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TABLE OF CONTENTS CHAPTER I GENERAL PRINCIPLES CHAPTER II CLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES CHAPTER III EMBEDDED DERIVATIVE INSTRUMENTS CHAPTER IV RECOGNITION OF FINANCIAL INSTRUMENTS CHAPTER V MEASUREMENT OF FINANCIAL INSTRUMENTS CHAPTER VI IMPAIRMENT OF FINANCIAL ASSETS CHAPTER VII DETERMINATION OF THE FAIR VALUE CHAPTER VIII DEFINITION OF FINANCIAL ASSETS, FINANCIAL LIABILITIES, AND EQUITY INSTRUMENTS CHAPTER I GENERAL PRINCIPLES Article 1. The present Standards are formulated according to the Accounting Standards for Enterprises-Basic Principles for the purpose of regulating the recognition and measurement of financial instruments. Article 2. The term "financial instruments" refers to the contracts whereby the financial assets of an enterprise are formed and whereby the financial liabilities or right instruments of any other entity are formed. Article 3. The term "derivative instruments" refers to the financial instruments or other contracts which the present Standards deal with and which are characterized by the following: (1) The value thereof varies with particular interest rