiased and probability-weighted amount that is determined by evaluating all kinds of possible outcomes. (b) Time value of money. (c) Reasonable and provable information about past events, present situation, and forecasts of future economic conditions (available at reporting date without undue cost or effort). B. The Group shall assess the credit assets in and off balance sheets in accordance with
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“Regulations Governing the Procedures for Bills Finance Companies to Evaluate Assets, Set Aside Loss Reserves, and Handle Non-Performing Credit, Non-Accrual Loans, and Bad Debt” with the consideration of collateral provided and the time length of overdue payment. Take the sum of 1% debt balance of normal credit assets, 2% debt balance of assets requiring special attention, 10% debt balance of assets deemed recoverable, 50% debt balance of assets that are doubtful and 100% debt balance of assets are not recoverable as the minimum for allowance for credit loss and reserve for losses of guarantee liability, which shall enough to cover any possible losses based on the experience. (13) Financial liabilities at fair value through profit or loss Effective 2018 A. Financial liabilities are classified in this category of held for trading if acquired principally for the purpose of repurchasing in the short-term. Derivatives are also categorised as financial liabilities held for trading unless they are designated as hedges. B. At initial recognition, the Group measures the financial liabilities at fair value. All related transaction costs are recognised in profit or loss. The Group subsequently measures these financial liabilities at fair value with any gain or loss recognised in profit or loss. (14) Financial guarantee contracts Effective 2018 A. A financial guarantee contract is a contract that requires the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. B. The Group initially recognises financial guarantee contracts at fair value on the date of issuance. The Group charges a service fee when the contract is signed and therefore the service fee income charged is the fair value at the date that the financial guarantee contract is signed. Service fee received in advance is recognised in deferred accounts and amortised through straight-line method during the contract term. C. IBFC measures the financial guarantee contract it issues at the greater of the following two amounts: (a) Allowance for losses determined by expected credit loss valuation model; and (b) The amount initially recognised less, when appropriate, cumulative effect recognised in accordance with IFRS 15. In addition to the abovementioned, subsidiary IBFC also assesses the possible loss on credit assets off balance sheets in accordance with “Regulations Governing the Procedures for Bills Finance Companies to Evaluate Assets, Set Aside Loss Reserves, and Handle Non-Performing Credit, Non-Accrual Loans, and Bad Debt” and other applicable laws. The greater of the two amounts is recognised and included in the guaranty policy reserve. (15) Derecognition of financial assets The Group derecognises a financial asset when one of the following conditions is met: A. The contractual rights to receive the cash flows from the financial asset expire.
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B. The contractual rights to receive cash flows of the financial asset have been transferred and the Group has transferred substantially all risks and rewards of ownership of the financial asset. C. The contractual rights to receive cash flows of the financial asset have been transferred; however, the Group has not retained control of the financial asset. A financial liability is derecognised when the obligation under the liability specified in the contract is discharged or cancelled or expires. (16) Offsetting financial instruments Financial assets and liabilities are offset and reported in the net amount in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. (17) Investments accounted for using equity method A. Associates are all entities over which the Group has significant influence but not control. In general, it is presumed that the investor has significant influence, if an investor holds, directly or indirectly 20 percent or more of the voting power of the investee. Investments in associates are accounted for using the equity method and are initially recognised at cost. B. The Group’s share of its associates’ post-acquisition profits or losses is recognised in profit or loss, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. C. When changes in an associate’s equity do not arise from profit or loss or other comprehensive income of the associate and such changes do not affect the Group’s ownership percentage of the associate, the Group recognises change in ownership interests in the associate in ‘capital surplus’ in proportion to its ownership. D. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been adjusted where necessary to ensure consistency with the policies adopted by the Group. E. When the Group disposes its investment in an associate and loses significant influence over this associate, the amounts previously recognised in other comprehensive income in relation to the associate, are reclassified to profit or loss, on the same basis as would be required if the relevant assets or liabilities were disposed of. If it retains significant influence over this associate, the amounts previously recognised in other comprehensive income in relation to the associate are reclassified to profit or loss proportionately in accordance with the aforementioned approach. (18) Customer margin account /Futures traders’ equity Engaged in futures brokerage business with receiving margins, premiums and differences from fair value in accordance with “Regulations Governing Futures Commission
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Merchants”, which are all recognised in ‘Customer margin deposit account’ in assets and ‘Futures traders’ equity’ in liabilities. ‘Customer margin deposit account’ and ‘Futures traders’ equity’ adjustments are according to the differences of daily market closing prices and related commissions. Accounts cannot be offset except for the same type of accounts of the same customer. Moreover, if borrower’s balance arises from futures traders’ equity, the balance shall be recognised as ‘Futures trading margin receivables’. (19) Property and equipment A. Property and equipment are initially recorded at cost. Borrowing costs incurred during the construction period are capitalised. B. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. C. Land is not depreciated. Other property and equipment apply cost model and are depreciated using the straight-line method to allocate their cost over their estimated useful lives. Each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. D. The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each financial year-end. If expectations for the assets’ residual values and useful lives differ from previous estimates or the patterns of consumption of the assets’ future economic benefits embodied in the assets have changed significantly, any change is accounted for as a change in estimate under IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’, from the date of the change. The estimated useful lives of buildings, equipment and leasehold are 55~60 years, 3~12 years and 3~6 years, respectively. (20) Intangible assets A. Computer software Computer software is stated at cost and amortised on a straight-line basis over its estimated useful lives of 3~6 years. B. Goodwill Goodwill arises in a business combination accounted for by applying the acquisition method. Goodwill is tested annually for impairment and presented in cost less accumulated impairment. (21) Impairment of non-financial assets A. The Group assesses at each balance sheet date the recoverable amounts of those assets where there is an indication that they are impaired. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell or value in use. Except for goodwill, when the circumstances or reasons for recognising impairment loss for an asset in prior years no longer exist or diminish, the impairment loss is reversed.
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The increased carrying amount due to reversal should not be more than what the accumulated depreciated or amortised historical cost would have been if the impairment had not been recognised. B. Recoverable amounts of goodwill are evaluated periodically. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Impairment loss of goodwill previously recognised in profit or loss shall not be reversed in the following years. C. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units, or groups of cash-generating units, that is/are expected to benefit from the synergies of the business combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level. (22) Provisions for contingent liabilities and contingent assets A. When all the following criteria are met, the Group shall recognise a provision (a) A present obligation (legal or constructive) as a result of a past event; (b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) The amount of the obligation can be reliably estimated. If there are several similar obligations, the outflow of economic benefit as a result of settlement is determined based on the overall obligation. Provisions for liabilities should be recognised when the outflow of economic benefits is probable in order to settle the obligation as a whole even if the outflow of economic benefits from any one of the obligation is remote. B. Provisions are measured by the present value of expense which is required for settling the anticipated obligation. The pre-tax discount rate is used with timely adjustment that reflects the current market assessments on the time value of money and the risks specific to the obligation. C. Contingent asset is a possible obligation that arises from past event, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. The Group did not recognise any contingent assets and made appropriate disclosure in compliance with relevant regulations when the economic inflow is probable. D. Contingent liability is a possible obligation that arises from past event, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. Or it could be a present obligation as a result of past event but the payment is not probable or the amount cannot be measured reliably. The Group did not recognise any contingent liabilities but made appropriate disclosure in compliance with relevant regulations. The Group did not recognise any contingent liabilities but made appropriate disclosure in compliance with relevant regulations. (23) Employee benefits
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A. Short-term employee benefits Short-term employee benefits are measured at the undiscounted amount of the benefits expected to be paid in respect of service rendered by employees in a period and should be recognised as expense in that period when the employees render service. B. Pensions (a) Defined contribution plans For defined contribution plans, the contributions are recognised as pension expense when they are due on an accrual basis. Prepaid contributions are recognised as an asset to the extent of a cash refund or a reduction in the future payments. (b) Defined benefit plans i. Net obligation under a defined benefit plan is defined as the present value of an amount of pension benefits that employees will receive on retirement for their services with the Group in current period or prior periods. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The net defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The rate used to discount is determined by using interest rates of government bonds (at the balance sheet date) that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. ii. Remeasurements arising on defined benefit plans are recognised in other comprehensive income in the period in which they arise and are recorded as retained earnings. C. Employees’ compensation and directors’ and supervisors’ remuneration Employees’ compensation and directors’ and supervisors’ remuneration are recognised as expense and liability, provided that such recognition is required under legal or constructive obligation and those amounts can be reliably estimated. Any difference between the resolved amounts and the subsequently actual distributed amounts is accounted for as changes in estimates. (24) Income tax A. The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or items recognised directly in equity, in which cases the tax is recognised in other comprehensive income or equity. B. The current income tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in accordance with applicable tax regulations. It establishes provisions where appropriate based on the amounts expected to be paid to the tax authorities. An additional 10% tax is levied on the unappropriated retained earnings and is recorded as income tax expense in the year the stockholders resolve to retain the earnings.
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C. Deferred tax is recognised, using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated balance sheet. However, the deferred tax is not accounted for if it arises from initial recognition of goodwill or of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. D. Deferred tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. At each balance sheet date, unrecognised and recognised deferred tax assets are reassessed. E. Current income tax assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. Deferred tax assets and liabilities are offset on the balance sheet when the entity has the legally enforceable right to offset current tax assets against current tax liabilities and they are levied by the same taxation authority on either the same entity or different entities that intend to settle on a net basis or realise the asset and settle the liability simultaneously. (25) Share capital Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Common stock dividends of the Company recognised as equity at the year of shareholders’ meeting approved. If the date of dividends declared is later than the consolidated balance sheet date, common stocks are disclosed in the subsequent events. (26) Share-based payment For the equity-settled share-based payment arrangements, the employee services received are measured at the fair value of the equity instruments granted at the grant date, and are recognized as compensation cost over the vesting period, with a corresponding adjustment to equity. The fair value of the equity instruments granted shall reflect the impact of market vesting conditions and vesting conditions. (27) Dividends Dividends are recorded in the Company’s financial statements in the period in which they are resolved by the Company’s shareholders. Cash dividends are classified as liabilities. (28) Income and expenses Income and expense of the Group are recognised as incurred, the main components are as follows: A. Interest income and expense: Interest income means interest income generated from
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holding bills and bonds, bills and bonds investment with resell agreements, various deposits, and other financial assets. Interest expense means various interest expenses resulting from bills and bonds sold under repurchase agreements and financing from banks. All the interest income and interest expense generated from interest-bearing financial instruments are calculated by effective interest rate according to relevant regulations and recognized as ‘Interest income’ and ‘Interest expense’ in the statements of comprehensive income. B. Service fee income and expense: Service fee income means service fee income earned from provision of guarantee, certification, underwriting and brokerage services. Service fee expense means expenses resulting from authorizing others to handle various procedures. Amounts receives when providing the services, such as guarantee service, is recognized as service fee income on a straight-line basis when providing the services. If the amounts earned are classified as income from implementation of significant activities, such as certification service, the amounts shall be recognized as income when the significant activities are completed. C. Futures contract gains or losses: The margin of futures trading is recognised at cost and measured through mark-to-market accounting. The gains or losses from mark-to-market, reversed futures trading or settled contracts are recognised as gains or losses in the current period; dealer handling fee expenditures is recognised on the transaction date of futures trading. D. Operating expenses: Operating expenses refer to expenditures required to carry out business operations, which primarily comprise employee benefit expense, depreciation and amortization expenses, and other business and administrative expenses. (29) Treasury shares Where the Group repurchases the Company’s equity share capital that has been issued, the consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Group’s equity holders. Where such shares are subsequently reissued, the difference between their book value and any consideration received and net of any directly attributable incremental transaction costs, is included in equity attributable to the Group’s equity holders. (30) Operating segments Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The Group’s chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors that makes strategic decisions.
5. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND KEY SOURCES OF ASSUMPTION UNCERTAINTY The preparation of these consolidated financial statements requires management to make critical judgements in applying the Group’s accounting policies and make critical assumptions and estimates concerning future events. Assumptions and estimates may differ from the actual results and are continually evaluated and adjusted based on historical experience and other factors. The details on critical accounting judgements, estimates and key sources of assumption uncertainty
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are as follows: (1) As the consolidated financial statements of the Group may be affected by the adoption of accounting policies, accounting estimates and assumptions, the Group’s management shall properly exercise its professional judgements, estimates, and assumptions on the information of the key risks that are not easy to obtain from other resources and could affect the carrying amounts of financial assets and liabilities in the next fiscal year while adopting critical accounting policies as stated in Note 4. Estimates and assumptions of the Group are the best estimates made in compliance with IFRSs. Estimates and assumptions are made based on historical experience and other factors deemed relevant; however, the actual results may differ from the estimates. The Group reviews the estimates and assumptions on an ongoing basis and recognises the adjustment of the estimates only in the period which is affected by the adjustment. If the adjustment simultaneously affects both the current and future periods, it should be recognized in both periods. (2) The Group makes estimates and assumptions based on the expectation of future events that are believed to be reasonable under the circumstances at the end of the reporting period. The resulting accounting estimates might be different from the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: A. Provisions for guarantee obligation of financial guarantee contracts. Unless otherwise provided by laws or regulations, IBFC assesses the adequacy of guarantee reserve of financial guarantee contracts at the balance sheet date by adopting related policies and models of expected credit loss. (a) The evaluation model and parameter assumptions adopted are based on the historical actual loss rate and the predicted information on macro-economic forecast of future prosperity changes issued by the government organizations annually. (b) For the debtors who have no significant increase of credit losses since the initial recognition after assessed, the provisions are measured use aforementioned model to recognise 12-month. For the debtors who have significant increase of credit losses since the initial recognition, the provisions are measured to recognise lifetime through observing if any adverse movement in payment status of the debtors, or industrial information and other indicators of arrears, and considering the value of collateral. (c) IBFC periodically reviews assumptions of factors for judgement in order to reduce the difference between expected credit loss and actual credit loss. B. Fair value measurement of unlisted stocks without active market The fair value of unlisted stocks without active market held by the Group, if measured using valuation model, is measured with observable data or models of financial instruments with similar characteristics. If there are no observable inputs from the market, the fair value of the instruments is measured with appropriate assumptions. If fair value is determined by a valuation model, it should be calibrated so that the end result reflects actual data and market prices, and only observable data should be used whenever it is possible. The measurement of fair value by using valuation model, is refer to the calculation by P/E method, P/B method and taking into account the discount
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due to market liquidity or risk specificity. And if the object has no comparable instruments or its fair value cannot be estimated using market method, other valuation technique, such as net assets method, is used to estimate its fair value. Any changes in these judgements and estimates will impact the fair value measurement of these unlisted stocks. Please refer to Note 12(2) for the financial instruments fair value information. C. Expected credit loss For financial assets, the measurement of expected credit losses uses complex models and multiple assumptions. These models and assumptions take into account future macro-economic conditions and credit behaviors of borrowers (e.g. probability of customer default and loss). Please refer to Note 12(4) for detailed information on parameters, assumptions, and estimation methods used in measuring expected credit losses and disclosure of the sensitivity of credit loss to the aforementioned factors. The measurement of expected credit losses according to applicable accounting rules involves significant judgement in several areas, for example: (a) The criteria used to judge whether there is significant increase in credit risk. (b) The selection of appropriate models and assumptions for measuring expected credit losses. (c) Determining the forward-looking factors that are necessary for the measurement of expected credit losses for each type of product. (d) For the purpose of measuring expected credit losses, classifying the financial instruments according to similar credit risk characteristics. Judgements and estimations used in above expected credit losses, please refer to Note 12(4)
6. DETAILS OF SIGNIFICANT ACCOUNTS (1) Cash and cash equivalents December 31, 2018 December 31, 2017 Petty cash$ 1,555 $ 1,560 Checking accounts and demand deposits 578,383 859,950 Foreign currency deposits 875,864 553,632 Time deposits 1,357,010 1,147,810 Cash and cash equivalents reported in the statement of financial position 2,812,812 2,562,952 Due from the central bank and call loans to banks 2,036,564 7,373 Total $ 4,849,376 $ 2,570,325
As of December 31, 2018 and 2017, the Group’s time deposit pledged to others was recognised under other financial assets. The details are provided in Notes 6(10) and 8.
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(2) Due from the central bank and call loans to banks / Due to the central bank and banks December 31, 2018 December 31, 2017 Due from the central bank$ 6,564 $ 7,373 Call loans to banks 2,030,000 - $ 2,036,564 $ 7,373 Bank call loans and overdrafts from banks$ 24,613,529 $ 34,537,986 Bank borrowings 4,104,881 3,207,703 $ 28,718,410 $ 37,745,689 A. Call loans to banks are the amount of call loans IBFC lent to banks and bills finance companies. The contract period are all within a year, the contract is renewable and interest is calculated by call loan rate set by banks. As of December 31, 2018, the call-loan interest rate for the most part of call loan was 0.20% to 0.23%. As of December 31, 2017, there is no call loan to banks. B. Due from call loans to banks and bank overdrafts is the short-term borrowings with daily interest IBFC borrowed within the credit line from banks or other financial institutions. The contract period is within a year, the contract is renewable and interest is calculated by call loan rate set by banks. As of December 31, 2018 and 2017, interest rate for due from call loans to banks and bank overdrafts were 0.60% to 4.80% and 0.42% to 2.80%, respectively. C. As of December 31, 2018 and 2017, the line of credit were $500,000 and $800,000 and it has not been used for the both years. D. As of December 31, 2018 and 2017, the line of credit for Waterland VC were $860,000 and $875,000 and interest rate were 1.50% to 1.66% and 1.54% to 1.75%. E. As of December 31, 2018 and 2017, the line of credit for Waterland Securities were $x12,329,827 and $12,284,420 and interest rate were 0.45% to 1.08%及 0.48% to 1.11%. The information of a partial of terms and conditions for borrowings is provided in F in this section. F. Waterland Securities signed a General Credit Lines Agreement of 300 million New Taiwan dollars with O-Bank (formerly named Taiwan Industrial Bank) in March 2015. The contract is expired in December 2017 and other terms specified in the agreement are as follow: (a) Current ratio is no lower than 100% (b) Debt ratio is no higher than 280% (c) Net tangible assets (shareholder’s equity less intangible assets) is no lower than $8 billion dollars. G. As of December 31, 2018 and 2017, the information regarding loan facility pledged loan facility is provided in Note 8.
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(3) Financial assets and liabilities at fair value through profit or loss December 31, 2018 Financial assets mandatorily measured at fair value through profit or loss Stocks $ 2,196,410 Beneficiary certificates 752,961 Commercial papers 83,428,665 Negotiable bank’s certificates of deposit 36,827,392 Government bonds 6,831 Corporate bonds 4,191,162 Derivative instruments 60,295 Call (put) warrants 91,662 Subtotal 127,555,378 Valuation adjustment ( 190,165) Total $ 127,365,213 Financial liabilities mandatorily measured at fair value through profit or loss Fixed rate commercial paper purchased $ 10,167 Securities borrowing payable 773,045 Call (put) warrants liabilities 206,114 Derivative instruments 117,462 Subtotal 1,106,788 Valuation adjustment ( 20,859) Total $ 1,085,929 A. As of December 31, 2018, the amounts of IBFC’s negotiable certificate of deposit pledged to the Central Bank and other financial instruments as collateral for the credit line of call loans were $. The information is provided in Note 8. B. As of December 31, 2018, the amounts of Waterland Securities’s government bonds pledged to OTC as performance bonds were $6,600. The information is provided in Note 8. C. As of December 31, 2018, Waterland Securities’s outstanding call (put) warrants totaled to 938 warrants consisting of 239 European style warrants and 699 American style warrants. The settlement is carried out by stock delivery within six to nine months from the vesting period of call (put) warrants to the trading date. However, Waterland Securities retains the option to settle by cash. D. Information relating to credit risk is provided in Note 12(5). (4) Bills and bonds purchased under resell agreements and bills and bonds sold under repurchase agreements A. As of December 31, 2018 and 2017, the maturity of bills and bonds purchased under resell agreements both were within a year and the interest rate were 0.35%～0.52% and 0.32%～0.39%, respectively. B. As of December 31, 2018 and 2017, the maturity of bills and bonds sold under repurchase agreements both were within a year and the interest rate were 0.19%～3.35% and 0.19%～2.30%, respectively.
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(5) Financial assets at fair value through other comprehensive income December 31, 2018 Debt instruments Government bonds $ 39,433,509 Financial bonds 13,820,660 Corporate bonds 54,969,795 108,223,964 Valuation adjustment 162,613 Subtotal 108,386,577 Equity instruments Listed cabinet stock 328,331 Unlisted stocks 1,349,443 Valuation adjustment 521,111 Subtotal 2,198,885 Total $ 110,585,462 A. The Group has elected to classify equity investments that are considered to be strategic investments or steady dividend income as financial assets at fair value through other comprehensive income. The fair value of such investments amounted to $2,198,885 as at December 31, 2018. B. Amounts recognised in profit or loss and other comprehensive income in relation to the financial assets at fair value through other comprehensive income are listed below: Year ended December 31, 2018 Debt instruments at fair value through other comprehensive income Fair value change recognised in other comprehensive income ($ 369,140) Cumulative other comprehensive income reclassified to profit or loss Reclassified due to impairment recognition $ 5,650 Reclassified due to derecognition ( 208,794) ($ 203,144) Interest income recognised in profit or loss $ 1,417,037 Year ended December 31, 2018 Equity instruments at fair value through other comprehensive income Fair value change recognised in other comprehensive income $ 42,412 Fair value change recognised in other comprehensive income - non- controlling interest 1 $ 42,413 Dividend income recognised in profit or loss held at end of year $ 37,901 Cumulative losses reclassified to retained earnings due to derecognition $ 6,705
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C. The cost of bond pledged as guarantee deposit by IBFC as required by relevant regulations is $933,642 ; The cost of government bond provided as security for litigation is $2,499 ; cost of bonds deposited as settlement reserve as require by “Taipei Exchange Rules Governing the Electionic Bond Trading System” is $104,695. Please refer to Note 8 for details. D. The cost of bond pledged for bank overdraft by the subsidiary IBFC on December 31, 2018 is $1,646,627, Please refer to Note 8 for details. E. The shareholders of Waterland Securities during their meeting on May 24, 2018 resolved to conduct a capital reduction on its investment of Fuding Venture Capital Co., Ltd. The capital reduction date was set on June 15, 2018. Waterland Securities received proceeds from capital reduction of $1,220 totaling 122 thousand shares. F. Grand Cathay Venture Capital III Co., Ltd which was invested by the subsidiary Waterland Securities held an interim shareholders’ meeting on December 14, 2018 and resolved for a capital reduction. The effective date of the capital reduction was December 24, 2018, and 194 thousand shares were eliminated, amounting to a refund of $1,938. G. On December 25, 2018, Waterland Securities purchased 13,000 thousand shares of Taiwan Stock Exchange Corporation with total consideration of $1,036,794. H. Waterland VC repurchased an investee’s shares as a result of the business combination between the investee and another company and the cumulative loss on disposal was $6,705. I. Information relating to credit risk is provided in Note 12(5). (6) Receivables, net December 31, 2018 December 31, 2017 Notes and accounts receivable$ 101,230 $ 17,152 Interest receivable 1,320,439 1,495,692 Margin loans receivable 8,281,147 10,192,311 Guaranteed proceeds receivable from refinancing 38,521 8,843 Receivable of securities and bonds sold 1,679,797 303,748 Receivable of securities settlement price 4,936,117 6,131,565 Lease payments receivable 3,138,670 2,188,457 Refinance guaranty receivable 2,040,144 1,247,230 Other receivables 65,764 299,792 21,601,829 21,884,790 Less: Allowance for bad debts( 85,007) ( 128,234) $ 21,516,822 $ 21,756,556 A. Movements of allowance for accounts receivable for 2018 is provided in Note6(16). Movements of allowance for accounts receivable for 2017 is provided in Note12(13).
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B. Net lease payment receivable of Guo Want International Leasing on December 31, 2018 and 2017 is as follow. December 31, 2018 December 31, 2017 Lease receivable$ 3,472,293 $ 2,502,840 Unguaranteed residual value - - Less:Unearned financing income( 331,329) ( 247,451) Allowance for bad debts ( 63,157) ( 63,785) Lease receivable - net $ 3,077,807 $ 2,191,604 Listed in account receivable$ 3,077,119 $ 2,188,457 Listed in other financial assets 688 3,147 C. Minimum lease payments Guo Want International Leasing is expect to receive from lease investment on December 31, 2018 and 2017 is as follow: December 31, 2018 December 31, 2017 Within one year$ 2,029,101 $ 1,586,621 One to two years 1,053,438 728,289 Two to three years 363,938 153,076 Above three years 25,816 34,854 $ 3,472,293 $ 2,502,840 (7) Transfer of financial assets - not fully derecognised During the Group’s activities, the transferred financial assets that do not meet derecognition conditions are debt instruments under repurchase agreements. Because transactions in respect to the repurchase agreements of debt instruments reflected in the Group’s related liabilities, which indicate the obligation to repurchase transferred financial assets in a specified future period within a fixed price, the Group, within the effective period of the transaction, cannot use, sell or pledge the already transferred financial asset, but must still bear interest risk and credit risk. Thus, such financial assets were not derecognised in its entirety. Financial assets that do not meet the derecognition conditions and related financial liabilities are analysed as below: December 31, 2018 Carrying amount of Carrying amount of Financial assets category financial assets transferre related financial liabilities Financial assets at fair value through profit or loss Repurchase agreement$ 91,294,877 $ 91,295,952 Financial assets at fair value through other comprehensive income Repurchase agreement$ 90,986,085 $ 91,343,962
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December 31, 2017 Carrying amount of Carrying amount of Financial assets category financial assets transferre related financial liabilities Financial assets at fair value through profit or loss Repurchase agreement$ 86,814,568 $ 85,845,314 Financial assets at fair value through other comprehensive income Repurchase agreement$ 85,291,270 $ 84,736,164 (8) Offsetting financial assets and financial liabilities The Group has transactions that do not meet the offsetting criteria in paragraph 42 of IAS 32 but follow the net settled master netting arrangements or other similar arrangements, i.e. Derivatives, repurchase agreements and resell agreements. If one party breaches the contract, such as arrears, insolvency or bankruptcy, the counterparty can choose to use net settlement or exercise legal right over the collateral. The fair value is the amount of the collateral obtained (paid) and the offsetting amount should not exceed the total financial asset (liabilities). The relevant information is as follow: A. Financial assets
December 31, 2018 Not offsetted in the balance sheet Gross amounts of Net amounts of Gross amounts of recognised financial assets Financial recognised financial liabilities presented in the instruments Cash collateral Description financial assets set off balance sheet (Note) pledged Net amount Derivative instrument $ 7,409 $ - $ 7,409 $ 7,310 $ -$ 99 No offsetting financial instruments as of December 31, 2017. B. Financial liabilities
December 31, 2018 Not offsetted in the balance sheet Gross amounts of Net amounts of Gross amounts of recognised financial liabilities Financial recognised financial assets set presented in the instruments Cash collateral Description financial liabilities off balance sheet (Note) pledged Net amount
Repurchase agreement $ 4,950,677 $ - $ 4,950,677 $ 4,950,677 $ - $ - Derivative instrument 7,922 - 7,922 7,310 - 612 $ 4,958,599 $ - $ 4,958,599 $ 4,957,987 $ -$ 612
December 31, 2017 Not offsetted in the balance sheet Gross amounts of Net amounts of Gross amounts of recognised financial liabilities Financial recognised financial assets set presented in the instruments Cash collateral Description financial liabilities off balance sheet (Note) pledged Net amount
Repurchase agreement $ 2,321,515 $ - $ 2,321,515 $ 2,321,515 $ - $ - Derivative instrument 387 - 387 - - 387 $ 2,321,902 $ - $ 2,321,902 $ 2,321,515 $ -$ 387
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Note: Including master netting arrangements and non-cash collateral. (9) Equity investments accounted for under equity method - net December 31, 2018 December 31, 2017 Taiwan Finance Corporation$ 1,639,740 $ 1,640,773 Pauguo Real Estate Management Corporation 52,022 48,774 $ 1,691,762 $ 1,689,547 A. The basic information of the associates that are material to the Group is as follows: Shareholding ratio Principal place of Relationshi Methods of Company name business December 31, 2018 December 31, 2017 p in nature measurement Taiwan Finance Taipei 24.55% 24.55% - Equity method Corporation Pauguo Real Estate Taipei 49.00% 49.00% - Equity method Management Corporation B. The summarised financial information of the associates that are material to the Group is as follows: Balance sheet Taiwan Finance Corporation December 31, 2018 December 31, 2017 Current assets$ 64,915,721 $ 58,496,684 Non-current assets 97,163 79,018 Current liabilities( 57,758,175) ( 51,374,822) Non-current liabilities ( 576,299) ( 517,331) Total net assets$ 6,678,410 $ 6,683,549 Share in associate's net assets$ 1,639,550 $ 1,640,811 Others 190 ( 38) Carrying amount of the associates$ 1,639,740 $ 1,640,773
Statement of comprehensive income Taiwan Finance Corporation For the years ended December 31, 2018 2017 Revenue$ 635,681 $ 652,093 Profit from continuing operations $ 389,993 $ 415,383 Other comprehensive income (net of tax) ( 116,834) 114,699 Total comprehensive income $ 273,159 $ 530,082 Dividends received from associates $ 70,961 $ 58,923 C. Comprehensive income of associates accounted for under equity method for the year ended December 31, 2018 and 2017 are summarised below:
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For the years ended December 31, 2018 2017 Profit from continuing operations $ 97,788 $ 101,670 Comprehensive income net of tax ( 28,009) 29,353 Total comprehensive income $ 69,779 $ 131,023 (10) Other financial assets, net December 31, 2018 December 31, 2017 Certificate of deposit pledged (Note 8)$ 2,173,266 $ 1,900,566 Futures trading margin 521,938 268,759 Customer guarantee designated bank account for allowance to pay back 53,294 206,990 Customer margin account 3,364,302 1,746,959 Security borrowing deposits 830,995 93,227 Guaranteed price deposits for security borrowing 763,179 3,570 Financial assets carried at cost - 882,914 Overdue receivables 148,848 564,331 7,855,822 5,667,316 Less: Allowance for bad debts - overdue receivables( 148,160) ( 285,334) Accumulated impairment - ( 133,879) $ 7,707,662 $ 5,248,103 A. As of December 31, 2017 the unlisted shares held by the Group have no quoted market price available in active market and cannot be measured reliably. Therefore, they are measured at cost in accordance with IAS 39. B. Movements in allowance for overdue receivables are provided in Note 6(16). C. Information relating to credit risk is provided in Note 12(5). D. The shareholders of Waterland Securities’ investee Fuding Venture Capital Co., Ltd at their annual shareholders’ meeting on June 1, 2017 resolved to reduce capital. The record date for capital reduction was June 30, 2017. The amount of shares eliminated was 528 thousand shares, the amount of capital reduced was $5,284. The management of Waterland Securities has assessed the impairment of the capital and provisioned impairment loss of $182 for the year ended December 31, 2017. E. The shareholders of Waterland Securities’ investee Guanhua Venture Capital Co., Ltd. at their annual shareholders’ meeting on December 12, 2017 resolved to reduce capital. The record date for capital reduction was December 21, 2017. The amount of shares eliminated was 89 thousand shares, the amount of capital reduced was $888. The management of Waterland Securities has assessed the impairment of the capital and provisioned impairment loss of $989 for the year ended December 31, 2017.
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WATERLAND FINANCIALHOLDINGS (11) Properties and equipment - net Prepayments Buildings and Leasehold for business Land structures Equipment improvements facilities Total At January 1, 2018 Cost$ 1,265,122 $ 630,249 $ 330,988 $ 75,408 $ 131,116 $ 2,432,883 Accumulated depreciation - ( 247,770) ( 219,674) ( 52,089) - ( 519,533) Accumulated impairment( 32,110) ( 15,255) - - -( 47,365) $ 1,233,012 $ 367,224 $ 111,314 $ 23,319 $ 131,116 $ 1,865,985 2018 Opening net book amount as at January 1$ 1,233,012 $ 367,224 $ 111,314 $ 23,319 $ 131,116 $ 1,865,985
Additions - 3,257 24,817 1,295 12,296 41,665 Disposals - - ( 1,080) - - ( 1,080) Transfers - 119,595 8,048 - ( 136,786) ( 9,143) Depreciation charge - ( 14,033) ( 41,201) ( 7,367) - ( 62,601) Impairment loss( 5,892) - - - - ( 5,892) Exchange differences - ( 1,112) ( 1) ( 97) 41 ( 1,169) Closing net book amount as at December 31$ 1,227,120 $ 474,931 $ 101,897 $ 17,150 $ 6,667 $ 1,827,765 At December 31, 2018 Cost$ 1,265,122 $ 752,918 $ 355,602 $ 76,383 $ 6,667 $ 2,456,692 Accumulated depreciation - ( 262,732) ( 253,705) ( 59,233) - ( 575,670) Accumulated impairment( 38,002) ( 15,255) - - -( 53,257) $ 1,227,120 $ 474,931 $ 101,897 $ 17,150 $ 6,667 $ 1,827,765
Prepayments Buildings and Leasehold for business Land structures Equipment improvements facilities Total At January 1, 2017 Cost$ 1,348,499 $ 710,657 $ 357,420 $ 132,103 $ 14,034 $ 2,562,713 Accumulated depreciation - ( 260,088) ( 252,145) ( 99,219) - ( 611,452) Accumulated impairment( 32,110) ( 15,255) - - -( 47,365) $ 1,316,389 $ 435,314 $ 105,275 $ 32,884 $ 14,034 $ 1,903,896 2017 Opening net book amount as at January 1$ 1,316,389 $ 435,314 $ 105,275 $ 32,884 $ 14,034 $ 1,903,896 Additions - - 35,093 2,333 134,539 171,965 Disposals( 83,377) ( 55,576) ( 375) ( 2,364) - ( 141,692) Transfers - ( 929) 13,561 - ( 17,389) ( 4,757) Depreciation charge - ( 11,585) ( 42,230) ( 9,492) - ( 63,307) Exchange differences - -( 10) ( 42) ( 68) ( 120) Closing net book amount as at December 31$ 1,233,012 $ 367,224 $ 111,314 $ 23,319 $ 131,116 $ 1,865,985 At December 31, 2017 Cost$ 1,265,122 $ 630,249 $ 330,988 $ 75,408 $ 131,116 $ 2,432,883 Accumulated depreciation - ( 247,770) ( 219,674) ( 52,089) - ( 519,533) Accumulated impairment( 32,110) ( 15,255) - - -( 47,365) $ 1,233,012 $ 367,224 $ 111,314 $ 23,319 $ 131,116 $ 1,865,985 Report 2018 Consolidated Financial A. No borrowing costs were capitalised as part of property and equipment for 2018 and 2017. B. Information about the property and equipment that were pledged to others as collateral is provided in Note 8
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232 WATERLAND FINANCIAL HOLDINGS
(12) Intangible assets – net A. Movements in computer software and intangible assets incurred from business combination are as fallow: Computer Goodwill software Others Total At January 1, 2018 Cost $ 528,821 $ 125,704 $ 1,039 $ 655,564 Accumulated amortisation and impairment ( 366,443) ( 68,246) ( 612) ( 435,301) $ 162,378 $ 57,458 $ 427 $ 220,263 2018 At January 1 $ 162,378 $ 57,458 $ 427 $ 220,263 Additions - 19,401 - 19,401 Transfers - 8,349 - 8,349 Amortisation charge ( 32) ( 22,812) ( 205) ( 23,049) Exchange differences - ( 39) - ( 39) At December 31 $ 162,346 $ 62,357 $ 222 $ 224,925 At December 31, 2018 Cost $ 528,821 $ 153,415 $ 1,039 $ 683,275 Accumulated amortisation and impairment ( 366,475) ( 91,058) ( 817) ( 458,350) $ 162,346 $ 62,357 $ 222 $ 224,925
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Computer Goodwill software Others Total At January 1, 2017 Cost$ 528,821 $ 104,301 $ 1,039 $ 634,161 Accumulated amortisation and impairment ( 223,230) ( 46,504) ( 408) ( 270,142) $ 305,591 $ 57,797 $ 631 $ 364,019
2017 At January 1$ 305,591 $ 57,797 $ 631 $ 364,019 Additions - 16,971 - 16,971 Transfers - 4,485 - 4,485 Amortisation charge - ( 21,742) ( 204) ( 21,946) Impairment loss ( 143,213) - - ( 143,213) Exchange differences - ( 53) - ( 53) At December 31$ 162,378 $ 57,458 $ 427 $ 220,263
At December 31, 2017 Cost$ 528,821 $ 125,704 $ 1,039 $ 655,564 Accumulated amortisation and impairment ( 366,443) ( 68,246) ( 612) ( 435,301) $ 162,378 $ 57,458 $ 427 $ 220,263 B. The details on goodwill are as follows: December 31, 2018 Accumulated Cost impairment Total Waterland Securities brokerage segment$ 162,378 $ - $ 162,378 Paradigm Asset Management 366,443 ( 366,443) - $ 528,821 ($ 366,443) $ 162,378
December 31, 2017 Accumulated Cost impairment Total $ 162,378 $ - $ 162,378 Waterland Securities brokerage segment 366,443 ( 366,443) - Paradigm Asset Management $ 528,821 ($ 366,443) $ 162,378 Goodwill is allocated to the Group’s cash-generating units identified according to operating segment. The recoverable amount of all cash-generating units has been determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The key assumptions used for value-in-use calculations are as follows:
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Waterland Securities brokerage segment Paradigm Asset Management 2018 Growth rate 0.00% 0.00% Discount rate 1.41% 7.09% 2017 Growth rate 0.00% 0.00% Discount rate 2.06% 5.04% Waterland Securities Management determined growth rate based on past performance and their expectations of market development. The discount rates used were pre-tax and reflected specific risks relating to the relevant operating segments. (13) Other assets, net December 31, 2018 December 31, 2017 Deferred charges$ 19,288 $ 24,245 Prepaid expenses 82,729 49,716 Refundable deposits 922,674 893,922 Amounts held for settlement 16,952 22,065 Underwriting share proceeds collected on behalf of clients 9,719 81,372 Other 41,646 - $ 1,093,008 $ 1,071,320 A. In accordance with the regulations of Regulations Governing Securities Firms, Regulations Governing the Conduct of Securities Trading Margin Purchase and Short Sale Operations by Securities Firms, Regulations Governing Futures Commission Merchants, Regulations Governing the Conduct of Discretionary Investment Business by Securities Investment Trust Enterprises and Securities Investment Consulting Enterprises as well as Regulations Governing Offshore Funds, Waterland Securities and its subsidiaries provided certificates of deposit of $590,000 as operating guarantee deposits as of December 31, 2018 and 2017. B. In accordance with the regulations of Regulations Governing Securities Firms and Regulations Governing Futures Commission Merchants, Waterland Securities and its subsidiaries paid settlement fund as of December 31, 2018 and 2017 amounting to $156,813 and $156,268, respectively. (14) Commercial paper payable - net December 31, 2018 December 31, 2017 Commercial paper payable $ 11,930,000 $ 11,236,000 Less: Discount on commercial paper payable ( 5,983) ( 4,647) $ 11,924,017 $ 11,231,353 A. As of December 31, 2018 and 2017, the interest rate ranges of commercial papers issued by the Company, Waterland Securities and Waterland VC are 0.45%~1.34% and 0.43%~1.658%, respectively B. As of December 31, 2018 and 2017, the Company has signed a commissioned guaranteed commercial papers contract with Ta Ching Bill Finance Corporation of total amount $200,000. A repayment promissory note of the same amount was issued to Ta Ching Bill Finance Corporation。
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C. The Company entered into a $2,120 million contract of circularly issuing as well as certificating, underwriting and purchasing non-guarantee commercial paper with IBFC in June 2014. IBFC is in charge of certificating, underwriting and purchasing non-guarantee commercial paper that was issued by the Company. Based on the contract, from the last trading day before the expiration of one year after the signing date of contract, the Company shall decrease the total face value of issuance amount to 70%. From the last trading day before the expiration of two years after the signing date of contract, the Company shall decrease the total face value of issuance amount to 40%. The facilities shall be reissued circularly once they are drawn down. If the Company is unable to issue non-guarantee commercial paper at the agreed-upon period and amount, a penalty of 1.55% annual rates shall be paid to IBFC on unissued commercial paper and the actual duration. The contract period ended in June 2017. D. The Company entered into a $200 million contract of circularly issuing as well as certificating, underwriting and purchasing non-guarantee commercial paper with Union Bank of Taiwan Co., Ltd. (“UBOT”) in June 2014. UBOT is in charge of certificating, underwriting and purchasing non-guarantee commercial paper that was issued by the Company. Based on the contract, from the last trading day before the expiration of one year after the signing date of contract, the Company shall decrease the total face value of issuance amount to 70%. From the last trading day before the expiration of two years after the signing date of contract, the Company shall decrease the total face value of issuance amount to 40%. The facilities shall be reissued circularly once they are drawn down. If the Company is unable to issue non-guarantee commercial paper at the agreed-upon period and amount, a penalty of 1.55% annual rates shall be paid to UBOT on unissued commercial paper and the actual duration. The contract period ended in June 2017. E. Waterland Securities entered into a $200 million contract with Ta Ching Bill Finance Corporation (“TCBF”) in April 2018. TCBF is in charge of underwriting non-guarantee commercial paper with issue days of no more than 100 days and was issued by the Company. All facilities shall be drawn down (issued) within 90 days from the signing date of agreement and the facilities shall be reissued circularly once they are drawn down. If one party is unable to issue or purchase non-guarantee commercial paper at the agreed-upon amount or the agreed-upon total cost of issuance, a penalty of 0.5% of the face value of unissued or unpurchased commercial paper based on the actual number of days elapsed shall be paid to the counterparty by the default party as commitment fees. The contract period will end in April 2021. F. Waterland Securities entered into a $50 million contract with UBOT in March and May, 2016. UBOT is in charge of certificating and underwriting non-guarantee commercial paper with issue days of no more than 180 days and was issued by the Company. Based on the agreement, all facilities shall be drawn down (issued) within 30 days and 90 days from the signing date of agreement and the facilities shall be reissued circularly once they are drawn down. If one party is unable to issue or purchase non-guarantee commercial paper at the agreed-upon amount or the agreed-upon total cost of issuance, a penalty of 1% of the face value of unissued or unpurchased commercial paper based on the actual number of days elapsed shall be paid to the counterparty by the default party as commitment fees. The contract period will end in March and June, 2019, respectively. G. Waterland Securities entered into a $500 million contract with IBFC in March and May, 2016. IBFC is in charge of certificating and underwriting non-guarantee commercial paper with issue days of no more than 180 days and was issued by the Company. Based on the contract, all facilities shall be drawn down (issued) within 30 days and 90 days from the signing date of agreement and the facilities shall be reissued circularly once they are drawn
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down. If one party is unable to issue or purchase non-guarantee commercial paper at the agreed-upon amount or the agreed-upon total cost of issuance, a penalty of 1% of the face value of unissued or unpurchased commercial paper based on the actual number of days elapsed shall be paid to the counterparty by the default party as commitment fees. The contract period will end in March and June, 2019, respectively. (15) Payables December 31, 2018 December 31, 2017 Settlement payable $ 4,699,191 $ 6,119,668 Deposits received from securities borrowers 1,715,509 951,640 Payable on bonds issued under repurchase agreement 914,708 145,838 Guaranteed price deposits received from securities borrowers 1,910,515 1,124,685 Others 1,893,653 1,378,719 $ 11,133,576 $ 9,720,550 (16) Allowance for bad debt / provisions Movements in allowance for accounts receivable and overdue receivables as well as provisions for guarantee liabilities are as follows Allowance for bad debt - accounts receivable and Provisions for overdue receivables guarantee obligation At January 1 2018$ 413,568 $ 1,276,508 Adjustment from adoption of IFRS 9 493 - Balance as of January 1, 2018 after adjustments 414,061 1,276,508 Provision 12,194 8,000 Write-off of allowance for bad debts( 191,075) - Exchange differences( 2,013) - At December 31, 2018$ 233,167 $ 1,284,508 The abovementioned provisions for guarantee liabilities are analysed and provisioned based on balance of guarantees (Note 9) which IBFC provided on commercial papers at the balance sheet date. (17) Other financial liabilities December 31, 2018 December 31, 2017 Futures traders’ equity$ 3,322,552 $ 1,713,829 Structured Products 99,924 - $ 3,422,476 $ 1,713,829
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(18) Pension plan A. Defined benefit plans (a) The Group has a defined benefit pension plan in accordance with the Labor Standards Law, covering all regular employees’ service years prior to the enforcement of the Labor Pension Act on July 1, 2005 and service years thereafter of employees who chose to continue to be subject to the pension mechanism under the Law. (b) Under the defined benefit pension plan, two units are accrued for each year of service for the first 15 years and one unit for each additional year thereafter, subject to a maximum of 45 units. Pension benefits are based on the number of units accrued and the average monthly salaries and wages of the last 6 months prior to retirement for the Company and its domestic subsidiaries except IBFC. The Company and its domestic subsidiaries except IBFC contribute monthly an amount equal to 2% of the employees’ monthly salaries and wages to the retirement fund deposited with Bank of Taiwan, the trustee, under the name of the independent retirement fund committee. Under the defined benefit pension plan of IBFC, 2 units are accrued for each service year for the service before February 28, 1998, an additional unit are accrued for the 16th service year with maximum of 61 units. 2 units are accrued for each service year for the first 15 years of the service after March 1, 1998. 1.5 units are accrued for each service year from the 16th to the 25th service year, an additional unit are accrued for the 16th. 1 unit is accrued for each service year with maximum of 51 units for the service over 25 years. Pension benefits are calculated based on the abovementioned standards (one unit represent the average monthly salaries and wages of the last 6 months prior to retirement). The total units for discontinued section calculation are no more than 51 units, the rule is not applicable for employees who have units over 51 before March 1, 1998.The IBFC and its domestic subsidiaries contribute monthly an amount equal to 2% of the employees’ monthly salaries and wages to the retirement fund deposited with Bank of Taiwan, the trustee, under the name of the independent retirement fund committee. Also, the Company and its domestic subsidiaries would assess the balance in the aforementioned labor pension reserve account by December 31, every year. If the account balance is insufficient to pay the pension calculated by the aforementioned method to the employees expected to qualify for retirement in the following year, the Company and its domestic subsidiaries will make contributions for the deficit by next March. (c) The amounts recognised in the balance sheet are as follows: December 31, 2018 December 31, 2017 Defined benefit obligation$ 525,601 $ 541,994 Fair value of plan assets ( 354,331) ( 350,644) Net liabilities in balance sheet $ 171,270 $ 191,350 Provisions$ 171,937 $ 191,955 Other assets ( 667) ( 605) Net liability $ 171,270 $ 191,350
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(d) Movements in net defined benefit liabilities are as follows: Present value of defined benefit Fair value of Net defined obligations plan assets benefit liability Year ended December 31, 2018 Balance at January 1$ 541,994 ($ 350,644) $ 191,350 Current service cost 4,013 - 4,013 Interest (expense) income 5,539 ( 3,590) 1,949 551,546 ( 354,234) 197,312 Remeasurements: Return on plan asset (excluding amounts included in interest income or expense) - ( 9,046) ( 9,046) Change in financial assumptions 2,611 - 2,611 Experience adjustments ( 8,711) -( 8,711) ( 6,100) ( 9,046) ( 15,146) Pension fund contribution - ( 10,896) ( 10,896) Paid pension ( 19,845) 19,845 - Balance at December 31 $ 525,601 ($ 354,331) $ 171,270 Present value of defined benefit Fair value of Net defined obligations plan assets benefit liability Year ended December 31, 2017 Balance at January 1$ 526,322 ($ 347,868) $ 178,454 Current service cost 3,951 - 3,951 Interest (expense) income 6,833 ( 4,465) 2,368 537,106 ( 352,333) 184,773 Remeasurements: Return on plan asset - ( 2,449) ( 2,449) (excluding amounts included in interest income or expense) 10,452 - 10,452 Change in financial assumptions 8,750 - 8,750 19,202 ( 2,449) 16,753 Pension fund contribution - ( 10,176) ( 10,176) Paid pension ( 14,314) 14,314 - Balance at December 31 $ 541,994 ($ 350,644) $ 191,350 (e) The Bank of Taiwan was commissioned to manage the Fund of the Company’s and domestic subsidiaries’ defined benefit pension plan in accordance with the Fund’s annual investment and utilisation plan and the “Regulations for Revenues, Expenditures, Safeguard and Utilisation of the Labor Retirement Fund” (Article 6: The scope of utilisation for the Fund includes deposit in domestic or foreign financial institutions, investment in domestic or foreign listed, over-the-counter, or private placement equity securities, investment in domestic or foreign real estate securitisation products, etc.). With regard to the utilisation of the Fund, its minimum earnings in the annual distributions on the final financial statements shall be no less than the earnings attainable from the amounts accrued from two-year time deposits with the interest rates offered by local banks. If the earnings is less than aforementioned rates, government shall make payment for the deficit after being authorized by the Regulator. The Company and domestic subsidiaries have no right
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to participate in managing and operating that fund and hence the Company and domestic subsidiaries are unable to disclose the classification of plan assets fair value in accordance with IAS 19 paragraph 142. The composition of fair value of plan assets as of December 31, 2018 and 2017 is given in the Annual Labor Retirement Fund Utilisation Report announced by the government. (f) The principal actuarial assumptions used were as follows: For the years ended December 31, 2018 2017 Discount rate 1.00%~1.20% 1.00%~1.20% Future salary increases 2.50%~4.00% 2.50%~4.00% the 4th version ~ the 4th version ~ Future mortality rate (note) the 5th version the 5th version Note: The Company’s assumptions regarding future mortality experience are set based on the Taiwan Standard Ordinary Experience Morality Table. Because the Company and the subsidiary IBFC changed the main actuarial assumption, the present value of defined benefit obligation is affected. The analysis was as follows: Discount rate Future salary increases Increase 0.25% Decrease 0.25% Increase 0.25% Decrease 0.25% December 31, 2018 Effect on presentvalue of defined benefit obligation ($ 6,164) $ 6,326 $ 5,382 ($ 5,264)
Discount rate Future salary increases Increase 0.25% Decrease 0.25% Increase 0.25% Decrease 0.25% December 31, 2017 Effect on presentvalue of defined benefit obligation ($ 6,632) $ 6,838 $ 5,896 ($ 5,756) Because the subsidiary, Waterland Securities, changed the main actuarial assumption, the present value of defined benefit obligation is affected. The analysis was as follows: Discount rate Future salary increases Increase 0.25% Decrease 0.25% Increase 0.25% Decrease 0.25% December 31, 2018 Effect on presentvalue of defined benefit obligation ($ 2,229) $ 2,293 $ 2,174 ($ 2,109)
Discount rate Future salary increases Increase 0.25% Decrease 0.25% Increase 0.25% Decrease 0.25% December 31, 2017 Effect on presentvalue of defined benefit obligation ($ 2,927) $ 3,019 $ 2,861 ($ 2,806)
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The sensitivity analysis above is based on one assumption which changed while the other conditions remain unchanged. In practice, more than one assumption may change all at once. The method of analysing sensitivity and the method of calculating net pension liability in the balance sheet are the same. (g) Expected contributions to the defined benefit pension plans of the Group for the year ending December 31, 2019 amount to $9,513. B. Defined contribution plans (a) Effective July 1, 2005, the Company and its domestic subsidiaries have established a defined contribution pension plan (the “New Plan”) under the Labor Pension Act (the “Act”), covering all regular employees with R.O.C. nationality. Under the New Plan, the Company and its domestic subsidiaries contribute monthly an amount based on 6% or above of the employees’ monthly salaries and wages to the employees’ individual pension accounts at the Bureau of Labor Insurance. The benefits accrued are paid monthly or in lump sum upon termination of employment. (b) The pension costs under defined contribution pension plans of the Group for the years ended December 31, 2018 and 2017, were $68,594 and $57,950, respectively.
(19) Other provisions Decommissioning liabilities Legal claims (note) Total At January 1, 2018$ 6,914 $ - $ 6,914 Used during the year( 933) ( 933) Unwinding of discount 141 - 141 At December 1, 2018 $ 6,122 $ -$ 6,122
Decommissioning liabilities Legal claims (note) Total At January 1, 2017$ 7,132 $ 41,245 $ 48,377 Used during the year( 380) ( 41,245) ( 41,625) Unwinding of discount 162 - 162 At December 31, 2017 $ 6,914 $ -$ 6,914 Note: For legal claims information, please refer to Note 9 (2).
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(20) Income tax A. Income tax expense (a) Components of income tax expense: For the years ended December 31, 2018 2017 Current tax: Current tax on profits for the year $ 492,083 $ 470,859 Prior year income tax (over) underestimation ( 54,553) 9,057 Total current tax 437,530 479,916 Deferred tax: Origination and reversal of temporary differences 57,434 ( 7,686) Impact of change in tax rate ( 5,940) - Total deferred tax 51,494 ( 7,686) Income tax expense $ 489,024 $ 472,230 (b) The income tax (charge) credit relating to components of other comprehensive income is as follows: For the years ended December 31, 2018 2017 Remeasurements of defined benefit plans$ 3,030 ($ 2,847) Debt instruments measured at fair value through other comprehensive income (47,817) - Unrealised (losses) gains on valuation of available-for-sale financial assets - 28,329 Impact of change in tax rate( 2,470) - ($ 47,257) $ 25,482
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B. Reconciliation between income tax expense and accounting profit: Years ended December 31, 2018 2017 Tax calculated based on profit before tax and statutory tax rate (note) $ 528,488 $ 512,728 Expenses disallowed by tax regulation( 429,946) ( 28,219) Tax exempt income by tax regulation( 50,526) ( 49,245) Temporary difference not recognised as deferred tax assets 453,194 12,334 Change in assessment of realisation of deferred tax assets ( 384) 8,833 Prior year income tax (over) underestimation ( 54,553) 9,057 Effect from Alternative Minimum Tax - 5,053 Effect from changes in tax regulation( 5,940) - Others 48,691 1,689 $ 489,024 $ 472,230 Income tax expense C. Amounts of deferred tax assets or liabilities as a result of temporary differences are as follows: For the years ended December 31, 2018 Recognised in other Recognised in comprehensive At January 1 profit or loss income At December 31 Deferred tax assets: Temporary differences: Allowance for bad debts $ 79,112 ($ 43,809) $ - $ 35,303 Unrealised retirement funds 11,171 377 - 11,548 Assets impairment losses 11,656 3,027 - 14,683 Remeasurements of defined benefit plans 9,662 - ( 549) 9,113 Unrealized loss on evaluation 288 ( 288) 19,488 19,488 Others 4,159 - - 4,159 Subotal $ 116,048 ($ 40,693) $ 18,939 $ 94,294 Deferred tax liabilities: Remeasurements of defined benefit plans - - ( 11) ( 11) Unrealized gains on exchange - ( 1,120) - ( 1,120) Unrealised gains on valuation ( 58,104) ( 9,681) 28,329 ( 39,456) Subtotal ( 58,104) ( 10,801) 28,318 ( 40,587) Total $ 57,944 ($ 51,494) $ 47,257 $ 53,707
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For the year ended December 31, 2017 Recognised in other Recognised in comprehensive At January 1 profit or loss income At December 31 Deferred tax assets: Temporary differences: Allowance for bad debts $ 32,341 $ 14,921 $ - $ 47,262 Unrealised retirement funds ( 3,718) ( 613) - ( 4,331) Asset impairment losses 18,404 9,032 - 27,436 Remeasurements of defined benefit plans 6,802 - 2,847 9,649 Others 42,992 ( 6,960) - 36,032 Subtotal $ 96,821 $ 16,380 $ 2,847 $ 116,048 Deferred tax liabilities: Unrealised gains on valuation ( 21,081) ( 8,694) ( 28,329) ( 58,104) Total $ 75,740 $ 7,686 ($ 25,482) $ 57,944 D. The Company’s consolidated tax return are filed jointly with IBFC and Waterland VC. As of December 31, 2018 and 2017, the estimate tax refund receivables are $0 and $488,497, respectively. E. Income tax returns of the Company, subsidiary IBFC and Waterland Venture Capital through 2014 have been assessed and approved by the Tax Authority F. With respect to the income tax returns of the subsidiary, Waterland Securities, as of December 31, 2016, the Tax Authority assessed to increase income tax payable by $11,946, mainly about ownership expenses of warrants adjustments and amortisation of goodwill. The income tax refund assessed by the Tax Authority has been recorded. However, Waterland Securities disagreed with the assessments and had filed for administrative litigation. Reinvestigation for 2016 income tax has been applied, the following process of administrative litigation will depend on the result of reinvestigation. G. The income tax returns for Waterland Futures Co., Ltd.、Waterland Securities Investment Consulting Co., Ltd. and Paradigm Asset Management was assessed by the Tax Authority until 2016 fiscal year.。 H. Under the amendments to the Income Tax Act which was promulgated by the President of the Republic of China in February 7, 2018, the Group’s applicable income tax rate was raised from 17% to 20% effective from January 1, 2018. The Group has accessed the impact of the change in income tax rate. I. With the abolishment of the imputation tax system under the amendments to the Income Tax Act promulgated by the President of the Republic of China in February, 2018, the information on unappropriated retained earnings and the balance of the imputation credit account as of December 31, 2018 and 2017, as well as the estimated creditable tax rate for the year ended December 31, 2017 is no longer disclosed.
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(21) Share capital A. As of December 31, 2018 and 2017, the Company’s authorised capital and paid-in capital were $50,000,000, $28,198,659 and $50,000,000, $27,866,659, respectively. B. On June 16, 2017, the shareholders at their shareholders’ meeting approved the capitalisation of the unappropriated earnings in the amount of $405,911 as resolved by the Board of Directors on March 22, 2017, and the record date for capital increase is August 14, 2017. The capital increase has been approved by Financial Supervisory Committee and the registration has been completed. The paid-in and authorised capital are $50,000,000 and $27,866,659, respectively, and the outstanding shares amounted to 2,766,666 thousand shares after deduction of repurchased treasury stocks of 20,000 thousand shares with par value of $10. C. On June 15, 2018, the shareholders at their shareholders’ meeting approved the capitalisation of the unappropriated earnings in the amount of $33,200 as resolved by the Board of Directors on March 27, 2018, and the record date for capital increase is August 8, 2018. The capital increase has been approved by Financial Supervisory Committee and the registration has been completed. The paid-in and authorised capital are $50,000,000 and $28,198,659, respectively. (22) Capital surplus A. Pursuant to the R.O.C. Company Act, capital surplus arising from paid-in capital in excess of par value on issuance of common stocks and donations can be used to cover accumulated deficit. Alternatively, it can be used to increase capital by issuing new shares or to distribute cash to shareholders in proportion to their share ownership, which shall be resolved by stockholders’ meetings, provided that the Company has no accumulated deficit. Further, the R.O.C. Securities and Exchange Act requires that the amount of capital surplus to be capitalised mentioned above should not exceed 10% of the paid-in capital each year. However, capital surplus should not be used to cover accumulated deficit unless the legal reserve is insufficient. B. In April 2017, the Board of Directors resolved to transfer treasury shares to the Group’s employees. The information is disclosed in Note 6(24). (23) Retained earnings A. Under the Company’s Articles of Incorporation, the current year’s earnings, if any, shall first be used to offset accumulated deficit, pay taxes, set aside as legal reserve and set aside or reverse special reserve in accordance with regulations. Whether the remainder, if any, is to be retained or to be appropriated, shall be resolved by the stockholders at the their meetings. Cash dividends shall account for at least 10% of the total dividends and the remaining will be distributed as stock dividends. B. Pursuant to the R.O.C. by the Company Act, except for covering accumulated deficit or issuing new stocks or cash to shareholders in proportion to their share ownership, the legal reserve shall not be used for any other purpose. The use of legal reserve for the issuance of stocks or cash to shareholders in proportion to their share ownership is permitted, provided that the distribution of the reserve is limited to the portion in excess of 25% of the Company’s paid-in capital. C. The amounts previously set aside by the Company as special reserve on initial application of IFRSs in accordance with FSC Letter No. 1010012865, dated April 6, 2012, shall be reversed proportionately when the relevant assets are used, disposed of or reclassified subsequently. Such amounts are reversed upon disposal or reclassified if the assets are investment property of land, and reversed over the use period if the assets are
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investment property other than land. D. (a).The Company’s earnings distribution for 2017 and 2016 was resolved by the Stockholders during their meeting in June 2018 and 2017. Details are as follows: 2017 2016 Dividend per Dividend per share share Amount (in dollars) Amount (in dollars) Legal reserve $ 237,023 $ 211,021 Cash dividends 1,798,332 $ 0.65 1,488,342 $ 0.55 Stock dividends 332,000 0.12 405,911 0.15 $ 2,367,355 $ 2,105,274
(b).The Company’s earnings distribution for 2018 was proposed by the Board of Director’ meeting in March 2019. Details are as follows: 2018 Amount share Legal reserve $ 174,949 Cash dividends 1,268,940 $ 0.45 Stock dividends 281,987 0.10 $ 1,725,876 E. For the information relating to employees’ compensation and directors’ remuneration, please refer to Note 6(33). (24) Treasury shares A. Movements in the number of the Company’s treasury shares for the years ended December 31, 2018 and 2017 are as follows: (Expressed in thousands of shares) For the years ended December 31, 2018 Beginning Ending balance of Share Share balance of Reason for reacquisition shares increase decrease shares To be reissued to employees 20,000 - - 20,000 For the years ended December 31, 2017 Beginning Ending balance of Share Share balance of Reason for reacquisition shares increase decrease shares To be reissued to employees 40,000 -( 20,000) 20,000 B. Pursuant to the R.O.C. Securities and Exchange Act, the number of shares bought back as treasury share should not exceed 10% of the number of the Company’s issued and outstanding shares and the amount bought back should not exceed the sum of retained earnings, paid-in capital in excess of par value and realised capital surplus.
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C. Pursuant to the R.O.C. Securities and Exchange Act, treasury shares should not be pledged as collateral and is not entitled to dividends before it is reissued. D. Pursuant to the R.O.C. Securities and Exchange Act, treasury shares should be reissued to the employees within three years from the reacquisition date and shares not reissued within the three-year period are to be retired. Treasury shares to enhance the Company’s credit rating and the stockholders’ equity should be retired within six months of acquisition. E. In April 2017, the Board of Directors resolved to transfer treasury shares to the Group’s employees and the subscription price is based on the average repurchase price of treasury shares. The total shares transferred to employees were 20,000 thousand shares. The Company received payments totaling $157,724, net of the securities transaction tax. The Group recognised $30,573 as employee benefits expenses and $22,172 as capital surplus. (25) Other interest income and interest expense Years ended December 31, 2018 2017 Interest income Interest income, bill$ 741,117 $ 617,390 Interest income, bond 1,426,707 1,539,187 Interest income, self-operation margin trading and short selling 520,300 444,056 Interest income, deposit 39,403 36,693 Interest income, rental 253,691 189,276 Others 53,713 43,667 3,034,931 2,870,269 Interest expenses Interest expense, repurchase( 876,878) ( 755,249) Interest expense, commercial papers( 64,179) ( 47,590) Interest expense, borrowings from central bank and other banks ( 268,243) ( 193,769) Others ( 20,685) ( 15,914) ( 1,229,985) ( 1,012,522) $ 1,804,946 $ 1,857,747 Net interest revenue (expense)
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(26) Net service fee and commission income Years ended December 31, 2018 2017 Service fee Service fee, guarantee $ 794,310 $ 762,267 Service fee, underwriting 492,615 355,270 Service fee, license (certification) - 137,418 Service fee, brokering 1,474,194 1,332,513 Others 197,362 131,994 2,958,481 2,719,462 Service charge Service charge, bills central depository( 10,953) ( 7,815) Service charge, self-operation ( 19,494) ( 13,361) Service charge, brokering ( 135,669) ( 116,114) Service charge, settlement ( 40,655) ( 31,318) Futures commission expense ( 13,063) ( 15,074) Others ( 8,556) ( 15,431) ( 228,390) ( 199,113) $ 2,730,091 $ 2,520,349 (27) Gains or losses on financial assets and financial liabilities at fair value through profit or loss Years ended December 31, 2018 2017 Realised gain (loss) Net gain (loss), bills $ 121,346 $ 199,450 Net gain (loss), bonds 90,363 300,854 Net gain (loss), disposal of listed stocks and open-end fund ( 295,742) 570,125 Net gain (loss), disposal of derivatives 99,698 ( 200,310) Net gain (loss), issuing call warrants 211,988 ( 66,553) Dividend income 77,991 - Others 3,770 ( 2,056) 309,414 801,510 Unrealised gain (loss) Net gain (loss), bills 49,089 ( 22,134) Net gain (loss), bonds ( 162,532) 51,389 Net gain (loss), disposal of listed stocks and open-end fund 168,582 16,182 Net gain (loss), derivatives 88,972 12,975 Net gain (loss), issuing call warrants ( 25,160) ( 16,477) Others 20,715 - 139,666 41,935 $ 449,080 $ 843,445
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(28) Realised gains on financial assets at fair value through other comprehensive income Year ended December 31, 2018 Gain on disposal Government bonds $ 247,931 Financial bonds 3,886 Corporate bonds 21,202 273,019 Loss on disposal Government bonds ($ 8,260) Financial bonds ( 6,419) Corporate bonds ( 49,546) Subtotal ( 64,225) Stock dividend income 35,824 $ 244,618
(29) Impairment loss on assets Years ended December 31, 2018 2017 Impairment loss on goodwill $ - $ 143,213 Impairment loss on investments in debt instruments measured at fair value through other comprehensive income 5,650 - Reversal of impairment loss on other financial assets ( 25) - Impairment loss recognised in profit or loss, property, plant and equipment 5,892 - Impairment loss on available-for-sale financial assets - 1,981 Impairment loss on financial assets at cost - 58,358 Other impairment loss - 75 $ 11,517 $ 203,627 (30) Bad debt expense, commitment and guarantee provision Years ended December 31, 2018 2017 Recovered bad debts and overdue accounts($ 18,827) ($ 7,432) Provisions for guarantee obligation 8,000 106,946 Allowance for bad debts (Note) 12,219 273,243 $ 1,392 $ 372,757 Note : In May 2017, Waterland Securities was commissioned to buy 2,428 thousands of shares of Pihsiang Machinery Manufacturing Co., Ltd. on margin, As of December 30, 2018, the amount of margin was $70,271, margin interest was $4,756 and advance payment was $409. As Pihsiang Machinery Manufacturing Co., Ltd. didn’t
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publish its financial statements for the three months ended March 31, 2017 in consistent with regulations, shares of Pihsiang Machinery Manufacturing Co., Ltd. have been delisted. Waterland Securities has claimed compensation from client and reported to Taiwan Stock Exchange. For the year ended December 31, 2018 and 2017, Waterland Securities recognized “Expected credit impairment losses” and “Losses on doubtful debts” at the amount of $239 and $75,197, respectively. The Company will continuously assess the probable loss based on results of disposal of shares of Pihsiang Machinery Manufacturing Co., Ltd. and compensation claimed from client. (31) Other non-interest income Years ended December 31, 2018 2017 Management fee and consulting revenues $ 106,185 $ 73,243 Gains (losses) on financial assets at cost - 23,766 Gains (losses) on disposal and retirement of 16,308 ( 537) assets Others 119,467 122,501 $ 225,115 $ 235,818
(32) Other miscellaneous income, net Years ended December 31, 2018 2017 Miscellaneous revenue $ 20,062 $ 567,260
The asset-backed commercial paper (ABCP) litigation of IBFC which was pending in Taiwan High Court reached a settlement in December 2017. Consideration for the settlement was $565,000 and shown as “Miscellaneous revenue”. (33) Employee benefit expense As of December 31, 2018 and 2017, the Group had 1,586 and 1,557 employees, respectively. The employee benefit expenses incurred for the years ended December 31, 2018 and 2017 are summarised below by function: Years ended December 31, 2018 2017 Employee benefit expense Wages and salaries $ 1,753,898 $ 1,816,231 Labour and health insurance fees 119,591 110,100 Pension costs 82,414 64,269 Other personnel expenses 38,949 24,648 $ 1,994,852 $ 2,015,248
A. In accordance with the Articles of Incorporation of the Company, The ratio of distributable profit before tax of the current year, after covering accumulated losses, shall be distributed as employees compensation and directors remuneration. The ratio shall be between 1 and 2% for employees’ compensation and shall not be higher than 2% for directors’ remuneration. B. For the years ended December 31, 2018 and 2017, employees’ compensation was accrued at $21,469 and $26,492, respectively, while directors’ remuneration was accrued
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at $30,669 and $36,126, respectively. The aforementioned amounts were recognised in wages and salaries. C. For the year ended December 31, 2018, the distributable profit of current year for the employees’ compensation and directors’ remuneration were estimated based on the ratio under the Articles and will be distributed in the form of cash. D. Employees’ compensation and directors’ remuneration of 2017 amounting to $26,492 and $36,126, respectively, as resolved at the meeting of Board of Directors were in agreement with those amounts recognised in the 2017 financial statements. E. Information about employees’ compensation and directors’ remuneration of the Company as resolved at the meeting of Board of Directors will be posted in the “Market Observation Post System” at the website of the Taiwan Stock Exchange. (34) Depreciation and amortisation expense Years ended December 31, 2018 2017 Depreciation expense $ 62,601 $ 63,307 Amortization expense 29,775 28,913 $ 92,376 $ 92,220
(35) Other general and administrative expense Years ended December 31, 2018 2017 Taxes$ 190,971 $ 188,382 Rental expense 144,419 146,660 Information technology expense 67,637 67,711 Postage expenses 66,048 62,222 Entertainment expense 53,705 68,700 Professional service fees 25,797 26,504 Repairs and maintenance expense 37,529 28,939 Depository service expense 32,395 27,255 Membership fee and allocation of expense 19,925 17,864 Others 219,148 212,242 $ 857,574 $ 846,479
2018 Consolidated Financial Report 251
(36) Basic and diluted earnings per share
Year ended December 31, 2018 Weighted average number of ordinary shares outstanding Earnings per share Amount after tax (share in thousands) (in dollars) Basic earnings per share Profit attributable to the parent $ 2,021,559 2,799,866 $ 0.72 Year ended December 31, 2017 Weighted average number of Earnings ordinary shares outstanding per share Amount after tax (share in thousands) (in dollars) Basic earnings per share Profit attributable to the parent $ 2,370,784 2,792,163 $ 0.85 The weighted average number of shares outstanding was retrospectively adjusted based on retained earnings capitalisation ratio in 2017.
(Following blank)
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7. RELATED PARTY TRANSACTIONS (1) Names of related parties and relationship Names of related parties Relationship with the Company Taiwan Finance Corporation Investments accounted for using equity method of the subsidiary IBFC First Commercial Bank Co., Ltd. (“FCB”) Director of the Company
Taiwan Cooperative Bank Co., Ltd. (“TCB”) Director of the Company
Bank of Kaohsiung Co., Ltd. (“BOK”) Director of the subsidiary Waterland Securities
The Shanhai Commercial & Savings Bank, Ltd. Director of the subsidiary Waterland Securities (“SCSB”) Mega International Commercial Bank Co., Ltd. Director of the subsidiary Waterland Securities
Cathay United Bank Co., Ltd. Major stockholder of the subsidiary Waterland Securities Cathay Financial Holding Co., Ltd. Major stockholder of the subsidiary Waterland Securities Mega Bills Co., Ltd. Director of the subsidiary Waterland Securities’s affiliated entity Mega Securities Co., Ltd. Director of the subsidiary Waterland Securities’s affiliated entity Taiwan Cooperative Financial Holding Co.,Ltd. The parent company of director of Company (“TCFHC”) First Financial Holding Co.,Ltd.(“FFHC”) The parent company of director of Company
First Securities Inc. (“FS”) The affiliated entity of director of Company
First Financial Asset Management Co., Ltd. The affiliated entity of director of Company (“FFAM”) First Securities Investment Trust Co., Ltd. The affiliated entity of director of Company (“FSIT”) Taiwan Cooperative Securities Co., Ltd. The affiliated entity of director of Company (“TCS”) BNP Paribas Cardif TCB Life Insurance Co., Ltd. The affiliated entity of director of Company
2018 Consolidated Financial Report 253
Names of related parties Relationship with the Company Taiwan Cooperative Bills Fiance Co., Ltd. The affiliated entity of director of Company
Entie Bank Co., Ltd. The chairman of Company and the general manager of the Company are second-degree relatives Paradigm Global High Yield Bond Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm Global Oil Resources Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm China Multi-opportunities Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm Emerging Asia Pacific Bond Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm Technology Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm Pion Money Market Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm Taiwan Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm Small Capital Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm Life Style Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm Japan First Class Rod Fund(Note1) Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm Taiwan Highlights No. 1 Fund Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm S&P Soybean Fund(Note2) Funds managed by second-tier subsidiary Paradigm Asset Management Paradigm 3-Year Maturity RMB Emerging Market Funds managed by second-tier subsidiary Paradigm Bond Fund(Note3) Asset Management Paradigm 3-Year Maturity China Offshore Emerging Funds managed by second-tier subsidiary Paradigm Market Bond Fund(Note4) Asset Management Paradigm S&P GSCI Brent Crude 2X Leveraged ER Funds managed by second-tier subsidiary Paradigm Futures ETF(Note4) Asset Management Paradigm S&P GSCI Brent Crude 1X Inverse ER Funds managed by second-tier subsidiary Paradigm Futures ETF(Note4) Asset Management Newmax technology Co., Ltd. Substantive related party of the subsidiary IBFC in substance International Bills Finance Corporation Foundation donated by the subsidiary IBFC Social Welfare Charity Foundation
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Names of related parties Relationship with the Company Other The subsidiary IBFC’s directors, supervisors, general managers, vice general managers, head of department directly under general managers and spouses and relatives of the subsidiary IBFC’s directors and general managers. Note1：The fund was liquidated in June 2017. Note 2：The fund was established in April 2017. Note 3：The fund was established in August 2017. Note 4：The fund was established in November 2017.
(2) Significant related party transactions and balances A. Significant transactions between IBFC and related parties are as follows : (a) Cash deposited with in banks and interest income: As of December 31, 2018 and 2017, the details of deposit balances were as follows: December 31, 2018 Checking account and Reserve Time deposits demand deposits account (Note) Total Key management of the parent company: FCB $ - $ 2,540 $ 38,854 $ 41,394 TCB 200,000 51,837 2,337 254,174 $ 200,000 $ 54,377 $ 41,191 $ 295,568 December 31, 2017 Checking account and Reserve Time deposits demand deposits account (Note) Total Key management of the parent company: $ - $ 3,137 $ 7,132 $ 10,269 FCB 200,000 51,590 - 251,590 TCB $ 200,000 $ 54,727 $ 7,132 $ 261,859 Note: It is shown as other financial assets. Please refer to Note 6(10). For the years ended December 31, 2018 and 2017, the related interest income were $220, respectively. (b) Banks call loans and overdrafts from bank and interest expense: The details of call loans and overdrafts balance as of December 31, 2018 and 2017 and the highest balance of call loans and overdraft, interest rate and related interest expense for the years ended December 31, 2018 and 2017 were as follows: Year ended December 31, 2018 Interest Highest balance Ending balance Interest rate (%) expense Key management of the parent company: FCB $ 5,000,000 $ 5,000,000 0.35~0.60 $ 15,271 TCB 3,000,000 -0.35~0.55 8,140 $ 8,000,000 $ 5,000,000 $ 23,411
2018 Consolidated Financial Report 255
Year ended December 31, 2017 Interest Highest balance Ending balance Interest rate (%) expense Key management of the parent company: FCB $ 2,000,000 $ 2,000,000 0.33~0.44 $ 7,235 TCB 3,000,000 3,000,000 0.33~0.44 8,312 $ 5,000,000 $ 5,000,000 $ 15,547 (c) Guarantees and endorsements: For the years ended December 31, 2018 and 2017, service fee from underwriting, certification and guarantees amounted to $316 and $204, respectively. As of December 31, 2018 and 2017, the details of guarantees provided to related parties for issuance of commercial papers were as follows: Year ended December 31, 2018 Allowance for bad debts and provision for guarantee Ending balance liabilities balance Rate (%) Collateral Other related parties: Newmax technology Co., Ltd. 11,000 110 2.65~2.70 Shares FFAM 400,000 4,000 0.86~1.03 Credit $ 411,000 $ 4,110
Year ended December 31, 2017 Allowance for bad debts and provision for guarantee Ending balance liabilities balance Rate (%) Collateral Other related parties: Newmax technology Co., Ltd. $ 11,000 $ 110 2.65 Shares (d) Non-guaranteed commercial papers and commercial papers guaranteed by others: For the years ended December 31, 2018 and 2017, service fee from underwriting and certification amounted to $2,427 and $2,515, respectively. As of December 31, 2018 and 2017, details of issuance of non-guaranteed commercial papers and commercial papers guaranteed by others from related parties were as follows: December 31, 2018 Unmatured amount Outstanding amount Rate (%) Other related parties: TCFHC $ 2,500,000 $ -0.51~0.795
December 31, 2017 Unmatured amount Outstanding amount Rate (%) Other related parties: TCFHC $ 1,400,000 $ - 0.49~0.51 TCS 530,000 - 0.46~0.73 FFHC 7,000,000 - 0.46~0.80 FS 356,000 - 0.46~0.72 $ 9,286,000 $ -
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(e) Net gain from trading bills and bonds: For the years ended December 31, 2018 and 2017, net gain from trading bills and bonds were $20,541 and $18,046, respectively. (f) Bills and bonds under repurchase or resell agreements: For the years ended December 31, 2018 and 2017, interest expenses of bills and bonds under repurchase or resell agreements with related parties were $2,236 and $2,733, respectively. As of December 31, 2018 and 2017, the balances of bills and bonds under repurchase or resell agreements with related parties were as follows: December 31, 2018 December 31, 2017 Other related parties: FS$ 370,044 $ 371,966 BNP Paribas Cardif TCB Life Insurance Co., Ltd. 49,960 280,801 $ 420,004 $ 652,767 The terms for the above transactions are not materially different from those with non-related parties. B. Significant transactions between Waterland Securities and its subsidiaries and related parties are as follows: (a) Cash in banks December 31, 2018 December 31, 2017 Key management of the parent company: TCB$ 73,810 $ 15,168 FCB 10,104 7,903 Key management of Waterland Securities: Mega International Commercial Bank Co., Ltd. 9,865 5,916 Other related parties: Cathay United Bank Co., Ltd. 484,944 520,755 Entie Bank Co., Ltd. 36,375 36,802 Other 1 1 $ 615,099 $ 586,545 (b) Bonds purchase under resell agreements Year ended December 31 2018 2017 Transaction amount Transaction amount Other related parties: Cathay United Bank Co., Ltd.$ 100,546 $ - Mega Bills Co., Ltd. 99,921 303,820 Mega Securities Co., Ltd. 100,276 301,621 $ 300,743 $ 605,441 As of December 31, 2018 and 2017, Waterland Securities and its subsidiaries had no bonds purchased under resell agreements with related parties.
2018 Consolidated Financial Report 257
(c) Bonds sold under repurchase agreements Year ended December 31 2018 2017 Transaction amount Transaction amount Other related parties: Mega Securities Co., Ltd.$ 100,090 $ 804,063 Entie Bank Co., Ltd. 598,868 - Cathay United Bank Co., Ltd. 802,476 401,379 $ 1,501,434 $ 1,205,442 As of December 31, 2018 and 2017, Waterland Securities and its subsidiaries had no bonds invested under repurchase agreements with related parties. (d) Outright Bond purchases/sales Year ended December 31, 2018 2017 Outright purchase Outright sell Outright purchase Outright sell transaction price transaction price transaction price transaction price Other related parties: Mega Securities Co., Ltd.$ 15,431,515 $ 3,029,071 $ 11,157,563 $ 4,477,716 Entie Bank Co., Ltd. 243,179 4,903,439 3,462,134 559,373 Cathay United Bank Co., Ltd. 5,796,096 4,999,751 851,988 500,962 Other 1,637,594 528,450 508,364 480,533 $ 23,108,384 $ 13,460,711 $ 15,980,049 $ 6,018,584 (e) Customer margin accounts/ Futures traders equity December 31, 2018 December 31, 2017 Other related parties: Paradigm Small Capital Fund $ 685 $ 8,047 Paradigm S&P Soybean Fund 93,081 - Paradigm S&P GSCI Brent Crude 2X Leveraged ER Futures ETF 21,317 - Other 26,515 - $ 141,598 $ 8,047 (f) Financial assets at fair value through profit or loss: As of December 31, 2018 and 2017, the balance of securities investment trust funds held by Waterland Securities and its subsidiaries and managed by second-tier subsidiaries amounted to $400,149 and $547,034, respectively. For the years ended December 31, 2018 and 2017, purchases of funds amounted to $1,810,500 and $2,046,500, respectively, and sale of funds amounted to $1,947,000 and $1,991,566, respectively.
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(g) Stocks issued by related parties December 31, 2018 December 31, 2017 Ending balance Ending balance of shares of shares (in thousand shares) Ending balance (in thousand shares) Ending balance Key management of Waterland Securities: SCSB - $ - 156 $ 5,243 Other related parties: Cathay Financial Holding Co., Ltd. 5 235 871 46,599
Year ended December 31 2018 2017 Gain (loss) on disposal Gain (loss) on disposal Key management of Waterland Securities: SCSB $ 286 $ 855 Other related parties: Cathay Financial Holding Co., Ltd. 2,049 11,461 Cathay Financial Holding Co., Ltd. (Preferred) - 4,368 (h) Other current assets December 31, 2018 December 31, 2017 Other related parties: Cathay United Bank Co., Ltd. $ 21,017 $ 70,154 Other 789 548 $ 21,806 $ 70,702 Other current assets are stock settlement and receipts under custody from customers' security subscription (i) Stock management revenue: For the years ended December 31, 2018 and 2017, stock management revenue from related parties amounted to $1,252 and $1,185, respectively. As of December 31, 2018 and 2017, stock management revenue receivables were $156 and $153, respectively. (j) Rental revenue: For the years ended December 31, 2018 and 2017, rental revenue from related parties amounted to $29,372 and $29,157, respectively. As of December 31, 2018 and 2017, lease receivables were $985 and $1,023, respectively. The above-mentioned transaction payment terms are based on a mutually signed contact. (k) Rental expense: For the years ended December 31, 2018 and 2017, rental expense to related parties amounted to $5,868 and $5,828, respectively. As of December 31, 2018 and 2017, no balance of lease payables, respectively. The above-mentioned transaction payment terms are based on a mutually signed contact. (l) Professional service fees: For the years ended December 31, 2018 and 2017, professional service fees to related parties amounted to $0 and $50, respectively. As of December 31, 2018 and 2017, Waterland Securities has no professional service fee payable to related parties.
2018 Consolidated Financial Report 259
(m) Funds management fee revenues Year ended December 31 2018 2017 Other related parties: Paradigm Global High Yield Bond Fund $ 10,137 $ 12,823 Paradigm 3-Year Maturity China Offshore Emerging Market Bond Fund 18,136 - Paradigm 3-Year Maturity RMB Emerging Market Bond Fund 29,352 11,156 Other 43,266 44,552 $ 100,891 $ 68,531
As of December 31, 2018 and 2017, funds management fee revenues receivables from related parties were $7,608 and $8,930, respectively. The above-mentioned transaction payment terms are based on a mutually signed contact. (n) Line of credit and drawdown amounts December 31, 2018 December 31, 2017 Drawdown Drawdown Line of credit amount Line of credit amount Key management of the parent company: TCB $ 1,000,000 $ - $ - $ - FCB - - 1,000,000 - Key management of Waterland Securities: SCSB 150,000 - 90,000 - Other related parties: Cathay United Bank Co., - - Ltd. 2,500,000 2,500,000 Other 50,000 - 100,000 - $ 2,700,000 $ -$ 3,690,000 $ - (o) Interest income Year ended December 31 2018 2017 Key management of Waterland Securities: Mega International Commercial Bank Co., Ltd. $ 20 $ 2,353 Other related parties: Cathay United Bank Co., Ltd. 5,654 5,726 Other 545 193 $ 6,219 $ 8,272 Abovementioned interest income refers to interest income due from banks.
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(p) Borrowing costs Year ended December 31 2018 2017 Key management of the parent company: FCB $ 193 $ 397 Other related parties: Cathay United Bank Co., Ltd. 741 986 $ 934 $ 1,383 Borrowing costs include interest, license, underwriting and settlement expenses. (q) Pledged assets i. Time deposit December 31, 2018 Pledged certificate Other banks time Total pledged of deposit Deposit pledge amount Key management of Waterland Securities: BOK $ 53,000 $ - $ 53,000 SCSB 60,000 - 60,000 Other related parties: Cathay United Bank Co., Ltd. 108,400 1,682,700 1,791,100 Other 6,166 - 6,166 $ 227,566 $ 1,682,700 $ 1,910,266
December 31, 2017 Pledged certificate Other banks time Total pledged of deposit Deposit pledge amount Key management of Waterland Securities: BOK $ 53,000 $ - $ 53,000 SCSB 20,000 - 20,000 Other related parties: Cathay United Bank Co., Ltd. 108,400 1,450,000 1,558,400 Other 6,166 - 6,166 $ 187,566 $ 1,450,000 $ 1,637,566
ii. As of December 31, 2018 and 2017, land and buildings pledged to Cathay United Bank Co., Ltd. were $1,056,061 and $1,064,425, respectively. iii. Collateral pledged are mainly for short-term borrowings, settlement reserve and deposit for property leasing. (r) As of December 31, 2018 and 2017, the balance of time deposits in Cathay United Bank Co., Ltd as operating guarantee deposits were both $510,000 and those in Entie Bank Co., Ltd. were both $25,000. (s) For the years ended December 31, 2018 and 2017, securities brokerage fees of Waterland Securities from related parties were $9,980 and $7,675, respectively. (t) For the years ended December 31, 2018 and 2017, the securities underwriting fees of Waterland Securities from related parties were $34 and $0, respectively.
2018 Consolidated Financial Report 261
(u) The transaction price and payment terms that the Company has come to an agreement with above related parties are the same as those with non-related parties. C. As of December 31, 2018 and 2017, the balance of cash deposited with banks as related parties of the Company were $27,371 and $13,670, respectively. Interest income from related parties amounted to $18 and $12, respectively, for the years ended December 31, 2018 and 2017. D. For the years ended December 31, 2018 and 2017, donation of the Group to the related party, International Bills Finance Corporation Social Welfare Charity Foundation, were $3,500 and $2,500, respectively. (3) Key management compensation Year ended December 31 2018 2017 Wages and salaries and other short-term employee benefit expenses $ 218,739 $ 250,418 Post-employment benefits 3,040 2,773 Share-based payment - 2,880 Termination benefits 6,409 - $ 228,188 $ 256,071
8. PLEDGED ASSETS Asset Items December 31, 2018 December 31, 2017 Purpose of pledge Properties and equipments Land $ 803,240 $ 803,240 Short-term borrowings Building 252,821 261,185 Short-term borrowings Other financial assets Time deposits 2,173,266 1,900,566 Short-term borrowings, rental deposits, settlement payments for others and bank overdrafts collateral Other assets Cash in banks 746,813 746,268 Operating bond and clearing and settlement fund to securities firm and futures commission merchant Financial assets at fair value through profit or loss Transferable time deposit 7,235,000 7,400,000 Central Bank, bank overdrafts and call loans collateral
Government bond 6,600 6,796 OTC contract guarantees
Financial assets at fair value through other comprehensive income Government bond 2,687,427 3,268,264 Operating guarantee deposits for bill merchants and bond settlement reserves merchants, for Electronic Bond Trading System (EBTS), guaranty money for litigations and collateral for bank overdrafts.
Stock - 84,345 Guarantees on commercial papers and short-term borrowings $ 13,905,167 $ 14,470,664
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9. SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNISED CONTRACT COMMITMENTS (1) As of December 31 2018 and 2017, the details of commitments and contingent liability of the subsidiary, IBFC, are as follows: December 31, 2018 December 31, 2017 Guarantees on commercial paper$ 117,375,400 $ 112,040,100 Sales of bills and bonds under repurchase agreements (Note)$ 174,787,317 $ 161,888,262 Acquisition of bills and bonds under reverse repurchase agreements (Note)$ 500,228 $ - Fixed rate commercial paper commitments$ 17,082,000 $ 12,132,000 Benchmark interest rate commercial paper commitments$ 48,481,000 $ 29,493,000 Revolving commitments of selling commercial paper sold$ 5,100,000 $ 5,850,000
Note: Refers to repurchase/resell prices of repurchase / resell trades on maturity dates. (2) Significant litigation against the subsidiary Waterland Securities is as follows: Global Securities Finance Co. (“GSF”) claimed that a former employee of Concourse Securities Co., Nanjin Branch provided accounts to others for the use of financing transaction with GSF without the account holders’ consent in 1998 and it caused damage to GSF. Waterland Securities settled with GSF on September 7, 2017 and paid $27,000 for settlement on December 31, 2017. (3) In accordance with regulations, the subsidiary Waterland Securities obtains letters of consent from Yuanta Securities Co., Ltd and Capital Securities Crop to be the first priority and second priority to conduct settlement matters on its behalf. According to letters of consent, when branches of the subsidiary Waterland Securities are unable to perform their settlement obligations, the mandated securities firm shall undertake to conduct settlement matters immediately on the behalf of branches of the subsidiary Waterland Securities as per TWSE’s request. Branches of the subsidiary Waterland Securities have also been appointed to be the first or second priority of mandated securities firm for the above securities firms. (4) The information of lease contracts and capital expenditures commitments of the Company and its subsidiaries is disclosed in Note 12(5) B(c).
10. SIGNIFICANT DISASTER LOSS None.
11. SIGNIFICANT EVENTS AFTER THE BALANCE SHEET DATE (1) On January 31, 2019, Waterland Financial Holding transferred 20,000 treasury shares to the employees of the Group. (2) On January 31, 2019, the Board of Waterland Securities’s Directors resolved to dispose 80% of shares of Paradigm Taiwan Asset Management Co., Ltd., and transaction amount depend on the net asset value of each shares of Paradigm Asset Management Co., Ltd.’s CPA – Audited financial statement at December 31, 2018, multiplying the price by 1.1 times to sell 32,000 of shares of common stock to Jkos Network Co., Ltd and related counterparty. The transaction was approval for investigation by the Regulator on February 27, 2019.
2018 Consolidated Financial Report 263
12. OTHERS (1) Fair value information of financial instruments As the short maturities or future payment or receipt is close to the carrying amount, the carrying amount at the balance sheet date was approximate to fair value for the financial instruments that are not measured at fair value, including cash and cash equivalents, due from the central bank and call loans to banks, securities purchased under resell agreements, receivables, other financial assets, guarantee deposits paid, due to the central bank and banks, notes and bonds issued under repurchase agreement, commercial papers payable, payables, other financial liabilities and other liabilities. Hierarchy information on financial instruments at fair value is as follows: (2) Fair value information A. Definition for the hierarchy classification of financial instruments measured at fair value (a) Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. A market is regarded as active where a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The fair value of the Group’s investment in listed stocks, emerging stocks, beneficiary certificates, on-the-run Taiwan central government bonds and derivative instruments with quoted market prices is included in Level 1. (b) Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The fair value of the Group’s investment in emerging stocks without active market, off-the-run government bonds, corporate bonds, bank debentures, convertible bonds and most derivative instruments is included in Level 2. (c) Level 3 Unobservable inputs for the asset or liability. Unlisted stock and emerging stock investments are all classified within Level 3. B. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer and broker and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Fair values of listed stocks, closed-end funds and depository receipts are determined by the closing price at the balance sheet date in an active market. Fair values of open-ended funds are determined by the net asset value at the balance sheet date. When fair value of debt instruments are available in major exchange markets and bulletined (for central government bonds determined as on-the-run issues) by OTC market, the debt instruments are classified as quoted prices in active market quotes in level 1. C. If all significant inputs required to measure fair value of an instrument are observable, the instrument is included in level 2. If non-derivatives held by the Group have no active market, fair value measured by using valuation techniques or quoted price offered by the counterparties can be referred to current fair value of instruments with similar terms and characteristics in substance, discounted cash flow method or other valuation methods, including calculated by applying model using market information available at the balance sheet date (yield curves on the Taipei Exchange, average commercial paper
264 WATERLAND FINANCIAL HOLDINGS
interest rates quoted from Reuters and TAIBOR). When assessing non-standard and low-complexity derivative instruments, for example, debt instruments without active market, interest rate swap contracts, foreign exchange swap contracts and options, the Group adopts valuation technique that is widely used by market participants. The inputs used in the valuation method to measure these financial instruments are normally observable in the market. D. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. For high-complexity financial instruments, the fair value is measured by using self-developed valuation model based on the valuation method and technique widely used within the same industry. Certain inputs used in the valuation model are not observable at market, and the Group must make reasonable estimates based on its assumptions. E. Level information of financial instruments at fair value December 31, 2018 Total Level 1 Level 2 Level 3 Recurring fair value measurements Non-derivative instruments Assets Financial assets at fair value through profit or loss Short-term notes and bills $ 120,252,641 $ - $ 120,252,641 $ - Stocks investments 2,082,647 1,578,742 92,169 411,736 Bonds investments 4,117,881 5,751 4,112,130 - Investments in bonds 613,011 613,011 - - Open-end fund 147,998 147,998 - - Call (put) warrant 90,740 90,740 - - Financial assets at fair value through other comprehensive income Equity investments 2,198,885 334,024 - 1,864,861 Bonds investments 108,386,577 1,783,526 106,603,051 - Liabilities Financial assets at fair value through profit or loss 968,467 958,300 10,167 - Derivative instrument: Assets Financial assets at fair value through profit or loss 60,295 2,039 58,256 - Futures guarantee 521,938 521,938 - - Liabilities Financial assets at fair value through other comprehensive income 117,462 4,504 112,958 -
2018 Consolidated Financial Report 265
December 31, 2017 Total Level 1 Level 2 Level 3 Recurring fair value measurements Non-derivative instruments Assets Financial assets at fair value through profit or loss Short-term notes and bills $ 121,909,291 $ - $ 121,909,291 $ - Bonds Investments 1,538,087 1,527,262 10,825 - Bonds Investments 3,677,184 - 3,677,184 - Investments in bonds 622,648 622,648 - - Open-end fund 27,177 27,177 - - Call (put) warrant 8,850 8,850 - - Financial assets at fair value through other comprehensive income Equity investments 867,842 867,842 - - Bonds Investments 106,018,560 2,704,996 103,313,564 - Liabilities Financial assets at fair value through profit or loss 131,819 120,264 11,555 - Derivative instrument: Assets Financial assets at fair value through profit or loss 51,504 640 50,864 - Futures guarantee 268,759 268,759 - - Liabilities Financial assets at fair value through other comprehensive income 208,762 11,601 197,161 -
F. No transfers between Level 1 and Level 2 occurred through January 1 to December 31, 2018 and January 1 to December 31, 2017
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G. Movements of financial assets at fair value classified into Level 3 Gain and loss on valuation Addition Reduction Amount recognised Items Amount in other Beginning recognised in comprehensive Purchased Transferred Sold, disposed Transferred balance gain and loss income or issued to Level 3 or settled from Level 3 Ending balance Financial assets at fair value through profit or loss Equity investment$ 417,902 $ 79,858 $ - $ 68,984 $ 6,164 ($ 36,750) ($ 124,422) $ 411,736
Financial assets at fair value through other comprehensive income Equity investment$ 813,712 $ - $ 42,425 $ 1,036,794 $ - ($ 28,070) $ - $ 1,864,861 H. In May 2018, trading of an equity investment in financial assets at fair value through profit or loss in the over-the-counter market was ceased, and such investments no longer had sufficient observable market information. Thus the Group transferred the fair value of investments from Level 1 into Level 3. Some other equity investments started trading in emerging market in June 2018 and sufficient observable market information became available, therefore the Group transferred these investments from Level 3 to Level 1and Level 2. For the year ended December 31, 2017, there was no investments in Level 3. I. For fair value measurements of Level 3, the sensitivity analysis of fair value on reasonable and replaceable assumptions concludes that the fair value measurement on financial instruments are reasonable. However, different valuation models or parameters may lead to different valuation results. The following is the effect of profit or loss or of other comprehensive income from financial instruments categorised within Level 3 if the inputs used to valuation models have changed upward or downward 10%: Fair value changes recognised Fair value changes recognised December 31, 2018 in profit and loss in other comprehensive income favourable unfavourable favourable unfavourable Financial assets at fair value through profit or loss Equity investment$ 8,145 ($ 8,145) $ - $ - Financial assets at fair value through other comprehensive income Equity investment$ - $ - $ 60,622 ($ 60,622)
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J. The following is the qualitative information of significant unobservable inputs used in Level 3 fair value measurement: Relationship between inputs Fair value Valuation technique Significant unobservable inputs Range and fair value Financial assets at fair value through profit or loss The higher the multiple, Equity investment$ 411,736 Price multiplier approach Price to earnings ratio multiple 0.94～3.19 the higher the fair value. The higher discount for Discount for lack of marketability 10%～50% marketability is, the lower the fair value is. The higher discount for Price-to-book ratio 0.83～3.57 marketability is, the lower the fair value is. Financial assets at fair value through other comprehensive income Venture capital company$ 7,129 Net assets method Not applicable Not applicable Not applicable Market approach –Market The higher discount for Discount for lack Equity investment 1,857,732 comparable companies or 0%～60% marketability is, the of marketability net asset value approach lower the fair value is. The higher the ratio is, Price-to-book ratio 0.52～1.72 the higher the fair value is. Transaction price in recent year 75.13 Not applicable K. Fair value measurement process for instruments classified in Level 3 When the Group measures the fair value of Level 3 financial instruments, the valuation department shall confirm the valuation model, parameters used, source of parameters and calculation method with the verification department first, confirm the independence and reliability of data sources and aperiodically adjust the valuation model, parameters and calculation methods to ensure the valuation result is reasonable. (3) Capital management In order to establish an evaluation process for capital adequacy and maintain proper self-owned capital structure, and also to develop business and control risk for better improvement of capital utilization, the Company sets up Minimum Capital Adequacy Ratio Management to implement capital strategies of senior management and disclose or report related information to competent authority. Objectives, policies and procedures of capital management are as follow: A. Objectives of capital management (a) The Company and each subsidiary in the Group shall identify, measure and control all relevant risks when undertaking a business and confine potential risks to a reasonable level in order to realise optimum allocation between risks and returns and maintain the capital adequacy. (b) In accordance with the Company’s rules of risk management procedures, the consolidated capital adequacy ratio for the Group shall not be lower than 100%, capital adequacy ratio for IBFC should be not be lower than 8%, capital adequacy ratio for Waterland Securities should not be lower than 150%. B. Policies and procedures of capital management The Company sets up its warning indicators for risk limitation and risk warning procedures are triggered if capital adequacy ratio of the Group does not meet 120%, or capital adequacy ratio for IBFC does not meet 10.5%, or capital adequacy ratio for
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Waterland Securities does not meet 250%. Department of risk management of the Company shall issue a warning notice to the Company or subsidiaries, request for explanation and report it to business development committee. C. Related information on capital adequacy. (a) The Group’s capital adequacy Expressed In Thousands Of New Taiwan Dollars, % December 31, 2018 Ownership of Items Qualifying Legal capital financial holding Company capital demand company Waterland Financial Holding Co., Ltd. -$ 32,435,350 $ 34,951,042 IBFC 100% 26,040,272 14,761,780 Waterland Securities 58.09% 3,858,602 1,759,980 Waterland VC 100% 1,404,528 1,114,709 Deductible item( 35,030,125) ( 34,740,306) Subtotal$ 28,708,627 $ 17,847,205 Capital adequacy ratio 160.86%
Expressed In Thousands Of New Taiwan Dollars, % December 31, 2017 Ownership of Items Qualifying Legal capital financial holding Company capital demand company Waterland Financial Holding Co., Ltd. -$ 32,307,632 $ 34,662,471 IBFC 100% 26,016,680 13,666,326 Waterland Securities 58.09% 3,752,041 1,690,750 Waterland VC 100% 1,383,823 1,151,661 Deductible item( 34,742,148) ( 34,509,986) Subtotal$ 28,718,028 $ 16,661,222 Capital adequacy ratio 172.36% (b) Qualifying capital of financial holding company Expressed In Thousands Of New Taiwan Dollars, % Items December 31, 2018 December 31, 2017 Common share$ 28,198,659 $ 27,866,659 Capital surplus 122,240 122,240 Legal reserve 1,640,034 1,403,011 Special reserve 234,587 234,587 Accumulated profit and loss 1,749,485 2,370,231 Equity adjustment 649,091 469,817 Less：capital deductible item ( 158,746) ( 158,913) Total qualifying capital$ 32,435,350 $ 32,307,632 (4) Financial risk management objectives and policies A. Risk management mechanism The Company constructed a risk management mechanism in accordance with laws and regulations and the overall business strategy of the Company. The Company's risk management policy covers objectives, scope and management procedures, and sets risk management principles and limits based on different attributes of various
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risks. The risk management objective of the Company is to identify, measure and control various business risks, to control the risks that may arise to a reasonable extent and to maintain appropriate level of capital adequacy. The Company has risk management guidelines, and base upon that, each subsidiary has developed risk management procedures and implementation guidelines for related businesses. The risk management mechanism is as follows:
B. Risk management organization The Board of Directors of the Company approves risk management policy, and senior management implements the policies approved by the Board of Directors, and clearly defines procedures for identifying, measuring, supervising and controlling various risks. The Company has (a) an audit committee which is affiliated to the Board of Directors, is responsible for supervising the effective implementation of internal controls and the control of the existing or potential risks of the Company; (b) Economic development committee, which is subordinate to the Board of Directors and is responsible for the medium and long-term operating and development of the Company, capital planning, review of subsidiaries' business objectives and budget, and coordination of major business matters between subsidiaries and the supervision of subsidiaries operating performance; (c) Compliance Office, to which the deputy general manager is assigned as the compliance officer, is responsible for planning management and execution of compliance system; (d) Risk Control Office, responsible for monitoring exposure various types of risk, and reviewing the development and implementation of risk management mechanisms of subsidiaries; (e) Audit Office, responsible for auditing various business risks on a regular basis . The risk management organization structure of the Company is as follows:
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C. Risk management policy All types of risks involved in the business of the Company and its subsidiaries, including but not limited to market risk, credit risk, operational risk, legal risk and liquidity risk, should be included in the scope of risk management. When implementing various risk management procedures, the Company and its subsidiaries shall, in addition to complying with the relevant provisions of competent authorities, follow risk management policies and guidelines. Various risk management principles are as follows: (a) Capital adequacy management In order to ensure the normal operation of finances and businesses, the Company and its subsidiaries should maintain appropriate level of capital adequacy. (b) Market risk management Control market risks through management mechanisms such as limit management, investment review and stop loss. (c) Credit risk management Control credit risk through management mechanisms such as limit management and credit review. (d) Liquidity risk management Assets or liabilities should not be excessively concentrated and should maintain a diversified source of funding. (e) Large scale of risk exposure management Control large-scale risk expose through management mechanisms such as limit management, credit review and investment review. (f) Operational risk management Establish a rigorous internal control system and reduce the chances of operational risks through internal audits and legal compliance systems. (g) Stakeholder transaction risk management Control the risk of trading with interested parties through management mechanisms such as limit management, credit review and investment review.
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(h) Investment risk management The long-term investment evaluation report shall be co-signed by an independent risk management unit or an audit unit. In addition, relevant risk management policies of IBFC are as follows: (a) Credit risk Credit risk management policy of IBFC includes credit evaluation beforehand, grading management and credit monitoring afterwards and measures to effectively reduce the risk. IBFC establishes appropriate risk limits through clear tiered authorization responsibility to avoid excessive concentration of credit risk; and establishes a credit review system to detect possible credit problems early, reduce defaults, and regularly assessed and supervision of credit enhancement tools. Credit risk from credit, various transactions and securities purchased are managed as a whole. IBFC regularly monitors credits, and the transaction status of each authorized amount are handled in accordance with relevant regulations. (b) Market risk In accordance with the annual market risk management objectives reviewed by the Board of Directors of the subsidiary IBFC, the handling plan for individual risk limits and loss limits for major financial instruments is sought to balance the expected profit of each financial instrument with the risk-taking ability of the subsidiary. It also formulates various business standards, control indicators, position evaluations and rules of business handling for new types of financial instruments, as the basis for the implementation of risk management. Market risk management reports are provided on a regular basis as a reference for monitoring market risks and developing market risk management strategies. (c) Operational risk The subsidiary establishes a rigorous internal control system and reduces the chances of operational risks through internal audits and legal compliance systems. Each transaction and operation personnel shall establish independent operation procedures for front-end trading and back-end settlement in order to implement operational risk management. Each business unit shall carry out its business in accordance with the relevant internal control system, business rules and emergency contingency plans, and conduct self-auditing on a monthly basis. (d) Liquidity risk Asset allocation plan shall be formulated according to regulations, purposes of funding and liquidity and profitability. Assets or liabilities shall not be excessively concentrated, and the sources shall be kept diversified to control liquidity risks. Liquidity risk management reports, including funding sources, capital utilization, and funding gap analysis should be regularly provided. In case of abnormal changes in the funding gap, appropriate improvement measures should be taken according to the “Funding and Emergency Response Points” of IBFC to maintain security of capital management. D. Sources and definition of risks When the Company and its subsidiaries engage in various businesses, they should identify, measure and control the risks involved and control the risks that may arise to a reasonable extent to achieve the optimal allocation of risks and rewards and maintain appropriate capital adequacy. In addition, relevant details of IBFC are as follows:
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(a) Credit risk The scope of measurement covers the risk that issuers of holding position, counterparties or debtors may not fulfill their obligations in the future. IBFC has established a client relationship management (CRM) database which extensively collects multi-dimensional operation and finance information of clients. IBFC establishes an early warning system to grasp clients’ dynamics, raises the credit review ratio, and regularly reviews credit risk. It also prepares various business statistics and risk management reports. IBFC reports them to the management, and to competent authorities on a regular basis. IBFC develops principles of credit risk pricing, and applied price differences based on the default risk and the collateral recovery rate, in order to balance expected loss and profit. A stress test is conducted each year to assess the potential impact on the subsidiary to evaluate potential impact to the subsidiary under extreme cases and to provide management reference for making credit risk strategy. (b) Market risk The scope of measurement includes the risk that various financial instruments may cause the market value of the holding position to fall due to fluctuations in market prices or interest rates. IBFC conducts a fair value assessment on financial instrument measured at fair value and monitors whether the relevant transactions are carried out within the authorized risk limits. At the same time, a sensitivity analysis and market risk value (VaR) model are established to plan for efficient risk compensation decisions. IBFC regularly produces market risk assessment reports to the management, which includes various market risk positions, unrealized gains and losses, derivative analysis and related risk limits. (c) Operational risk The scope of measurement covers whether the design of front-end trading, middle-office risk control, and back-office settlement and delivery duties considers separation of duties and checks and balances. In order to effectively control operational risk, each unit should fill out the “Operational Risk Management Monthly Report” every month, and continually track and manage the operational risk events that have been but yet to be closed. The risk management unit shall report the operation risk management situation to the risk management committee and the Board of Directors on a quarterly basis as a reference for business management decisions. All units shall conduct self-auditing and report to the audit office on a monthly basis; and the audit office shall conduct on-site inspections to each business unit at least every six months, and follow up on ratification of the control deficiencies. (d) Liquidity risk The scope of measurement includes appropriateness of various use of funds of IBFC (mainly for holding commercial papers, bonds, call loans to other banks, deposits and bills and bonds under resell agreements) and source of funds (mainly bills and bonds under repurchase agreements and call loans from other bank). In order to effectively control liquidity risk, various capital utilization and source management principles and funding gap limits are established. If the limits have to be exceeded for business, it must be signed by the general manager for verification and adjusted and improved as soon as possible.
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E. Risk hedging or mitigation policy When the Company and its subsidiaries engage in various businesses, they shall not exceed the statutory limits of these businesses and limits internally set; in addition, the Company may limit the scope of related business of subsidiaries or the engaging amount based on the consideration of risk diversification. Various risk limits are as follows:
Note: Except for capital adequacy ratio, other items are multiples or percentages of the Company’s net book value. F. Recognition and measurement of expected credit losses Expected credit loss is the valuation basis of impairment loss, which considers reasonable and supportable information about past events, current conditions and forecasts of future economic conditions (available without undue cost or effort). On the balance sheet date, the Group assesses whether there has been significant increase in credit risk since initial recognition or whether asset is already credit-impaired. It is
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classified into one of the following three stages: credit risk has not significantly increased or credit risk is low on the balance sheet date (Stage 1), credit risk has significantly increased (Stage 2) and credit has been impaired (Stage 3). The loss allowance is measured using 12-month expected credit losses (Stage 1) and lifetime expected credit losses (Stage 2 and Stage 3). The definition of each stage and recognition of expected credit loss are as follows: Stage 1 Stage 2 Stage 3 Financial assets with no Financial assets with Credit-impaired significant increase in significant increase in financial assets at the credit risk since initial credit risk since initial reporting date Definition recognition or low recognition credit risk at the reporting date Recognition 12-month expected Lifetime expected credit Lifetime expected of expected credit losses losses credit losses credit losses
The Group uses the following key judgements and assumptions when estimating expected credit losses in accordance with IFRS 9: (a) Determining whether these has been significant increase in credit risk since initial recognition At each reporting date, the Group assesses whether there has been changes in the default risk of credit assets and debt instruments measured at fair value through other comprehensive income in order to determine whether there has been significant increase in credit risk since initial recognition i. Credit business The major indicators for significant increase in credit risk used by the credit business of IBFC are as follows: (i) The borrower is over 30 days past due. (ii) The borrower has other records of bad credit: (a) The borrower has applied for interest-only payments or initiated debt negotiations. (b) Negotiable instruments issued by the borrower are not accepted. (c) The borrower has delayed payments owed to other financial institutions. (d) Other records of bad credit. (iii) The possibility of elimination of collateral. ii. Debt instruments A debt instrument is considered to have significant increase in credit risk if any of the following conditions apply. (i) Contractual payments, including interest, are 30 days past due (ii) Credit rating at the reporting date is of non-investment grade (BBB-) and has decreased by more than 2 scales since initial recognition.
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(iii) Placed on the warning list of securities subsidiaries. (b) Definition of financial assets in default and a credit-impaired financial asset i. Credit business (i) The borrower is more than 3 months past due. (ii) Borrower’s loans from other banking institutions have been recognised as non-performing, and reclassified as non-accrual or written off as uncollectible. (iii) Borrower has filed for reorganization or bankruptcy. (iv) The borrower failed to repay principal and is in the deterioration of the financial condition. The borrower has hire loan negotiators. (v) The collateral has been seized or actioned. (vi) Other situation that has significant damage to the Group’s credit right. ii. Debt instruments A debt instrument is considered credit-impaired if any of the following conditions apply: (i) Contractual payments, including interest, are over 3 months past due. (ii) Credit rating at the reporting date is of default grade. (iii) Court has initiated reorganisation or liquidation proceedings. (iv) Declaration of bankruptcy in court. (v) The issuer has filed for bankruptcy, reorganisation or other debt relief procedures, or another party has filed for such procedures on behalf of the issuer (c) Write-off policy The Company writes off its non-performing and non-accrual loans as bad debt, less the estimated recoverable amount, if any of the following conditions apply: i. The debt cannot be fully or partially recovered due to the dissolution of, disappearance of, settlement with, or declaration of bankruptcy by the debtor. ii. The collateral and assets of the primary and secondary debtors cannot be used to recover the debt due to more senior claims on such assets or low value of such assets. iii. The collateral and assets of the primary and secondary debtors could not be auctioned off after multiple attempts. iv. The non-performing and non-accrual loans are two years past due, and could not be recovered from collection procedures. v. The non-performing and non-accrual loans less than two years past due, which could not be recovered from collection procedures, can be written off as bad debt, less the estimated recoverable amount. vi. Unsecured non-performing and non-accrual loans are required to be written off as bad debt when they are over six months past due; however, loans for which it is possible to go after the assets of the primary or secondary debtor are not subject to this requirement.
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(d) Measurement of expected credit losses The expected credit loss (ECL) model of debt instruments is primarily based on the following three parameters: probability of default, loss given default and exposure at default. i. Credit business (i) Loss given default (LGD) (a) Stage1：The incidence rate of guarantee obligation for normal assets are assessed based on the self - guaranteed loss rate in the past 10 years. Calculation of the self - guaranteed loss rate is as follows: (amount of written-off bad debt in the past 10 years less amount of recovered bad debt in the past 10 years) / average guaranteed amount in the past 10 years. (b) Stage2：“Guaranteed bill receivables evaluation form” is prepared based on the financial situation of debtors and collateral to estimate potential losses from difference between future cash flow and credit balance. (c) Stage3：“Credit evaluation form” is assessed based on the financial situation of debtors and collateral to estimate potential losses from difference between the future cash flow and credit balance. (ii) Exposure at default (EAD): EAD is the balance of self - guaranteed loss issuance and it is calculated on commercial paper guarantee amount off the balance sheet. ii. Debt instruments (i) Probability of default: Use data from external credit ratings. (ii) Loss given default: The average loss given default in data from external credit ratings. (iii) Exposure at default: Total carrying amount, including interest receivable. (e) Consideration of forward-looking information: i. Credit business (i) Please refer to Market Observation Post System for material information and external credit information. (ii) Internal credit check process and credit rating include background checks, financial situation, operating performance, investment performance, repayment capacity, business comparison, industrial development. ii. Debt instruments According to the rating guideline published by external credit rating agencies, credit ratings have already incorporated forward-looking information.
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(5) Significant financial risks and degrees of financial risks A. Credit risk Credit risks occur when counterparty fails to fulfill its obligation and results in losses in financial instruments held by the Group. In addition, the information regarding policy of IBFC is as follow: Losses in financial instruments held by IBFC occurs when the counterparty fails to fulfil its obligation. IBFC has a considerable amount of guarantee commitments because of financial guarantees for underwriting of commercial papers issued. Such guarantee agreement normally comes with a year expiration period. The range of contract period for commercial papers is within a year and the expiration dates are not concentrated on the same day. Since IBFC is only subject to payments in the event of default on the issuer of commercial papers in such guarantee contracts and not all the contracts are guaranteed to be funded, the contract amount for such financial instruments does not represent the expected future cash outflow. In other words, the demand for future cash flow is less than the contract amount. When default on the issuer of commercial papers in such guarantee contracts occurred and the underlying collateral or other collateral has completely lost its values, the amount of credit risk exposure will be equal to the drawndown amount, which is the maximum potential loss. In granting guarantees for the issuance of commercial papers, IBFC undertakes strict credit assessment and also demands appropriate collateral from clients as necessary. Collateral provided normally includes cash, real estate, liquid securities or other assets. In the event of client defaults, IBFC assumes rights on such collateral or other collateral to reduce credit risk. Fair value of collateral is not taken into consideration when disclosing maximum credit risk exposure. (a) The commercial papers guarantee contracts, drawndown amount of guarantee contracts and percentage of guarantee with collateral of IBFC that has credit risks off the balance sheet are as follows: December 31, 2018 December 31, 2017 Commercial paper guarantee contract$ 233,822,900 $ 204,463,800 Drawdown amounts of guarantee contracts 117,375,400 112,040,100 The percentage of guarantees 70.40% 61.90% with collateral (b) The maximum credit exposure of IBFC and accounts off the balance sheet are as follows: Financial instrument items December 31, 2018 December 31, 2017 Guarantees off the balance sheet $ 117,375,400 $ 112,040,100
(c) Profile of concentration of credit risk of the Group: The credit risks are deemed significantly concentrated when the financial instrument transactions significantly concentrate on a single person, or when there are multiple trading counterparties engaging in similar business activities with similar economic characteristics making the effects on their abilities of fulfilling the contractual obligation due to economy or other forces similar. The concentration of credit risk includes the nature of business activities of debtors. The Group does not significantly carry out transactions with single client or single counterparty. Commercial papers
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underwritten by IBFC have similar industrial types and the contract amount of the credit risk concentration are shown as follows: i. Industrial types
Type of industry December 31, 2018 December 31, 2017 Amount Ratio(%) Amount Ratio(%) Infrastructure and construction $ 35,867,500 30.56 $ 27,409,100 24.46 Finance and investment 28,933,600 24.65 26,994,200 24.09 Petrifaction and utility (Note1) 6,630,100 5.65 8,520,800 7.61 Electric machinery and electronics 5,015,700 4.27 7,601,200 6.78 Machinery 6,473,400 5.52 6,809,700 6.08 Food and textile 4,463,600 3.80 5,932,500 5.29 Trade and commerce 7,699,300 6.56 9,392,000 8.38 Shopping center and hotel 7,569,500 6.45 7,090,400 6.33 Others – no greater than 5% (Note2) 14,722,700 12.54 12,290,200 10.97 $ 117,375,400 100.00 $ 112,040,100 100.00 Note1: Including mining industry, paper and forest industry, chemical industry, petrifaction industry and utilities industry. Note2: Including storage and transportation, telecommunication, media, securities finance, real estate, miscellances industries, financial holding and others. ii. Collateral
December 31, 2018 December 31, 2017 Collateral Amount Ratio(%) Amount Ratio(%) Unsecured $ 34,743,119 29.60 $ 42,687,278 38.10 Secured Secured by real estate 56,340,192 48.00 44,591,960 39.80 Secured by stocks 18,897,439 16.10 16,245,814 14.50 Secured by bonds 5,516,644 4.70 7,282,606 6.50 Secured by checks 939,003 0.80 672,241 0.60 Others 939,003 0.80 560,201 0.50 $ 117,375,400 100.00 $ 112,040,100 100.00
(d) The changes in the Group’s allowance for bad debt and cumulative provision for impairment
i. Credit business a. For the year ended December 31, 2018, the reconciliation of the balance of provisions for guarantee obligation is as follows:
Lifetime Lifetime expected credit Total 12-month expected losses (credit-impaired impairment Provisions for expected Year ended December 31, 2018 credit financial assets that were recognised Allowance for losses guarantee credit losses losses neither purchased nor under liabilities （Stage 1） （Stage 2） originated)（Stage 3） IFRS 9
Balance at the beginning of the year $ 223,683 $ 198,800 $ - $ 422,483 $ 854,025 $ 1,276,508 - Transferred to 12-month Stage 2－＞Stage 1 39,700 ( 39,700) - - expected credit losses Stage 3－＞Stage 1 - - - - - Transferred to lifetime Stage 1－＞Stage 2 - - - - expected credit losses Stage 3－＞Stage 2 - - - - 8,000 - Transferred to credit- Stage 1－＞Stage 3 - - - - impaired financial asset Stage 2－＞Stage 3 - - - - 81,128 Originated or purchased ( 75,828) ( 5,300) - ( 81,128) Derecognised - - - - Write-off of uncollectible amount - - - - - Foreign exchange - - - - - Other changes - - - - - Report 2018 Consolidated Financial Balance at the end of the year $ 187,555 $ 153,800 $ - $ 341,355 $ 935,153 $ 1,284,508
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WATERLAND FINANCIALHOLDINGS b. Changes in allowance for bad debts in relation to receivables for the year ended December 31, 2018 are as follows: Year ended December 31, 2018 Allowance for bad debts in relation to receivables and overdue receivables $ 413,568 At January 1_IAS 39 Adjustments under new standards 493 At January 1_IFRS 9 414,061 Provision 12,194 Write-offs ( 191,075) Effect of foreign exchange ( 2,013)
December 31 $ 233,167 (Following blank)
ii. Bond investment a. The reconciliation of the balance of the cumulative impairment of financial assets at fair value through other comprehensive Income for the year ended December 31, 2018 was as follows:
Lifetime Lifetime expected credit Total 12-month expected losses (credit-impaired impairment expected Allowance for Year ended December 31, 2018 credit financial assets that were recognised credit losses losses losses neither purchased nor under （Stage 1） （Stage 2） originated)（Stage 3） IFRS 9 Balance at the beginning of the year $ 57,834 $ - $ - $ 57,834 $ 57,834 - Transferred to 12-month Stage 2－＞Stage 1 - - - - expected credit losses Stage 3－＞Stage 1 - - - - - Transferred to lifetime Stage 1－＞Stage 2 - - - - expected credit losses Stage 3－＞Stage 2 - - - - 5,650 - Transferred to credit- Stage 1－＞Stage 3 - - - - impaired financial asset Stage 2－＞Stage 3 - - - - Originated or purchased 5,650 - - 5,650 Derecognised (disposal) - - - - Write-off of uncollectible amount - - - - - Foreign exchange 15 - - 15 15 Other changes - - - - - 2018 Consolidated Financial Report 2018 Consolidated Financial Balance at the end of the year $ 63,499 $ - $ - $ 63,499 $ 63,499 The details of material changes to the cumulative impairment of bond investments for the year ended December 31, 2018.are as follows: Financial assets at fair value through other comprehensive income: The cost of bond financial assets at fair value through other comprehensive was 980 millions and the cumulative impairment increased corresponding.
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B. Liquidity risk (a) The capital and working capital of the Group and its subsidiaries are sufficient, therefore there is low liquidity risk due from inability to raise capital for fulfilling contractual obligations. In order to fulfill the payment obligation and potential emergent fund demand in the market, the Group holds sound earning assets with high liquidity. In order to manage liquidity risk, the Group held assets including cash and cash equivalents, due from the Central Bank and call loans to banks, financial assets at fair value through profit or loss, bills and bonds purchased under resell agreements and financial assets at fair value through other comprehensive income, etc. The Company’s fundamental management policy is to match the maturity date and interest rate on assets and liabilities and control any mismatch. Due to uncertainty and variety of types of terms, maturity date and interest rate on assets and liabilities usually cannot fully match, such mismatch may result in either potential gain or loss. The Group divides it into group by the nature of assets and liabilities for maturity analysis to evaluate liquidity capacity of subsidiaries within the Group. The maturity analysis is as follow: (Following blank)
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Expressed in Millions of New Taiwan Dollars December 31, 2018 Up to One to Three months Over one Financial instrument items one month three months to one year year Total Assets Non-derivative instruments Cash and cash equivalents $ 1,837 $ 188 $ 788 $ - $ 2,813 Due from the central bank and call loans to banks 2,037 - - - 2,037 Financial assets at fair value through profit or loss Short-term notes and bills 72,228 33,883 13,423 1,004 120,538 Investments in bonds 134 10 427 3,361 3,932 Securities held for operations - 91 - - - 91 Call (put) warrant 1 185 186 Bills and bonds purchased under resell agreements 1,030 - - - 1,030 Receivables Margin loans receivable 8,281 - - - 8,281 Receivable of securities settlement price 4,936 - - - 4,936 Financial assets at fair value through other comprehensive income Investments in bonds 973 3,080 11,718 92,616 108,387 Other financial assets Customer margin accounts 3,364 - - - 3,364 Pledged time certificate of deposit 234 724 1,215 - 2,173 Derivative instruments: Financial assets at fair value through profit or loss, derivative instruments-derivative instruments 13 18 8 21 60 Total assets 95,159 37,903 27,579 97,187 257,828 Liabilities Non-derivative instruments Due to the central bank and banks Call loans 24,614 - - - 24,614 Short-term borrowings 1,420 560 2,125 - 4,105 Financial liabilities at fair value through profit or loss Call (put) warrant liabilities - 81 125 - 206 Liabilities on sale of borrowed 773 - - - 773 Fixed rate commercial paper purchased - - 1 9 10 Billss and bonds sold under repurchase agreements 143,655 29,013 3,113 - 175,781 Commercial paper payable 7,525 3,555 650 200 11,930 Payables Deposits payable for securities financing 1,911 - - - 1,911 Settlements payable 6,501 73 18 1 6,593 Payable on bonds and notes under repurchase agreement 915 - - - 915 Deposits from securities borrowing 1,716 - - - 1,716
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Expressed in Millions of New Taiwan Dollars December 31, 2018 Up to One to Three months Over one Financial instrument items one month three months to one year year Total Other financial liabilities Futures traders’ equity 3,323 - - - 3,323 Other liabilities Securities borrowing deposits, deposited 77 - - - 77 Derivative instruments Convertible corporate bond asset swaps 81 - 8 28 117 Total liabilities 192,511 33,282 6,040 238 232,071 Net liquidity gap ($ 97,352) $ 4,621 $ 21,539 $ 96,949 $ 25,757
Expressed in Millions of New Taiwan Dollars December 31, 2017 Up to One to Three months Over one Financial instrument items one month three months to one year year Total Assets Non-derivative instruments Cash and cash equivalents $ 1,786 $ 77 $ 700 $ - $ 2,563 Due from the central bank and call loans to banks 7 - - - 7 Financial assets at fair value through profit or loss Short-term notes and bills 52,482 55,877 13,496 122 121,977 Investments in bonds 25 77 649 2,868 3,619 Call (put) warrant 9 - - - 9 Bills and bonds purchased under resell agreements 6 - - 52 58 Bills and bonds purchased under resell agreements 125 - - - 125 Receivables Margin loans receivable 10,192 - - - 10,192 Receivable of securities settlement price 6,132 - - - 6,132 Available-for-sale financial assets Investments in bonds 1,000 2,036 13,239 89,744 106,019 Other financial assets Customer margin deposit 1,747 - - - 1,747 Pledged time deposits 242 601 1,058 - 1,901 Derivative instruments Financial assets at fair value through profit or loss, derivative instruments-derivative instruments 36 - 5 11 52 Total assets 73,789 58,668 29,147 92,797 254,401
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Expressed in Millions of New Taiwan Dollars December 31, 2017 Up to One to Three months Over one Financial instrument items one month three months to one year year Total Liabilities Non-derivative instruments Due to the central bank and banks Call loans 34,538 - - - 34,538 Short-term borrowings 1,234 425 1,549 - 3,208 Financial liabilities at fair value through profit or loss Call (put) warrant liabilities 3 32 73 - 108 Securities borrowing payables 12 - - - 12 Fixed rate commercial paper purchased - - 2 10 12 Billss and bonds sold under repurchase agreements 145,101 23,488 2,955 - 171,544 Commercial paper payable 9,390 646 100 1,100 11,236 Payables Deposits payable for securities financing 1,125 - - - 1,125 Security settlements payable 7,200 205 89 4 7,498 Payable on bonds and notes under repurchas 146 - - - 146 Security settlements for refundable deposits 952 - - - 952 Other financial liabilities Futures traders' equity 1,714 - - - 1,714 Other liabilities Deposits from securities borrowing 144 - - - 144 Derivative instruments: Convertible corporate bond asset swaps 146 - 35 28 209 Total liabilities 201,705 24,796 4,803 1,142 232,446 Net liquidity gap ($ 127,916) $ 33,872 $ 24,344 $ 91,655 $ 21,955
286
WATERLAND FINANCIALHOLDINGS (b) Maturity analysis of off balance sheet items The following table illustrates the maturity analysis for off balance sheet items of the Group by the remaining maturity from the balance sheet date to the contract expiration date. Regarding the financial guarantee contracts issued, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called. December 31, 2018 Up to one month One month to three months Three months to six months Total Off-balance-sheet items Commercial paper guarantee$ 77,319,900 $ 38,244,800 $ 1,810,700 $ 117,375,400 December 31, 2017 Off-balance-sheet items
Commercial paper guarantee$ 71,826,500 $ 37,299,400 $ 2,914,200 $ 112,040,100 (c) Maturity analysis for lease contract and capital expense commitment December 31, 2018 Less than one year One to five years Total Leasing contractual commitments Operating lease expense (lessee) ($ 107,240) ($ 121,961) ($ 229,201) Capital expense commitment ( 28,141) ( 1,400) ( 29,541) Operating lease income (lessor) 1,524 1,672 3,196 December 31, 2017 Less than one year One to five years Total Leasing contractual commitments Operating lease expense (lessee) ($ 132,820) ($ 159,534) ($ 292,354) Capital expense commitment ( 6,791) ( 2,374) ( 9,165) Operating lease income (lessor) 70 - 70
2018 Consolidated Financial Report 287
C. Market risk
Sources and definition of market risk: the fluctuation in value of financial assets arising from uncertain market price in certain period, such as interest rate, exchange rate, equity securities and merchandise price, may lead to the risk of loss in owned position. The department of market risk management supervises the use of related risk limits each day, such as sensitivity, VaR and stress testing, the managing mechanism of market risk of the Company and IBFC is shown as follows:
(a) Interest rate risk managements
The bonds and fixed interest rate investments in FRCP of IBFC may cause risk incurred by fair value changes of fixed interest risk instruments arising from the fluctuation of market interest rate. To respond to the fair value risk from interest rate fluctuation, IBFC pursues fixed and reasonable profit under the consideration of capital preservation as its investment strategy. Investments shall be allocated into different industries and to objectives with different natures. IBFC continuously monitors important domestic and overseas economic indicators to effectively distribute and control the risk. At the beginning of each year, IBFC sets out various limits and the solutions while the limits be reached based on risk tolerance of financial instruments and annual budget target. The solutions will be reported to the Board of Directors and executed after approved. In addition, IBFC daily supervises the position limits of bonds and fixed interest rate investments in FRCP and limits of interest sensitivity to effectively control interest rate risk.
(b) Foreign exchange risk management
i. The Group is exposed to foreign exchange risk which refers to the net position of foreign currency assets less foreign currency liability, and plus the position of derivatives which may cause losses arising from movement in fair value by exchange rate fluctuations. In terms of foreign exchange risk management, the Group mainly monitors position limits on relevant businesses including the risk limits of overall foreign currencies, foreign currencies position limits, liquidity limits in foreign currency market, foreign currency asset allocation limits, liquidity limits in foreign currency funds, stress testing limits of foreign currency funds and exchange rate fluctuations.
ii. Information on foreign exchange risk gap
The Group’s businesses involve some non-functional currency operations (the Company’s and certain subsidiaries’ functional currency: NTD; other certain subsidiaries’ functional currency: USD and HKD). The information on assets and liabilities denominated in foreign currencies whose values would be materially affected by the exchange rate fluctuations is as follows:
288 WATERLAND FINANCIAL HOLDINGS
December 31, 2018 USD CNY EUR Cash and cash equivalents $ 144,215 $ 1,083,229 $ 468,935 Financial assets at fair value through profit or loss 13,530 95,969 - Financial assets at fair value through other comprehensive income 15,290,775 22,698 2,018,457 Receivables, net 1,089,197 3,241,466 576,429 Other financial assets 212,904 779 - Other assets, net 82,581 37,414 - Total assets 16,833,202 4,481,555 3,063,821 Due to central bank and banks 233,529 3,199,418 - Financial liabilities at fair value through profit or loss - - 2,395 Billss and bonds sold under repurchase agreements 13,619,758 - 1,583,826 Payables 944,266 277,355 595,061 Other financial liabilities 131,947 58 - Others 19,065 156,453 - Total liabilities 14,948,565 3,633,284 2,181,282 On-balance sheet foreign currency gap $ 1,884,637 $ 848,271 $ 882,539 Notional principal of off-balance sheet currency swap $ 1,081,500 $ -$ 701,850 Exchange rate to NTD 30.715 4.472 35.179 December 31, 2017 USD CNY Cash and cash equivalent$ 278,398 $ 184,773 Financial assets at fair value through profit or loss 305,572 71,533 Financial assets at fair value through other comprehensive income 14,027,729 22,726 Receivables, net 324,060 2,417,551 Others 312,746 28,103 Total assets 15,248,505 2,724,686 Due to central bank and banks 1,217,068 543,620 Billss and bonds sold under repurchase agreements 11,337,239 - Payables 161,688 163,045 Others 282,487 148,870 Total liabilities 12,998,482 855,535 On-balance sheet foreign currency gap $ 2,250,023 $ 1,869,151 Notional principal of off-balance sheet currency swap $ 2,245,511 $ - Exchange rate to NTD 29.760 4.565
(c) Equity securities price risk management
i. Definition of equity securities price risk
The market risk of IBFC’s equity securities comprises the individual risk arising from the price fluctuation of individual equity security market and the general market risk arising from the price fluctuation of the entire security market.
ii. Management policy
At the beginning of each year, IBFC sets out the position limits of equity security instruments, limits of monthly loss, annual loss and the solutions if the limits are
2018 Consolidated Financial Report 289
reached based on the categories of financial instruments, risk tolerance and annual budget target. The solutions will be reported to the Board of directors and executed after approved.
iii. Evaluation method
For the equity security instruments at fair value through profit or loss, the limits of monthly and annual loss of IBFC are calculated based on current year budgets. For the equity security instruments at fair value through other comprehensive income, the annual limits of loss are set as certain percentage of the amount of unrealised loss at fair value reached to certain ratio of net assets.
(d) Information on Value at Risk
Value at Risk is used to measure the possible maximum potential losses in investment portfolio arising from the fluctuation of market risk factors in a specified period and confidence level. The Group applies the historical simulation method to measure Value at Risk, which is gathering the historic risk factors information, calculating the movement of each two adjacent days and sorting the movements for the year (250 days), and using confidence level of 95% times positions respectively to calculate Value at Risk of one day in future. Year ended December 31, 2018 Risks Average Maximum Minimum Interest VaR$ 67,647 $ 90,404 $ 53,637 Equity securities VaR 21,085 33,791 11,456 Total VaR 66,868 88,897 54,350
Year ended December 31, 2017 Risks Average Maximum Minimum Interest VaR$ 106,263 $ 124,902 $ 75,880 Equity securities VaR 28,591 38,480 15,748 Total VaR 100,598 122,298 72,714
Note: The maximum and minimum VaR are selected from the maximum and minimum VaR of a single day in the period.
290 WATERLAND FINANCIAL HOLDINGS
(6) In accordance with Article 46 of the Financial Holding Company Act, the following table represents the Company and its subsidiaries’ provision of business credit or endorsements to, or other transactions with, the same individual, the same related party, or the same affiliated company. December 31, 2018 Expressed in Millions of New Taiwan Dollars; % Total balance of transaction Percentage (%) of net value on listed in article 46, paragraph 2 Name effective date of financial of the Financial Holding holding company Company Act 1. Same Natural Persons or Same Legal Person (1) Ministry of Finance, R.O.C. $ 32,956 101.39 (2) Central Bank, R.O.C. 18,240 56.12 (3) Taiwan Power Company 5,677 17.46 (4) Hon Hai Precision Industry Co., Ltd. 5,556 17.09 (5) First Commercial Bank Co., Ltd. 5,500 16.92 (6) Others (Note) 51,689 159.01 Total$ 119,618 367.99 2. Same Related Party None. $ - - 3. Affiliated company of the Same Legal Person (1) Far Eastern New Century Corporation $ 12,105 36.96 (2) Fubon Financial Holding Co., Ltd. 10,676 32.84 (3) Formosa Plastics Co., Ltd. 5,932 19.97 (3) First Financial Holding Co.,Ltd. 5,901 18.25 (4) Hon Hai Precision Industry Co., Ltd. 5,757 18.15 (5) Others 60,024 182.69 Total$ 100,395 308.86 Note: For the details of customs whose balance is not excess 5% of total amount in each item, please refer to the Company’s website.
(7) Information on the allocation of the revenues, costs, expenses, gains and losses arising from business activities, transactions, joint promotion for businesses development, information sharing, and operating facilities or premises sharing between the financial holdings company and its subsidiaries and inter-subsidiary.
A. Decorating Project: The subsidiary, IBFC, shall empty its space for Waterland Securities setting up professional counters by hiring their own working team before the agreed date. During the decoration period, IBFC agreed to provide water, electricity or other facilities to support the project. As of December 31, 2018 and 2017, the subsidiaries have no aforementioned transactions. B. Related premises and hardware equipment: The subsidiary, IBFC, provide the place of professional counters and related hardware equipment and pay for the maintenance fee and utilities expense of the place. Waterland Securities is in charge of installing the software and hardware of the information computer and pay for the expenses of single device wiring, single device information transmission and data wiring. As of December 31, 2018 and 2017, the subsidiaries have no aforementioned transactions.
2018 Consolidated Financial Report 291
C. Remuneration and bonus: Promotion details, methods of calculation and payment of remuneration and bonus shall be determined separately by the responsible segments by considering the need of each type of services when the subsidiaries, IBFC and Waterland Securities agree to promote businesses jointly. As of December 31, 2018 and 2017, the subsidiaries recognised promotion commission income $1,090 and $1,823 respectively for the aforementioned transactions.
(8) Financial information by business line
Year ended December 31, 2018 Expressed in Thousands of New Taiwan Dollars Items by business line Bills finance Securities Others Consolidation Net interest income $ 1,067,669 $ 597,967 $ 139,310 $ 1,804,946 Net non-interest income 1,850,777 1,815,032 117,878 3,783,687 Net income 2,918,446 2,412,999 257,188 5,588,633 Bad debt expenses commitment and guarantee liability provision 68,965 ( 39,685) ( 30,672) ( 1,392) Operating expenses ( 680,897) ( 1,935,281) ( 328,624) ( 2,944,802) Consolidated income from continuing operations before income tax 2,306,514 438,033 ( 102,108) 2,642,439 Income tax expenses ( 416,398) ( 86,944) 14,318 ( 489,024) Consolidated net income$ 1,890,116 $ 351,089 ($ 87,790) $ 2,153,415 Year ended December 31, 2017 Expressed in Thousands of New Taiwan Dollars Items by business line Bills finance Securities Others Consolidation Net interest income $ 1,198,176 $ 553,972 $ 105,599 $ 1,857,747 Net non-interest income 2,463,705 1,850,151 171,147 4,485,003 Net income 3,661,881 2,404,123 276,746 6,342,750 Bad debt expenses commitment and guarantee liability provision ( 255,172) ( 87,595) ( 29,990) ( 372,757) Operating expenses ( 730,587) ( 1,895,565) ( 327,795) ( 2,953,947) Consolidated income from continuing operations before income tax 2,676,122 420,963 ( 81,039) 3,016,046 Income tax expenses ( 428,330) ( 22,414) ( 21,486) ( 472,230) Consolidated net income$ 2,247,792 $ 398,549 ($ 102,525) $ 2,543,816 Note: Financial information by business line which shall be shown separately is determined according to each company’s classification methods for business group management to fill in amounts written off for consolidation purpose.
292
WATERLAND FINANCIALHOLDINGS (9) Financial holdings company’s financial statements and its subsidiary’s condensed balance sheets and statements of income A. Waterland Financial Holdings (a) Individual Condensed Balance Sheets Expressed in Thousands of New Taiwan Dollar Assets December 31, 2018 December 31, 2017 Liabilities and Equity December 31, 2018 December 31, 2017
Cash and cash equivalents$ 27,614 $ 13,914 Commercial paper payable $ 4,996,224 $ 3,138,202 Financial assets at fair value through other Payables 74,159 473,052 comprehensive income 78,179 - Current income tax liabilities 165,726 173,546 Securities purchased under resell agreements 2,695,265 930,000 Provisions for employee benefits 2,451 2,450 Receivable - net 120,414 123,362 Deferred income tax liabilities 11 - Current tax assets - 488,497 Total Liabilities 5,238,571 3,787,250 Investments accounted for using equity method - net 34,740,306 34,509,986
Other financial assets - net - 18,554 Share capital 28,198,659 27,866,659 Property and equipment - net 2,074 2,233 Capital surplus 122,240 122,240 Intangible assets - net 182 348 Retained earnings 3,624,106 4,007,829 Deferred income tax assets - net 313 266 Other equity 649,091 469,817 Other assets - net 10,197 8,512 Treasury shares ( 158,123) ( 158,123) Total equity 32,435,973 32,308,422 Total assets$ 37,674,544 $ 36,095,672 Total liabilities and equity $ 37,674,544 $ 36,095,672
Chairperson: Chi-Lin Wea President: Yu-Chia Ting Chief Accountant: Hui-Yu Kuo
2018 Consolidated Financial Report 293
(b) Individual Condensed Statements of Comprehensive Income Expressed in Thousands of New Taiwan Dollars Items Year ended December 31, 2018 Year ended December 31, 2017 Income Share of profit (loss) of associates and joint ventures accounted for under equity method $ 2,192,606 $ 2,557,845 Realised gains on financial assets at fair value through other comprehensive income 3,898 - Other income 15,117 10,403 Expenses and losses Operating expenses ( 192,567) ( 200,904) Other expenses and losses ( 26,045) ( 21,560) Net income from continuing operations before income tax 1,993,009 2,345,784 Tax income 28,550 25,000 Profit for the year 2,021,559 2,370,784 Other comprehensive income Components of other comprehensive income that will not be reclassified to profit or loss Remeasurement of defined benefit plans 53 ( 316) Gains on valuation of investments in equity instruments measured at fair value through other comprehensive income 4,737 - Share of other comprehensive income of associates and joint ventures accounted for under equity method 39,455 ( 11,191) Income tax related to components of other comprehensive income that will not be reclassified to profit or loss 36 54 Components of other comprehensive income that will be reclassified to profit or loss Share of other comprehensive income of associates and joint ventures accounted for under equity method ( 550,879) 322,436 Other comprehensive income ( 506,598) 310,983 Total comprehensive income $ 1,514,961 $ 2,681,767 Earnings per share $ 0.72 $ 0.85 Basic earnings per share (in dollars)
Chairperson: Chi-Lin Wea President: Yu-Chia Ting Chief Accountant: Hui-Yu Kuo
294
WATERLAND FINANCIALHOLDINGS (c) Individual Condensed Statement of Change in Equity Retained earnings Other equity interest Unrealised gains or Exchange losses on financial difference on assets measured at Unrealised gains or translation of fair value through losses on valuation Capital Special Undistributed foreign financial other comprehensive of available-for- Treasury Ordinary share surplus Legal reserve reserve earnings statements income sale financial assets shares Total For the year ended December 31, 2017 Balance at January 1, 2017 $ 27,460,748 $ 100,068 $ 1,191,990 $ 234,587 $ 2,116,174 ($ 24,477) $ - $ 171,858 ($ 316,245) $ 30,934,703 Appropriation of 2016 earnings Legal reserve - - 211,021 - ( 211,021) - - - - - Cash dividends - - - - ( 1,488,342) - - - - ( 1,488,342) Stock dividends 405,911 - - - ( 405,911) - - - - -
Net income for 2017 - - - - 2,370,784 - - - - 2,370,784 Other comprehensive income for 2017 - - - - ( 11,453) ( 44,811) - 367,247 - 310,983 Share-based payment - 22,172 ------158,122 180,294 Balance at December 31, 2017 $ 27,866,659 $ 122,240 $ 1,403,011 $ 234,587 $ 2,370,231 ($ 69,288) $ - $ 539,105 ($ 158,123) $ 32,308,422 For the year ended December 31, 2018 Balance at January 1, 2018 $ 27,866,659 $ 122,240 $ 1,403,011 $ 234,587 $ 2,370,231 ($ 69,288) $ - $ 539,105 ($ 158,123) $ 32,308,422 Effect of retrospective application and retrospective restatement - - - -( 272,998) - 1,223,025 ( 539,105) - 410,922 Balance at 1 January after retrospective application 27,866,659 122,240 1,403,011 234,587 2,097,233 ( 69,288) 1,223,025 - ( 158,123) 32,719,344 Appropriation of 2018 earnings Legal reserve - - 237,023 - ( 237,023) - - - - - Cash dividends - - - - ( 1,798,332) - - - - ( 1,798,332) Stock dividends 332,000 - - - ( 332,000) - - - - - Net income for 2018 - - - - 2,021,559 - - - - 2,021,559 Other comprehensive income for 2018 - - - - 4,753 ( 10,998) ( 500,353) - - ( 506,598) Comprehensive income for 2018 - - - - 2,026,312 ( 10,998) ( 500,353) - - 1,514,961 Disposal of investments in equity instruments measured at fair value through other comprehensive income - - - -( 6,705) - 6,705 - - - Balance at December 31, 2018 $ 28,198,659 $ 122,240 $ 1,640,034 $ 234,587 $ 1,749,485 ($ 80,286) $ 729,377 $ - ($ 158,123) $ 32,435,973
Chairperson: Chi-Lin Wea President: Yu-Chia Ting Chief Accountant: Hui-Yu Kuo
2018 Consolidated Financial Report 295
(d) Individual Condensed Statements of cash flows Expressed in Thousands of New Taiwan Dollars Items Year ended December 31, 2018 Year ended December 31, 2017 Operating cash flows Profit before tax for the year$ 1,993,009 $ 2,345,784 Adjustments Adjustments to reconcile profit (loss) Depreciation and amortisation expenses 1,097 1,162 Interest expense 21,040 13,538 Interest income ( 7,409) ( 450) Dividend income ( 3,898) - Share-based payments - 1,964
Share of profit or loss of assosiates and joint ventures accounted for under equity method( 2,192,606) ( 2,557,845) Payables on amortised fees of discounted bills of commercial paper 5,000 - Changes in operating assets and liabilities Changes in operating assets Bills and bonds purchased under resell agreements ( 1,765,265) ( 930,000) Receivables 169,953 ( 22,357) Other assets ( 1,733) 18 Changes in operating liabilities Payables ( 349,535) 3,253 Provisions for employee benefits 53 85 Cash infilw (outflow) generated from operations( 2,130,294) ( 1,144,848) Interest received 5,890 360 Dividends received 3,898 - Dividends received from investment accounted for under equity method 1,806,896 1,490,934 Interest paid - ( 13,538) Income taxes paid (refunded) 294,384 68,669 Net cash flows from (used in) operating activities( 19,226) 401,577 Cash flows from investing activities: Acquisition of properties and equipment ( 724) ( 1,150) Acquisition of intangible assets - ( 165) Proceeds from capital reduction of investments accounted for using equity method - 929,381 Net cash used in investing activities( 724) 928,066 Cash flows from financing activities: Increase (decrease) in commercial paper payable 1,831,982 ( 1,339) Cash dividends ( 1,798,332) ( 1,488,342) Transfer of treasury shares - 157,724 Net cash flows (used in) from financing activities 33,650 ( 1,331,957) Net increase in cash and cash equivalents 13,700 ( 2,314) Cash and cash equivalents at beginning of the year 13,914 16,228 Cash and cash equivalents at end of the year$ 27,614 $ 13,914
Chairperson: Chi-Lin Wea President: Yu-Chia Ting Chief Accountant: Hui-Yu Kuo
296
WATERLAND FINANCIALHOLDINGS B. International Bills Finance Corporation (a) Individual Condensed Balance Sheets Expressed in Thousands of New Taiwan Dollars Assets December 31, 2018 December 31, 2017 Liabilities and equity December 31, 2018 December 31, 2017 Cash and cash equivalents $ 940,076 $ 439,818 Interbank lending and overdraft $ 24,613,529 $ 34,537,986 Due from the Central bank and call Financial liabilities at fair value loans to banks 2,036,564 7,373 through profit or loss 50,574 74,317 Financial assets at fair value through Notes and bonds issued under profit or loss 123,511,989 124,916,576 repurchase agreement 174,668,264 161,828,072 Financial assets at fair value through Payables other comprehensive income 98,947,981 - 2,046,812 679,665
Securities purchased under resell Current income tax liabilities agreements 500,036 - 117,085 118,429 Receivable, net 2,798,926 1,547,666 Provisions 1,425,312 1,406,610 Total current tax assets for the year - 389,601 Deferred tax liabilities: 40,576 58,104 Available-for-sale financial assets - 96,738,937 Other liabilities 230,049 316,481 Investments accounted for using Total Liabilities equity method, net 1,639,740 1,640,773 203,192,201 199,019,664 Other financial assets, net 403,624 897,573 Share capital 18,090,000 18,090,000 Property and equipment, net 450,913 461,689 Capital surplus 343,651 343,651 Intangible assets, net 8,791 3,805 Retained earnings 9,268,887 9,005,968 Deferred income tax assets 47,906 22,457 Other equity 547,329 712,341 Other assets, net 155,522 105,356 Total equity 28,249,867 28,151,960 $ 231,442,068 $ 227,171,624 $ 231,442,068 $ 227,171,624 Total assets Total liabilities and equity
2018 Consolidated Financial Report 297
(b) Individual Condensed Statements of Comprehensive Income
Expressed in Thousands of New Taiwan Dollars Year ended December 31, Year ended December 31, Items 2018 2017 Interest income, net$ 1,067,669 $ 1,198,176 Net income (except interest), net 1,855,830 2,466,962 Net income 2,923,499 3,665,138 Reversal (provision) 68,965 ( 255,172) Operating expenses ( 680,897) ( 730,587) Profit before income tax 2,311,567 2,679,379 Income tax expenses ( 416,398) ( 428,330) Profit after income tax 1,895,169 2,251,049 Other comprehensive income ( 502,089) 367,907 Total comprehensive income for the year $ 1,393,080 $ 2,618,956 Basic earnings per share (in dollars) $ 1.05 $ 1.24
298
WATERLAND FINANCIALHOLDINGS C. Waterland Securities Co., Ltd. (a) Individual Condensed Balance Sheets Assets December 31, 2018 December 31, 2017 Liabilities and equity December 31, 2018 December 31, 2017 Current assets $ 33,410,295 $ 33,135,088 Current liabilities $ 28,937,020 $ 26,808,282 Financial assets at fair Long-term liabilities 199,957 1,099,663 value through profit or loss 6,600 6,796 Non-current liabilities 32,478 63,995 Financial assets at fair value Total Liabilities 29,169,455 27,971,940 through other comprehensive income 1,200,602 -
Investments accounted for using equity method 1,295,057 1,302,018 Share capital 7,500,000 7,500,000 Property and equipment 1,257,363 1,284,032 Capital surplus 23,825 23,825 Intangible assets 201,216 203,635 Retained earnings 1,101,013 1,199,972 Deferred income tax assets 8,639 50,695 Other equity 176,040 ( 98,890) Other non-current assets 590,561 614,583 Total equity 8,800,878 8,624,907 Total assets $ 37,970,333 $ 36,596,847 Total liabilities and equity $ 37,970,333 $ 36,596,847
2018 Consolidated Financial Report 299
(b) Individual Condensed Statements of Comprehensive Income
Expressed in Thousands of New Taiwan Dollars Year ended December 31, Year ended December 31, Items 2018 2017 Income $ 2,269,277 $ 2,476,382 Expenditure and expense ( 1,961,661) ( 1,992,226) Other gains and losses 95,651 ( 53,437) Profit before income tax 403,267 430,719 Income tax expenses ( 78,670) ( 17,916) Profit after income tax 324,597 412,803 Other comprehensive income 20,737 40,029 Total comprehensive income for the year $ 345,334 $ 452,832 Basic earnings per share $ 0.43 $ 0.47 (in dollars)
300
WATERLAND FINANCIALHOLDINGS D. Waterland Venture Capital Co., Ltd. (a) Individual Condensed Balance Sheets
Expressed in Thousands of New Taiwan Dollars Assets December 31, 2018 December 31, 2017 Liabilities and equity December 31, 2018 December 31, 2017 Current assets $ 1,163,243 $ 738,058 Current liabilities $ 824,890 $ 919,498 Investments accounted for using equity method 1,059,392 1,027,379 Total liabilities 824,890 919,498 Property and equipment 1,852 2,289 Share capital 1,540,000 1,540,000 Deferred income tax assets 2,692 2,288 Capital surplus 4,346 4,346 Other assets 2,239 533,307 Retained earnings( 66,310) 39,511
Other equity ( 73,508) ( 200,034) Total equity 1,404,528 1,383,823 Total assets $ 2,229,418 $ 2,303,321 Total liabilities and equity $ 2,229,418 $ 2,303,321
(b) Individual Condensed Statements of Comprehensive Income
Expressed in Thousands of New Taiwan Dollars Year ended December 31, Year ended December 31, Items 2018 2017 Revenue $ 148,103 $ 199,397 Operating expense ( 49,994) ( 49,527) Operating income 98,109 149,870 Nonoperating income and expense ( 10,117) ( 71,671) Profit after income tax 87,992 78,199 Income tax benefit 9,833 ( 7,258) Net income 97,825 70,941 Other comprehensive income ( 19,808) ( 68,037) Total comprehensive income for the year $ 78,017 $ 2,904 Earnings per share (after tax) (in dollars) $ 0.64 $ 0.46
2018 Consolidated Financial Report 301
(10) Profitability information for Waterland Financial Holdings and the Group A. Profitability information for Waterland Financial Holdings Items Year ended December 31, 2018 Year ended December 31, 2017 Return on total assets, before tax 5.37% 6.63% Return on total assets, after tax 5.45% 6.70% Return on stockholders’ equity, before tax 6.12% 7.42% Return on stockholders’ equity, after tax 6.21% 7.50% Net profit margin ratio 92.50% 92.80% Note: Return on total assets = Income before (after) income tax / average total assets. Return on stockholders’ equity = Income before (after) income tax / average stockholders’ equity. Net profit margin ratio = Income after income tax / net revenues.
B. Profitability information for Waterland Financial Holding Group Items Year ended December 31, 2018 Year ended December 31, 2017 Return on total assets, before tax 0.96% 1.15% Return on total assets, after tax 0.79% 0.97% Return on stockholders’ equity, before tax 7.29% 8.50% Return on stockholders’ equity, after tax 5.94% 7.17% Net profit margin ratio 38.53% 40.11% Note: Return on total assets = Income before (after) income tax / average total assets. Return on stockholders’ equity = Income before (after) income tax / average stockholders’ equity. Net profit margin ratio = Income after income tax / net revenues. (11) Profitability information for the subsidiary - Waterland Securities Co., Ltd.
Items Year ended December 31, 2018 Year ended December 31, 2017 Return on total assets, before tax 1.08% 1.27% Return on total assets, after tax 0.87% 1.22% Return on stockholders’ equity, before tax 4.59% 4.68% Return on stockholders’ equity, after tax 3.69% 4.48% Net profit margin ratio 15.37% 18.76% Note: Return on total assets = Income before (after) income tax / average total assets. Return on stockholders’ equity = Income before (after) income tax / average stockholders’ equity. Net profit margin ratio = Income after income tax / net revenues.
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(12) Profitability, asset quality, management information, and liquidity and market risk sensitivity of the subsidiary- International Bills Finance Corporation
A. Profitability Items Year ended December 31, 2018 Year ended December 31, 2017 Return on total assets, before tax 1.01% 1.20% Return on total assets, after tax 0.83% 1.01% Return on stockholders’ equity, before tax 8.16% 9.72% Return on stockholders’ equity, after tax 6.69% 8.16% Net profit margin ratio 64.83% 61.42% Note: Return on total assets = Income before (after) income tax / average total assets. Return on stockholders’ equity = Income before (after) income tax / average stockholders’ equity. Net profit margin ratio = Income after income tax / net revenues. B. Asset quality Items December 31, 2018 December 31, 2017 Guarantees in arrear and guaranteed credits overdue for longer than three months$ - $ - Overdue credits (non-accrual loans are inclusive) - 434,300 Loans under surveillance (Note) - - Overdue receivables - 434,300 Ratio of overdue credits 0.00% 0.39% Ratio of overdue credits plus ratio of loans under surveillance 0.00% 0.39% Provision for bad debts and guarantees as required by regulations 1,282,916 1,410,393 Provision for bad debts and guarantees actually reserved 1,284,508 1,434,958 Note: Items follow “Regulations Governing the Procedures to Evaluate Assets, Set Aside Loss Reserves, and Handle Non-Performing Credit, Non-Accrual Loans, and Bad Debt” are refer to the issuing companies have applied to reform, or have been notified as dishonored account by Taiwan Clearing house or its loans from other financial institutions have been reclassified as overdue loan or written off as bad debt, and also its marking interest rate of issued commercial paper is lower than its book interest rate of IBFC. The IBFC has assessed and reserved appropriate guarantee liabilities
C. Management information (a) Overview of main businesses
Items December 31, 2018 December 31, 2017 Total guarantees and endorsement for short-term bills $ 117,375,400 $ 112,040,100 Guarantees and endorsement for short-term bills / Net amount (after deducting final accounts allotment) 4.73 4.70 Total securities sold under repurchase agreements 174,668,264 161,828,072 Securities sold under repurchase agreements / Net amount 7.04 6.80 (after deducting final accounts allotment)
2018 Consolidated Financial Report 303
(b) Credit risk concentration Items December 31, 2018 December 31, 2017 Amount of credit extensions to interested parties $ 1,057,900 $ 1,614,000 Ratio of credit extensions to interested parties (%) 0.90 1.44 Ratio of credit extensions secured by stocks (%) 16.10 14.50 Industry concentration (%) (Top 3 industries with highest ratio of credit extension amount) Construction industry 30.56% 24.46% Financial periphery and investment industry 24.65% 24.09% Trading industry 6.56% 8.38% (c) Credit risk concentration (December 31, 2018) Expressed in Millions of New Taiwan Dollars Total outstanding loan amount / net Ranking Group Name Total Credit worth of the (Note 1) (Note 2) Balance current period (%) 1 Fubon Group$ 3,859 13.66% 2 Eastern Century Group 3,725 13.19% 3 China Petrochemical Development Group 3,007 10.64% 4 Kings Group 2,639 9.34% 5 Sunpowerl Group 2,421 8.57% 6 Vedan Group 2,320 8.21% 7 The Far Eastern Group 2,188 7.75% 8 HuiYu Architecture Group 2,146 7.60% 9 Lien Hwa Group 2,069 7.32% 10 Shanyuan Group 1,900 6.73% Note 1: Ranking the top ten group entities other than government and government enterprise according to their total amounts of outstanding credits, while those with total categorized amount less than 5% of net assets of IBFC are excluded. Note 2: Definition of group entities is based on Article 6 of Supplementary Provisions to the “Taiwan Stock Exchange Corporation Rules for Review of Securities Listings.”
(d) Policy of provision for losses Allowance for credit loss and provision for losses of guarantee obiligations: The Group shall follow the “financial guarantee contracts” listed in Note 4 and consider “Regulations Governing the Procedures for Bills Finance Companies to Evaluate Assets, Set Aside Loss Reserves, and Handle Non-Performing Credit, Non-Accrual Loans, and Bad Debt” of the subsidiary. The aforementioned policy require the subsidiary assess potential loss on credit assets on and off balance sheets. Other than normal credit assets shall be classified as Category One, the remaining non-performing loans are assessed based on the collateral provided and the time period of overdue payment as follows: i. Category Two for assets requiring special attention: refer to the credit assets with adequate collateral based on assessments and past the repayment due date for 1 month to 12 months; or with no collateral based on assessments and past the
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repayment due date for 1 month to 3 months; or even the credit assets which have past the repayment due date yet but the debtors have other bad debt credit. ii. Category Three for assets deemed recoverable: refer to the credit assets with adequate collateral based on assessments and past the repayment due date over 12 months: or those with no collateral based on assessments and past the repayment due date for 3 months to 6 months; iii. Category Four for assets that are doubtful: refer to the credit assets with no collateral based on assessments and past the repayment due date for 6 months to 12 months. iv. Category Five for assets not recoverable: refer to the credit assets with no collateral based on assessments and past the repayment due date over 12 months or the credit assets not recoverable. The subsidiary shall assess the credit assets on and off balance sheets according to the aforementioned policy and provide the sum of 1% of the balance of Category One, 2% of the balance of Category Two, 10% of the balance of Category Three, 50% of the balance of Category Four and 100% of the balance of Category Five as the minimum for allowance for credit loss and provision for losses of guarantee obligation, which shall be enough to cover any possible losses based on experiences.
(e) Information on Breach of Applicable Laws or Regulations Items Reason and amount incurred Indictment of the Company’s chairman or employees for breach of applicable laws or regulations in the past year (Note) None Penalties imposed by the regulatory authority for breach of the Bills Financing Act in the past year (Note) None Rectification requested by the Ministry of Finance for business The deficiencies of IBFC in executing misconduct in the past year (Note) anti-money laundering and countering the financing of terrorism may cause inadequate management, which should be rectified according to Article 51 in the Act of Governing Bills and Finance Business, whitch mutatis mutandis applies item of Article 61-1 of the Banking Act. Frauds committed by the Company’s employees, major contingencies, or incidents caused by non- compliance with the Safety Rules Governing the Financial Institutions, which have incurred a total loss exceeding $50 million on one single incident or all the incidents in the latest year (Note) None Others None Note: The latest period denotes one-year time from the current period of disclosure.
2018 Consolidated Financial Report 305
D. Sources and utilization of capital December 31, 2018 Expressed in Millions of New Taiwan Dollars 31 to 90 91 to 180 181 days to 1 to 30 days Over 1 year days days 1 year Bills $ 64,816 $ 41,280 $ 10,688 $ 2,751 $ 1,004 Bonds 1,102 3,040 5,401 6,317 84,961 Cash in banks 747 200 - - - Utilization of Call loan to banks 2,030 - - - - capital Bills and bonds purchased under resell agreements 500 - - - - Total 69,195 44,520 16,089 9,068 85,965 Call loan from banks 24,614 - - - - Bills and bonds sold Sources of under repurchase capital agreements 143,591 27,988 3,082 7 - Own capital - - - - 28,258 Total 168,205 27,988 3,082 7 28,258 Net capital( 99,010) 16,532 13,007 9,061 57,707 Accumulated net capital( 99,010) ( 82,478) ( 69,471) ( 60,410) ( 2,703)
December 31, 2017 Expressed in Millions of New Taiwan Dollars 31 to 90 91 to 180 181 days to 1 to 30 days Over 1 year days days 1 year Bills $ 52,482 $ 55,877 $ 10,349 $ 3,147 $ 122 Bonds 950 2,085 2,112 11,445 82,715 Cash in banks 447 - - - - Utilization of Call loan to banks - - - - - capital Bills and bonds under resale agreements - - - - - Total 53,879 57,962 12,461 14,592 82,837 Call loan from banks 34,538 - - - - Bills and bonds sold Sources of under repurchase capital agreements 136,137 22,748 2,910 32 - Own capital - - - - 28,152 Total 170,675 22,748 2,910 32 28,152 Net capital( 116,796) 35,214 9,551 14,560 54,685 Accumulated net capital( 116,796) ( 81,582) ( 72,031) ( 57,471) ( 2,786)
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E. Interest rate sensitivity analysis on assets and liabilities: December 31, 2018 Expressed in Millions of New Taiwan Dollars 91 to 180 181 days to Items 1 to 90 days Over 1 year Total days 1 year Interest rate sensitive assets $ 113,715 $ 16,089 $ 9,068 $ 85,963 $ 224,835 Interest rate sensitive liabilities 196,193 3,082 7 - 199,282 Interest rate sensitivity gap ( 82,478) 13,007 9,061 85,963 25,553 Net assets 28,250 Ratio of interest rate sensitive assets to interest rate sensitive liabilities 112.82% Ratio of interest rate sensitivity gap to net worth 90.45%
December 31, 2018 Expressed in Millions of New Taiwan Dollars 91 to 180 181 days to Items 1 to 90 days Over 1 year Total days 1 year Interest rate sensitive assets $ 111,841 $ 12,461 $ 14,592 $ 82,837 $ 221,731 Interest rate sensitive liabilities 193,423 2,910 32 - 196,365 Interest rate sensitivity gap ( 81,582) 9,551 14,560 82,837 25,366 Net assets 28,152 Ratio of interest rate sensitive assets to interest rate sensitive liabilities 112.92% Ratio of interest rate sensitivity gap to net worth 90.10%
2018 Consolidated Financial Report 307
F. Average amounts and average interest rates of interest-earning assets and interest-bearing liabilities Year ended December 31, Year ended December 31, Average Average Average interest Average interest amount (Note 1) (%) amount (Note 1) (%) Assets Certificates of deposit (Note 2)$ 404,052 0.21%$ 400,000 0.22% Due from the central bank and call loans to banks 342,519 0.74% 171,623 0.68% Financial assets at fair value through profit or loss-bills and bonds 111,385,260 0.67% 99,672,809 0.63% Financial assets at fair value through other comprehensive income-bonds 95,362,263 1.36% - - Bills and bonds purchased under resell agreements 562,944 0.45% 532,611 0.41% Available-for-sale financial assets- bonds - - 94,800,580 1.43% Held-to-maturity financial assets- bonds - - 135,409 2.05% Liabilities Interbank lending and overdraft 29,293,023 0.54% 28,349,067 0.41% Bills and bonds sold under repurchase agreements 157,141,018 0.52% 147,262,215 0.47% Note1: The average amount is the daily average amount on interest-earning assets and interest-bearing liabilities date. Note 2: Certificates of deposit include pledge certificates of deposit and due from the Central bank.
(13) Information on adopting IAS 39 in 2017 A. Summary of significant accounting policies adopted in 2017: (a) Financial assets at fair value through profit or loss i. Financial assets at fair value through profit or loss are financial assets held for trading or financial assets designated as at fair value through profit or loss on initial recognition. Financial assets are classified in this category of held for trading if acquired principally for the purpose of selling in the short-term. Derivatives are also categorized as financial assets held for trading unless they are designated as hedges. Financial assets that meet one of the following criteria are designated as at fair value through profit or loss on initial recognition: (i) Hybrid (combined) contracts; or (ii) They eliminate or significantly reduce a measurement or recognition inconsistency; or (iii) They are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management or
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investment strategy. ii. On a regular way purchase or sale basis, financial assets at fair value through profit or loss are recognised and derecognised using trade date accounting. iii. Financial assets at fair value through profit or loss are initially recognised at fair value. Related transaction costs are expensed in profit or loss. These financial liabilities are subsequently remeasured and stated at fair value, and any changes in the fair value of these financial liabilities are recognised in profit or loss. (b) Available-for-sale financial assets i. Available-for-sale financial assets are non-derivative instruments that are either designated in this category or not classified in any of the other categories. ii. On a regular way purchase or sale basis, available-for-sale financial assets are recognised and derecognised using trade date accounting. iii. Available-for-sale financial assets are initially recognised at fair value plus transaction costs. These financial assets are subsequently remeasured and stated at fair value, and any changes in the fair value of these financial assets are recognised in other comprehensive income. (c) Held-to-maturity financial assets i. Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturity date that the Group has the positive intention and ability to hold to maturity other than those that meet the definition of loans and receivables and those that are designated as at fair value through profit or loss or as available-for-sale on initial recognition. ii. On a regular way purchase or sale basis, held-to-maturity financial assets are recognised and derecognised using trade date accounting. iii. Held-to-maturity financial assets are initially recognised at fair value on the trade date plus transaction costs and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Amortisation of a premium or a discount on such assets is recognised in profit or loss. (d) Financial assets at cost Financial assets at cost are accounted for using trade date accounting. These assets are initially recognized at fair value plus transaction costs of acquisition. The fair value can be reasonably estimated when the following criteria are met at the balance sheet date: (a) the variability in the range of reasonable fair value estimates is insignificant for that instrument, or (b) the probabilities of the estimates within the range can be reasonably assessed and used in estimating fair value. If the variability in the range of reasonable fair value estimate could vary significantly, and the probabilities of the various estimates cannot be reasonably measured, then it should be assessed by cost. (e) Accounts receivable and overdue receivables Accounts receivable include accounts receivable, notes receivable, interest receivable, margin loans receivable, guaranteed proceeds receivable from refinancing, sale of securities and bonds receivable, lease and installment receivables, and other receivables. Accounts receivable are accounted for as follows:
2018 Consolidated Financial Report 309
i. Accounts receivable and overdue receivables are initially recognized at fair value, which includes the price of transaction, significant costs of transaction, significant handling fees paid or received, discount and premium, etc., and subsequently measured at amortized cost using the effective interest method. However, short-term receivable without bearing interest are subsequently measured at initial invoice amount as the effect of discounting is immaterial. ii. The commercial paper guaranteed by the IBFC which matures without being presented immediately within six months from the maturity, shall be accounted for as accounts receivable. Receivables overdue for longer than six months shall be accounted for as overdue receivables. iii. During the period which guaranteed commercial paper are issued for, the collateral is subject to provisional attachment yet the borrower still operates and pays the interest regularly. In order to extend a grace period for the borrower to apply for removal of such attachment, if such commercial paper matures without being presented immediately, the balance of the commercial paper shall be accounted for as notes receivable. iv. Other receivables represent accounts receivable except for those listed under designated accounts. v. Allowance for doubtful accounts for claims such as accounts receivable and overdue receivables is recognized by assessing at balance sheet date whether objective evidence exists indicating impairment losses generated from material individual financial assets, and impairment losses generated individually or as a company from immaterial individual financial assets. An impairment loss is recognized when there is objective evidence of impairment. The amount of the impairment is measured as the difference between the financial asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. If, in a subsequent period, the amount of the impairment decreased and the decrease can be related obviously to an event occurring after the impairment loss was recognised, previously recognised impairment of financial assets shall be reversed. The reversal shall not lead the carrying amount of financial asset exceed its amortised cost before the impairment recognised. And the reversal amount shall be recognised in current profit or loss. IBFC also assessed in accordance with “Regulations Governing the Procedures for Bills Finance Companies to Evaluate Assets, Set Aside Loss Reserves, and Handle Non-Performing Credit, Non-Accrual Loans, and Bad Debt＂. (f) Impairment of financial assets i. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. ii. The criteria that the Group uses to determine whether there is objective evidence of an impairment loss is as follows: (i) Significant financial difficulty of the issuer or debtor; (ii) A breach of contract, such as a default or delinquency in interest or
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principal payments; (iii) The Group, for economic or legal reasons relating to the borrower’s financial difficulty, granted the borrower a concession that a lender would not otherwise consider; (iv) It becomes probable that the borrower will enter bankruptcy or other financial reorganisation; (v) The disappearance of an active market for that financial asset because of financial difficulties; (vi) Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial asset in the group, including adverse changes in the payment status of borrowers in the group or national or local economic conditions that correlate with defaults on the assets in the group; (vii) Information about significant changes with an adverse effect that have taken place in the technology, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered; (viii) A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost. iii. When the Group assesses that there has been objective evidence of impairment and an impairment loss has occurred, accounting for impairment is made as follows according to the category of financial assets: (i) Financial assets measured at amortised cost 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 discounted at the financial asset’s original effective interest rate, and is recognised in profit or loss. 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 loss was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset does not exceed its amortised cost that would have been at the date of reversal had the impairment loss not been recognised previously. Impairment loss is recognised and reversed by adjusting the carrying amount of the asset through the use of an impairment allowance account. (ii) Financial assets at cost 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 discounted at current market return rate of similar financial asset, and is recognised in profit or loss. Impairment loss recognised for this category shall not be reversed subsequently. Impairment loss is recognised by adjusting the carrying amount of the asset through the use of an impairment allowance account.
2018 Consolidated Financial Report 311
(iii) Available-for-sale financial assets The amount of the impairment loss is measured as the difference between the asset’s acquisition cost (less any principal repayment and amortisation) and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss, and is reclassified from ‘other comprehensive income’ to ‘profit or loss’. If, in a subsequent period, the fair value of an investment in a debt instrument increases, and the increase can be related objectively to an event occurring after the impairment loss was recognised, such impairment loss is reversed through profit or loss. Impairment loss of an investment in an equity instrument recognised in profit or loss shall not be reversed through profit or loss. Impairment loss is recognised and reversed by adjusting the carrying amount of the asset through the use of an impairment allowance account. (g) Financial liabilities at fair value through profit or loss i. Financial liabilities at fair value through profit or loss are financial liabilities held for trading or financial liabilities designated as at fair value through profit or loss on initial recognition. Financial liabilities are classified in this category of held for trading if acquired principally for the purpose of repurchasing in the short-term. Derivatives are also categorized as financial liabilities held for trading unless they are designated as hedges. Financial liabilities that meet one of the following criteria are designated as at fair value through profit or loss at initial recognition: (i) Hybrid (combined) contracts; or (ii) They eliminate or significantly reduce a measurement or recognition inconsistency; or (iii) They are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management policy. ii. Financial liabilities at fair value through profit or loss are initially recognised at fair value. Related transaction costs are expensed in profit or loss. These financial liabilities are subsequently remeasured and stated at fair value, and any changes in the fair value of these financial liabilities are recognised in profit or loss. (h) Financial guarantee business i. IBFC initially recognizes financial guarantee contracts at fair value on the date it provides the guarantee. It charges a service fee when guarantee provided after the contract was signed and therefore the service fee income charged is the fair value at the date that the financial guarantee contract was signed and is recognised under “Service fee and commission income＂. Service fee received in advance is recognised in deferred income and amortized through straight-line method over the guarantee period. ii. Subsequently, IBFC should measure the financial guarantee contract issued at the higher of: (i) the amount determined in accordance with IAS 37 endorsed by the FSC, “Provisions, contingent liabilities and contingent assets＂and
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(ii) The amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with IAS 18,“Revenue”endorsed by the FSC. iii. The best estimate of the liability amount of a financial guarantee contract requires management to exercise their judgment combined with historical loss data based on the similar transaction experiences. The increase in liabilities due to financial guarantee contract is recognised in “Bad Debt Expenses and Guarantee Liability Provisions”. iv. IBFC shall assess credit assets on and off balance sheets in accordance with “Regulations Governing the Procedures for Bills Finance Companies to Evaluate Assets, Set Aside Loss Reserves, and Handle Non-Performing Credit, Non-Accrual Loans, and Bad Debt” considering collateral provided and the length of overdue. Take the sum of 1% of the balance of normal credit assets, 2% of the balance of assets requiring special attention, 10% of the balance of assets deemed recoverable, 50% of the balance of assets that are doubtful and 100% of the balance of assets are not recoverable as the minimum for allowance for credit loss and provision for losses of guarantee obligation, which shall be enough to cover any possible losses based on the experience.
(Following blank)
B. The reconciliations of carrying amount of financial assets transferred from December 31, 2017, IAS 39, to January 1, 2018, IFRS 9, were as follows:
IAS 39 IFRS 9 January 1, 2018 January 1, 2018 January 1, 2018 December 31, 2017 January 31, 2018 Effect from Effect from Effect from Carrying amount Reclassifications Remeasurement Carrying amount retained earnings retained earnings retained earnings
Financial assets at fair value throu $ 127,834,741 $ - $ - $ 127,834,741 $ - $ - $ - Addition:
From available-for-sale financial ass - 868,558 - 868,558 ( 192,028) 192,028 -
From financial assets at cost (IAS 3 - 427,733 ( 9,831) 417,902 ( 33,077) 23,246 - Deduction:
Reclassified to equity instruments at - ( 6,524) - ( 6,524) - - -
Total changes on measured at fair $ 127,834,741 $ 1,289,767 ($ 9,831) $ 129,114,677 ($ 225,105) $ 215,274 $ -
Financial assets at fair value throu $ - $ - $ - $ - $ - $ - $ - Addition- Debt instrument
From available-for-sale financial ass - 106,017,844 - 106,017,844 ( 54,448) 54,448 - Addition- Equity instruments
From available-for-sale financial ass - - - - 311 ( 311) - 2018 Consolidated Financial Report 2018 Consolidated Financial
From financial assets at fair value th - 6,524 ( 4,179) 2,345 ( 589) ( 1,839) ( 1,751)
From financial assets at cost (IAS 3 - 321,302 490,066 811,368 10,483 410,603 68,980
Total changes on measured at fair $ - $ 106,345,670 $ 485,887 $ 106,831,557 ($ 44,243) $ 462,901 $ 67,229 Investments accounted for using e $ 1,689,547 $ -$ 2,588 $ 1,692,135 ($ 3,157) $ 5,745 $ - Accounts receivable $ 21,756,556 $ -($ 493) $ 21,756,063 ($ 493) $ -$ -
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WATERLAND FINANCIALHOLDINGS (a) As debt instruments classified as “Available-for-sale financial assets”, which totaled $106,017,844, met the criteria that the objective of the Group’s business model is to achieve by both collecting contractual cash flows and selling financial assets; and the assets’ contractual cash flows represent solely payments of principal and interest, they were reclassified as “Financial assets at fair value through other comprehensive income (debt instruments)”, amounting to $106,017,844, and decreased retained earnings and increased other equity interest in the amounts of $54,448 on initial adoption of IFRS 9. (b) Under IAS 39, because the equity instruments, which were classified as “Financial assets at fair value through profit or loss”, “Financial assets
at cost”, and “Available-for-sale financial assets”, amounting to $6,524、$321,302 and $311, respectively, were not held for trading, they were reclassified as “Financial assets at fair value through other comprehensive income (equity instruments)” amounting to $813,713, and increased retained earnings, other equity interest and non-controlling interests in the amounts of $10,205, $408,453 and $67,229 on initial adoption of IFRS 9. (c) Under IAS 39, the equity instruments, which were classified as “Available-for-sale financial assets”, “Financial assets at cost”, amounting to $868,558, and $427,733, respectively, were reclassified as “Financial assets at fair value through profit or loss (equity instruments)” amounting to $1,286,460, and decreased retained earnings and increased other equity interest in the amounts of $225,105 and $215,274 under IFRS 9. (d) In accordance with IFRS 9, the investment accounted for under equity method, Taiwan Finance Corporation, made an irrevocable election at initial recognition on equity instruments not held for trading and reclassified “Financial assets at cost”, the Group increased investments accounted for under equity method and other equity interest amounting to $2,588 in proportion to ownership percentage. In line with the requirements of IFRS 9 on provision for impairment, the Group increased other equity interest and decreased retained earnings amounting to $3,157 in proportion to ownership percentage. (e) In line with the requirement of IFRS 9 on provision for impairment, accounts receivable was decreased by $493 and retained earnings was decreased by $493.
C. The reconciliation of allowance for impairment and provision from December 31, 2017, as these are impaired under IAS 39, to January 1, 2018, as these are expected to be impaired under IFRS 9, are as follows: Allowance for bad debt impairment under Reclassifica Remeasure Allowance for bad debt IAS 39 and provision under IAS 37 tions ment impairment under IFRS 9
Loans and receivables (IAS 39)/Financial assets at amortised cost (IFRS 9) Receivable$ 128,234 $ - $ 493 $ 128,727 Other financial assets 285,334 - - 285,334 vailable-for-sale financial assets (IAS 39)/Financial asset measured at fair value through other comprehensive income (IFRS 9) Financial assets at fair value through - - 54,448 54,448 other comprehensive income Guarantee obiligation Guarantee obiligation 1,276,508 - - 1,276,508 Total $ 1,690,076 $ -$ 54,941 $ 1,745,017
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D. The details of significant accounts as of December 31, 2017 are as follows: (a) Financial assets (liabilities) at fair value through profit or loss December 31, 2017 Financial assets held for trading Stocks$ 1,577,146 Beneficiary certificates 648,327 Commercial papers 81,615,349 Negotiable bank certificates of deposit 40,173,822 Government bond 303,306 Corporate bond 3,289,915 Derivative instrument: 51,504 Call (put) warranties 13,424 127,672,793 Valuation adjustment 161,948 $ 127,834,741 Financial liabilities held for trading Fixed rate commercial paper purchased $ 11,555 Securities borrowing payable 12,024 Call (put) warrant liabilities 108,386 Derivative instrument 208,762 340,727 Valuation adjustment ( 146) $ 340,581 i. As of December 31, 2017, negotiable bank certificates of deposit of IBFC, provided as guarantee for intraday call-loan with the Central bank and other financial institutions, totaled $7,400,000. ii. As of December 31, 2017, government bonds of Waterland Securities, which is provided as guarantee for litigations and performance guarantee for Taipei Exchange, totaled $6,796. (b) Available-for-sale financial assets, net December 31, 2017 Stocks$ 1,131,033 Government bond 38,890,000 Bank debenture 13,399,463 Corporate bond 52,988,534 106,409,030 Accumulated impairment( 23,059) Valuation adjustment 500,431 $ 106,886,402
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i. As at December 31, 2017, in accordance with the relevant regulations, bonds provided as refundable deposits with the Central Bank or other banks amounted to $1,085,555. In addition, the government bonds provided as guarantee for litigations was $482,744. ii. As of December 31, 2017, bonds provided as collaterals for bank overdrafts by IBFC was $1,699,985. iii. For the year ended December 31, 2017, the provision of impairment loss for available-for-sale financial assets of Waterland Venture Capital Co., Ltd. was $1,981. iv. As at December 31, 2017, stocks held by Waterland Venture Capital Co., Ltd. And provided as collateral for guarantees for issuance of commercial papers amounted to $84,345. v. The Group recognised $673,824 in other comprehensive income for fair value changes and reclassified $335,930 from equity to profit or loss for the years ended December 31, 2017. (c) Allowance for bad debts/ Provisions i. Movements in allowance for accounts receivable, overdue loans and provision for guarantee obligation are as follows: Allowance for accounts receivable Provision for and overdue loans guarantee obligation January 1, 2017$ 193,528 $ 1,172,064 Provision 273,243 106,946 Transfer 2,502 ( 2,502) Write-offs ( 54,380) - Exchange difference ( 1,325) - Balance at December 31, 2017$ 413,568 $ 1,276,508 The aforementioned guarantee obligation were provided and assessed based on the guaranteed balance of commercial papers on balance sheet date (For details please refer to Note 9). ii. As of December 31, 2017, the Group’s receivables and allowance for bad debts are assessed as follows: Total receivables and Allowance for bad Items overdue loans debts amount December 31, 2017 With individual objective evidence of impairment -Individual assessment$ 787,807 $ 292,720 Without individual objective evidence of impairment -Individual assessment 3,123 42 -Collective assessment (Note) 15,962,930 120,806 Note：Information on receivables of the Group, please refer to Note 6(6).
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(d) Gains (loss) on financial assets (liabilities) at fair value through profit or loss December 31, 2017 Realized gains (losses) Gains (losses) on disposal of $ 199,450 bills, net Gains (losses) on disposal of 300,854 bonds, net Gains (losses) on disposal of 570,125 listed stocks and open-ended funds, net Gains (losses) on disposal of ( 200,310) derivative instruments, net Gains (losses) on call (put) ( 66,553) warrants, net Others( 2,056) 801,510 Gains (losses) on valuation Gains (losses) on valuation of ( 22,134) bills, net Gains (losses) on valuation of 51,389 bonds, net Gains (losses) on valuation of 16,182 listed stocks and open-ended funds, net 12,975 Gains (losses) on valuation of ( 16,477) derivative instruments, net Gains (losses) on valuation of 41,935 call (put) warrants, net $ 843,445 (e) Realized gains (losses) on available-for-sale financial assets
Year ended December 31, 2017 Gains (losses) on bonds investment, net$ 131,132 Gains (losses) on listed stocks and open-ended funds, net 204,798 $ 335,930 (f) Realized gains (losses) on held-to-maturity financial assets 2017 Gains (losses) on government bonds, net $ 5,315
(g) Financial assets credit quality and analysis of days past due and impairment: Financial assets held by the Company and subsidiaries comprise cash and cash equivalents, due from the central bank and call loans to banks, receivables from disposal of stocks and
2018 Consolidated Financial Report 319
bonds, securities settlement receivable, various refundable deposits and margin accounts. The counterparties have good credit ratings so that the credit risk is extremely low as assessed. Besides, analysis of credit quality of financial assets are as follows: i. The Group’s internal credit rating can be categorized into low risk, medium risk and high risk. Definition of each rating is as follows: (i) Low risk: a company or the underlying position is capable of fulfilling the financial commitment to a stable extent even when facing with a significant uncertain factor or being exposed to adverse condition. (ii) Medium risk: a company or the underlying position’s capability to fulfill the financial commitment is weak. Any adverse operation, financial or economic movement shall further weaken its ability to fulfill the financial commitment. (iii) High risk: a company or the underlying position’s capability to fulfill the financial commitment is uncertain. The capability to fulfill the financial commitment shall be determined by whether the operating environment and financial position are favourable. (iv) Overdue credits: the balance of guarantees in arrear, endorsement or guaranteed credits and purchased trading commercial papers overdue for more than three months or within 3 months but have begun collection procedures from principal and subordinate debtors or liquidation of collateral. The Group uses internal and external credit rating as specified in below table. In the table below, above-mentioned two credit ratings are not directly correlated. They are mainly used to represent the similarity of credit quality. Internal credit ratings Credit rating of Taiwan Ratings Historical default rate (1 year) Low risk twAAA～twBBB- 0.00%～1.00% Medium risk twBB+～twBB- 2.55% High risk twB+～twC 4.88%～26.81% Impairment D 100%
320
WATERLAND FINANCIALHOLDINGS ii. The table of the credit quality of financial assets of the Group: December 31, 2017 Not past due or impaired Financial assets Low risk Medium risk High risk due but not impa Impaired Total Provisions Net amount Financial assets at fair value through profit or loss Short-term notes and bills $ 121,909,291 $ - $ - $ - $ - $ 121,909,291 $ - $ 121,909,291 Open-end fund 500,170 46,864 - - - 547,034 - 547,034 Debt securities investments 3,668,279 8,905 - - - 3,677,184 - 3,677,184 Derivative instrument 50,864 - - - - 50,864 - 50,864 Bills and bonds purchased under resell agreements 124,908 - - - - 124,908 - 124,908
Available-for-sale financial assets Equity securities investments 798,494 - - - 92,407 890,901 23,059 867,842 Debt securities investments 106,018,560 - - - - 106,018,560 - 106,018,560 Receivable, net Interest receivable 1,495,692 - - - - 1,495,692 - 1,495,692 Margin loans receivable 10,192,311 - - - - 10,192,311 87,224 10,105,087 Receivable of securities settlement price 6,131,565 - - - - 6,131,565 - 6,131,565 Lease payments receivable 1,961,858 - - 3,123 223,476 2,188,457 40,944 2,147,513 Others 1,876,765 - - - - 1,876,765 66 1,876,699 Other financial assets Certificates of deposit pledged 1,900,566 - - - - 1,900,566 - 1,900,566 Deposit for securities borrowing 93,227 - - - - 93,227 - 93,227 Proceeds as collateral for security lending 3,570 - - - - 3,570 - 3,570 Financial assets at cost 725,405 - - - 157,509 882,914 133,879 749,035 Overdue receivables - - - - 564,331 564,331 285,334 278,997
2018 Consolidated Financial Report 321
iii. Analysis of financial assets that were impaired is as follows:
Carrying amount Amount of Carrying amount prior the after recognition Available collateral and to recognition of impairment of impairment other credit strengthening Financial assets impairment loss loss loss collateral December 31, 2017 Equity securities None. investments $ 249,916 $ 156,938 $ 92,978 Real estate, machinery and Accounts receivable 223,476 7,386 216,090 equipment Movable property and real Overdue receivables 564,331 285,334 278,997 estate
13. SUPPLEMENTARY DISCLOSURES
(1) Significant transactions information (The Company and significant subsidiaries)
A. Marketable securities acquired or disposed of, at amounted over $300 million or 10% of the issued capital: The Company and the subsidiaries, IBFC and Waterland Securities, are financial institutions, and are waived from disclosing. None for Waterland Venture Capital Co., Ltd.
B. Acquisition and disposal of real estate reaching $300 million or 10% of paid-in capital or more: None.
C. Allowance for service fees to related parties amounting to at least $5 million: None.
D. Receivables from related parties reaching $300 million or 10% of paid-in capital or more: None.
E. Subsidiaries disposing non-performing loans reaching $5 billion or more: None.
F. Information on categories of securitization of assets of subsidiaries applied for and approved in accordance to both financial asset securitization rule and real estate securitization regulations: None.
G. Other significant transactions which may affect the decisions of users of financial reports: None.
322
WATERLAND FINANCIALHOLDINGS
(2) Information on investees
A. Investees’ funds lent to others: None for the Company and the subsidiaries : IBFC, Waterland Securities and Waterland Venture Capital Co., Ltd.
B. Investees’ endorsement / guarantee provided:
Expressed in Thousands of New Taiwan Dollars
Provision of Provision of Provision of Increase Amount of Ratio of endorsement endorsement Ceiling on endorsement Limit on Maximum (decrease) Outstanding endorsement accumulate s/ s/ total amount of s/ Party being endorsements/ outstanding of endorsement/ s/ endorsement/ guarantees guarantees Endorser/guar Actual amount endorsements/ guarantees
endorsed/ guarantees endorsement/ individual guarantee amount guarantees guarantee amount by to antor drawn down guarantees by guaranteed provided for a guarantee amount subsidiary at December 31, secured with to net asset value of parent the party in provided subsidiary to single party in this month in this 2018 collateral the endorser/ company to Mainland parent month guarantor company subsidiary China company
Waterland Guo Want Venture International $4,220,430 $3,212,083 $ - $2,752,243 $2,211,022 $ - 195.65% $4,923,835 Y N Y Capital Co., Leasing Corp. Ltd.
Note: Amount of guarantee provided by the investees to companies not included within the Group should not exceed 3.5 times net assets of the subsidiary- Waterland Venture Capital Co., Ltd. The guarantee amount to subsidiary, Waterland Venture Capital Co., Ltd, whose shares are more than 50% directly or indirectly held by the Company should not exceed 3 times net assets of Waterland Venture Capital Co., Ltd.
C. Holding of marketable securities at the end of the period on December 31, 2018: Expressed in thousands of New Taiwan Dollar / per share December 31, 2018 Relationship with the Securities held by Marketable securities securities issuer Number of shares Book value Ownership (%) Ownership (%) Fair value Note Waterland Venture Beneficiary certificates: Financial assets at fair value Capital Co., Ltd W.I.S.E. Yuanta/P-shares CSI 300 None.through profit or loss 623,000 $ 8,940 Not applicable$ 8,940 Paradigm S&P GSCI Soybeans ER Futures " " 2,000,000 32,380 " 32,380 Yuanta/P-shares Russell Greater China Large Cap Value Index Fund " " 299,096 4,667 "4,667 $ 45,987 $ 45,987 Stocks: Financial assets at fair value Tehmag Foods Corporation None.through profit or loss 121,220 $ 23,517 0.36%$ 23,517 Taiwan Name Plate Co., Ltd. " " 560,000 15,372 2.86% 15,372 Fusheng Precision Co., Ltd. " " 498,000 79,431 0.42% 79,431 Brinno Inc " " 591,000 25,865 2.59% 25,865 YungShin Global Holding Corporation " " 473,000 18,613 0.18% 18,613 Kanpai Co., Ltd. " " 647,523 64,118 3.50% 64,118 Superalloy International Co., Ltd. " " 591,000 31,264 0.30% 31,264 ALFOT Technologies Co., Ltd. " " 221,300 4,979 0.71% 4,979 TTBio Corporation Inc " " 1,434,551 42,606 5.96% 42,606 Long Time Technology Corporation " " 250,000 8,510 0.21% 8,510 Jason's Entertainment Co., Ltd. " " 186,979 5,048 1.18% 5,048 EirGenix, Inc " " 2,270,347 70,018 1.52% 70,018 Art Emperor Technology & Culture Co., Ltd. " " 103,200 2,480 0.67% 2,480 Drewloong Precsion, Inc " " 246,153 29,637 0.82% 29,637 GMT Global Inc " " 680,089 31,903 2.32% 31,903
Enimmune Corp " " 798,000 17,820 1.80% 17,820 Report 2018 Consolidated Financial Advagene Biopharma Co., Ltd. " " 1,000,000 25,990 2.27% 25,990 Smartdisplayer Technology Co., Ltd. " " 700,000 26,894 2.81% 26,894 Greatest Idea Strategy Co., Ltd. " " 65,286 221 0.39% 221 Udn.com Co., Ltd. " " 775,521 29,796 4.44% 29,796 Eva Technology Co., Ltd. " " 69,600 78 0.34% 78 Initio Corporation " " 7,154 - 0.07% - Eversol Co., Ltd. " " 1,201,114 - 0.43% -
323
324
WATERLAND FINANCIALHOLDINGS
Expressed in thousands of New Taiwan Dollar / per share December 31, 2018 Relationship with the Securities held by Marketable securities securities issuer Number of shares Book value Ownership (%) Ownership (%) Fair value Note
Waterland Venture Stocks: Financial assets at fair value Capital Co., Ltd High Power Opto Inc None.through profit or loss 14,721 $ - 0.03%$ - Aptos Technology Co., Ltd. " " 180,516 1,079 0.32% 1,079 Arclite Co., Ltd. " " 20,732 117 0.27% 117 Taiwan Polysilicon Corporation " " 84,000 - 0.03% - Powerchip Technology Corporation " " 4,089,477 199,444 0.17% 199,444 Joyin Co., Ltd. " " 51,735 672 0.08% 672 Tennrich International corp " " 433,806 1,045 0.71% 1,045
Poju International Co., Ltd. " " 1,000,000 38,322 2.16% 38,322 Touch Cloud Inc. " " 250,000 1,583 3.42% 1,583 Formosa Biomedical Technology Corp " " 76,046 1,595 0.05% 1,595 Mister International Co., Ltd. " " 496,439 14,575 3.88% 14,575 ADE Technology Inc " " 1,101,846 25,342 5.29% 25,342 Yufu Technology Co., Ltd. " " 5,000,000 10,165 5.38% 10,165 Miho International Cosmetic Co., Ltd. " " 428,000 4,280 1.00% 4,280 Besst Kingdom Co., Ltd. " " 332,941 19,311 3.57% 19,311 Gret Dream Pictures, Inc " " 500,000 4,230 4.99% 4,230 HCT Logistics Co., Ltd. " " 52,570 2,681 0.02% 2,681 Solidlite Corporation " " 900,000 8,190 4.10% 8,190 Minima Technology Co., Ltd. " " 862,676 21,567 3.54% 21,567 Ching Fu Shipbuilding Co., Ltd. " " 3,702,000 - 0.74% - O'Pay Electronic Payment CO., Ltd. " " 189,750 6,180 0.13% 6,180 Rich Healthy Fruits & Vegetable Corp " " 184,000 17,763 1.05% 17,763 932,301 932,301 $ 978,288 $ 978,288
Pauguo Real Estate Management Co., Ltd. None. Investment accounted under 4,900,000 $ 52,022 49.00%$ 52,022 the equity method Stocks: Financial assets at fair value Zhonglin Venture Capital Co., Ltd. None.through profit or loss 6,666,000 $ 100,190 6.66%$ 100,190 Waterland Securities Co., Ltd. " " 843 5 0.00% 5 $ 100,195 $ 100,195 Note : Marketable securities under 0.01% of total issued shares are not disclosed.
D. Marketable securities acquired or disposed of, over $300 million or 10% of the issued capital: The subsidiaries, International Bills Finance Corporation and Waterland Securities, are financial institutions, and are waived from disclosing. None for Waterland Venture Capital Co., Ltd.
E. Trading in derivative instruments undertaken during the reporting periods: Please refer to Notes 6(3) and 7.
(3) Information regarding reinvested business and consolidated stock holdings:
Expressed in thousands of New Taiwan Dollars The Company and affiliate companies consolidated stock holdings Investment Percentage of income ownership (%) at (loss) recognised Number of owned Number of Number of Percentage the end of current Carrying value of by the Company shares pro forma shares of ownership Investor Investee Location Main business activities period investment for current period (in thousands) shares (in thousands) (%) Note Waterland International Brokerage and proprietary trading of short- Financial Bills Finance Taipei term notes, bills and bonds; Underwriting, 100% $ 28,249,867 $ 1,895,169 1,809,000 Not applicable 1,809,000 100% Holdings Corporation certificate and guarantee of commercial paper Brokerage and proprietary trading, underwriting securities, margin trading of Waterland securities, brokerage of buying and selling 〞 Securities Taipei 58.09% 5,084,348 198,379 435,660 〞 435,660 58.09% foreign securities, supplementary and Co., Ltd proprietary trading of futures trading in centralized market and operating locations. Waterland Venture 〞 Taipei Venture Capital 100% 1,406,091 99,058 154,000 〞 154,000 100% Capital Co., Report 2018 Consolidated Financial Ltd Brokerage and proprietary trading of short- International Taiwan term notes, bills and government bonds; Bills Finance Finance Taipei 24.55% 1,639,740 95,349 126,716 〞 126,716 24.55% Underwriting, certificate and guarantee of Corporation Corporation commercial paper Waterland Waterland Securities Securities Co., Investment Taipei Consulting on portfolio investments 100% 100,869 Note 9,000 〞 9,000 100% Ltd Consulting Co., Ltd Waterland 〞 Future Co., Taipei Domestic and overseas futures business 99.88% 751,369 Note 59,930 〞 59,930 99.88% Ltd
325
326
WATERLAND FINANCIALHOLDINGS
Expressed in thousands of New Taiwan Dollars Investment Percentage of income ownership (%) at (loss) recognised Number of owned Number of Number of Percentage the end of current Carrying value of by the Company shares pro forma shares of ownership Investor Investee Location Main business activities period investment for current period (in thousands) shares (in thousands) (%) Note Paradigm Waterland Asset Securities Co., Taipei Securities investment trust business 100%$ 420,999 Note 41,000 Not applicable 41,000 100% Management Ltd Co., Ltd Waterland Waterland British Securities Securities Co., virgin Holding company 100% 21,739 Note 5,582 〞 5,582 100% (BVI) Co., Ltd islands Ltd. Waterland Waterland
Securities Hong Proprietary trading, brokerage and consulting Securities (BVI) 100% 21,779 Note 43,000 〞 43,000 100% (BVI) Co., Kong of securities Co., Ltd. Ltd. Waterland IBF Financial British Venture Capital Holding CO., virgin General investments 100% USD $34,053 Note 30,100 〞 30,100 100% Co., Ltd Ltd islands Financing leasing business, leasing business, Guo Want purchase leasing assets from domestic and IBF Financial International Nanjing overseas, disposal and maintenance of leasing 100% RMB $212,737 Note Limited company 〞 Limited company 100% Holding CO., Ltd Leasing Corp assets, leasing transaction consulting, and non-financing guarantee Pauguo Real Waterland Estate Construction management and lease Venture Capital Taipei 49% 52,022 $ 2,439 4,900 〞 4,900 49% Management construction and development Co., Ltd Corporation
Note: It is the subsidiary and second-tier subsidiary described in consolidated financial statements.
(4) Information on investments in Mainland China
A. Information of investment in Mainland China:
Expressed in thousands of New Taiwan Dollars or foreign currencies Accumulated Accumulated Amount remitted from Taiwan to Accumulated Investment amount of amount of Mainland China/Amount remitted amount of income investment remittance from back to Taiwan for the year ended remittance from Ownership held recognised by Book value of income Taiwan to December 31, 2018 Taiwan to Net income of by the the Company for investments in remitted back Mainland China Mainland China investee as of Company the year ended Mainland China to Taiwan as Investee in Paid-in capital Investment as of January 1, Remitted to Remitted back as of December December 31, (direct or December 31, as of December of December Mainland China Main business activities (Note 2) method 2018 (Note 2) Mainland China to Taiwan 31, 2018 2018 indirect) 2018 31,2018 31, 2018 Financial leasing business, leasing business, purchase Guo Want leasing assets from domestic $ 904,543 $ 904,543 $ 904,543 $ 56,518 $ 56,518 $ 1,006,824 $ 87,187 International and overseas, disposal and Note $ - $ - 100% (USD 30,000) (USD 30,000) (USD 30,000) (USD 1,873) (USD 1,873) (USD 32,780) (USD 2,808) Leasing Corp maintenance of leasing assets, leasing transaction consulting, and non-financing guarantee Note 1: Waterland Venture Capital Co., Ltd invested 100% of IBF Financial Holding Co., Ltd. in British virgin islands, which then reinvested 100% of Guo Want International Leasing Corp. Note 2: Based on the approved investment amount (US$30,000) pursuant to Jing-Shen-II-Zi Letter No. 10300305700 issued by the Investment Commission of the Ministry of Economic Affairs on December 12, 2014, the actual remitted amount, converted using the exchange rate at the date of remittance, was $904,543. Note 3: Consolidated in the consolidated financial statements. 2018 Consolidated Financial Report 2018 Consolidated Financial
B. Limitation on investment in Mainland China
Accumulated amount of remittance Investment amount approved by the Investment Ceiling on investments in Mainland from Taiwan to Mainland China as of Commission of the Ministry of Economic Affairs China imposed by the Investment December 31, 2018 (MOEA) Commission of MOEA (Note 4) $ 904,543 (USD 30,000) $ 904,543 (USD 30,000)$ 842,717 Note 4: Calculated as 60% of consolidated net assets of the subsidiary-Waterland Venture Capital Co., Ltd.
(5) Related party transactions of subsidiaries amounting to at least $100 million Please refer to Note 7 327
328
WATERLAND FINANCIALHOLDINGS (6) Significant inter-company transactions during the reporting periods
For the year ended December 31, 2018 Expressed in thousands of NTD Transaction
Percentage of consolidated total Number Relationship operating revenues or total assets (Note 1) Company name Counterparty (Note 2) General ledger account Amount Transaction terms (Note 3) 0 Waterland Financial Holdings International Bills Finance Corporation 1 Fee expense 2,389 No significant difference from general customers 0.04% International Bills Finance Corporation 1 Bills and bonds purchased under resale agreements 2,254,524 〞 0.81% International Bills Finance Corporation 1 Interest income 5,027 〞 0.09% International Bills Finance Corporation 1 Receivable 1,314 〞 0.00% Waterland Securities Co., Ltd. 1 Other operating expenses 8,356 〞 0.15% Waterland Securities Co., Ltd. 1 Payables 683 〞 0.00% Waterland Securities Co., Ltd. 1 Stock agent reserve 100 〞 0.00% 1 International Bills Finance Corporation Waterland Securities Co., Ltd. 3 Agent commission expense 4,252 〞 0.08% Waterland Securities Co., Ltd. 3 Fee income 6,916 〞 0.12% Waterland Securities Co., Ltd. 3 Profits or losses on financial assets at fair value through profit or loss 1,544 〞 0.03% Waterland Future Co., Ltd. 3 Customer margin deposits /Equity of futures traders 8,043 〞 0.00%
2 Waterland Securities Co., Ltd. Waterland Venture Capital Co., Ltd. 3 Brokerage commission income 450 〞 0.01% Waterland Future Co., Ltd. 3 Services commission income 60 〞 0.00% Waterland Future Co., Ltd. 3 Other operating revenue 62,382 〞 1.12% Waterland Future Co., Ltd. 3 Accounts receivable, futures 4,196 〞 0.00% Waterland Future Co., Ltd. 3 Other gains and losses 744 〞 0.01% Waterland Future Co., Ltd. 3 Agent commission income 538 〞 0.01% Waterland Future Co., Ltd. 3 Interest income 66 〞 0.00% Waterland Future Co., Ltd. 3 Service fee income of self-operation 617 〞 0.01% Waterland Future Co., Ltd. 3 Accounts payable 1,215 〞 0.00% Waterland Future Co., Ltd. 3 Service fee of settlement 10,902 〞 0.20% Waterland Securities Investment Consulting Co., Ltd. 3 Other operating expenses 56,188 〞 1.01% Waterland Securities Investment Consulting Co., Ltd. 3 Other payables 4,300 〞 0.00% Waterland Securities Investment Consulting Co., Ltd. 3 Other gains and losses 95 〞 0.00% Paradigm Asset Management Co., Ltd. 3 Other gains and losses 4,137 〞 0.07% 3 Waterland Future Co., Ltd. Waterland Securities Co., Ltd. 3 Customer margin deposits /equity of futures traders 250,791 〞 0.09% Note 1: The numbers filled in for the transaction company in respect of inter-company transactions are as follows: (1)Parent company is ‘0’. (2)The subsidiaries are numbered in order starting from ‘1’. Note 2:Relationship between transaction company and counterparty is classified into the following three categories; fill in the number of category each case belongs to. (1)Parent company to subsidiary. (2)Subsidiary to parent company. (3)Subsidiary to subsidiary. Note 3:Regarding percentage of transaction amount to consolidated total operating revenues or total assets, it is computed based on period-end balance of transaction to consolidated total assets for balance sheet accounts and based on accumulated transaction amount for the period to consolidated total operating revenues for income statement accounts.
2018 Consolidated Financial Report 329
14. DISCLOSURE OF FINANCIAL INFORMATION BY SEGMENTS
(1) General Information The Group has determined the reportable operating segments based on the reports reviewed by the chief operating decision-maker that are used to make strategic decisions, and no significant change was made during the year. The chief operating decision maker considers the business from a subsidiary perspective. The Group’s major subsidiaries are bills finance companies and securities firm. Except for bills finance companies and securities firm, remaining subsidiaries do not meet the quantitative thresholds required by IFRS 8 for reportable segments, therefore, the operating results are combined and expressed in ‘other operating segments’. (2) Measurement of segment information: The chief operating decision-maker evaluates the performance of the operating segments based on subsidiaries’ profit, net of tax
(3) Information about segment profit or loss, assets and liabilities The segment information provided to the Chief Operating Decision-Maker for the reportable segments of years 2018 and 2017 is as follows: Year ended December 31, 2018 Bills finance Securities Adjustmenst companies firm Others and write-offs Total Profit (loss) after tax $ 1,895,169 $ 324,597 ($ 91,065) $ 24,714 $ 2,153,415
Year ended December 31, 2017 Bills finance Securities Adjustmenst companies firm Others and write-offs Total Profit (loss) after tax $ 2,251,049 $ 412,803 ($ 161,846) $ 41,810 $ 2,543,816 1. External revenue accounts for more than 90% of the Group's revenue. 2. Assets and liabilities of the reportable segments are not disclosed as they are not provided to CODM.
(4) Information on products and services The Group’s reportable segment was classified based on product and service perspective, and general information as well as product and service types have been disclosed. No addition disclosure for revenue information on products and services was applicable.
(5) Geographical information Revenue arising from overseas single external customer was not material, therefore, no information was disclosed.
(6) Major customer information The Group has no major customer whose sales over 10% of the Group’s total revenue, thus, no information was disclosed.
Branches of Subsidiaries International Bills Finance Corporation Head Office 104 2,9,10,11F, No. 167, Sec. 2, Nanjing E. (02)2518-1688 Rd., Songshan Dist., Taipei City Kaohsiung Branch 801 2F-1, No. 396, Qixian 2nd Rd., Kaohsiung City (07)282-1182 Taichung Branch 403 16F, No. 101, Sec. 1, Ziyou Rd., Taichung City (04)2220-2181 Tainan Branch 703 14F, No. 457, Chenggong Rd., Tainan City (06)228-0121 Taipei Branch 114 13F-1, No. 413, Ruiguang Rd., Neihu Dist., Taipei (02)8797-3311 City Taoyuan Branch 330 10F, No. 286, Sec. 3, Sanmin Rd., Taoyuan Dist., (03)332-7172 Taoyuan City Banqiao Branch 220 4F, No. 33, Sec. 1, Minsheng Rd., Banqiao Dist., (02)2959-9001 New Taipei City Zhongshan Branch 104 8F, No. 48, Minquan W. Rd., Taipei City (02)2522-1989 Hsinchu Branch 300 11F, No. 168, Beida Rd., Hsinchu City (03)521-8161 Waterland Securities Co., Ltd. Head Office 105 15F, No. 188, Sec. 5, Nanjing E. Rd., Songshan (02)2528-8988 Dist.,Taipei City Brokerage 103 B1F, No. 199, Sec. 3, Chongqing N. Rd., Datong (02)2593-3888 Department Dist. Taipei City Beitou Branch 112 2F, No. 13, Sec. 2, Beitou Rd., Beitou Dist., Taipei (02)2896-9268 City Nangang Branch 115 B1F, No. 25, Ln. 12, Xingzhong Rd., Nangang (02)2653-5757 Dist.,Taipei City Anhe Branch 106 3F, No. 382, Sec. 4, Xinyi Rd., Da’an Dist., Taipei (02)2755-7999 City Dunbei Branch 105 2F, No. 346, Sec. 3, Nanjing E. Rd., Songshan (02)2776-0606 (Institutional Dist.,Taipei City Customer) Xinzhuang Branch 242 B1F, No. 16, Sec. 1, Zhonghua Rd., Xinzhuang (02)2992-3888 Dist., New Taipei City Zhonghe Branch 235 3F, No. 43, Xinyi St., Zhonghe Dist., New Taipe(02)2946-7777 City Nankan Branch 338 3F-1, 3F-2, No. 295, Zhongzheng Rd., Luzhu Dist. (03)311-5688 Taoyuan City Neili Branch 320 3,4F, No. 125, Xingnong Rd., Zhongli Dist., (03)461-8688 Taoyuan City Jiuding Branch 406 1F, No. 245, 1,2F, No. 245-1, Beitun Rd., Beitun (04)2232-1688 Dist., Taichung City
Zhonggang Branch 403 5F, No. 16, Sec. 2, Taiwan Blvd., West Dist., (04)2206-9988 Taichung City Changhua Branch 500 1F, No. 656, Sec. 3, Jinma Rd., Changhua City, (04)763-8888 Changhua County Chiayi Branch 600 3,4F, No. 508, Chuiyang Rd., Chiayi City (05)216-2888 Tainan Branch 704 5F, No. 114, Chenggong Rd., North Dist., Tainan (06)220-3979 City Nanke Branch 744 2F, No. 1-1, Fuxing Rd., Xinshi Dist., Tainan City (06)589-0128 North Kaohsiung 811 2F, No. 77, Liwen Rd., Zuoying Dist., Kaohsiung (07)558-1777 Branch City Zhongzheng Branch 801 1F, No. 213, Zhongzheng 4th Rd., Qianjin Dist., (07)216-6166 Kaohsiung City Heping Branch 802 1F, No. 87, Heping 1st Rd., Lingya Dist., (07)771-1111 Kaohsiung City Tianxiang Branch 807 No. 148, Tianxiang 1st Rd., Sanmin Dist., (07)347-7111 Kaohsiung City Taitung Branch 950 2,3F, No. 397, Sec. 1, Zhonghua Rd., Taitung City (089)321-789 Changcheng Branch 106 4F, No. 376, Sec. 4, Ren’ai Rd., Da’an Dist., Taipei (02)2700-8999 City Bo’ai Branch 100 2F, No. 38, Bo’ai Rd., Zhongzheng Dist., Taipei (02)2389-9988 City Nanjing Branch 105 8F.-9, No. 188, Sec. 5, Nanjing E. Rd., Songshan (02)2528-7799 Dist.,Taipei City Taoyuan Branch 330 5F, No. 133, Zhongzheng Rd., Taoyuan Dist., (03)338-1123 Taoyuan City Taichung Branch 407 7F, No. 1, Shizheng N. 1st Rd., Xitun Dist., (04)2255-3232 Taichung City Waterland Venture Capital Co., Ltd. Head Office 105 8F.-6, No. 188, Sec. 5, Nanjing E. Rd., Songshan (02)2528-8077 Dist.,Taipei City
Waterland Financial Holding Co., Ltd.
Chairman: Chi-Lin Wea
Notice to Readers: This English-version annual report is a translation of the Chinese version. If there is any discrepancy between the English and Chinese versions, the Chinese version shall prevail. WATERLAND FINANCIAL HOLDINGS 4F/10F, No.167, Section 2, Nanjing E. Road, Taipei (104), Taiwan TEL:+886-2-2515-4567 FAX:+886-2-2501-0606 http://www.waterland-fin.com.tw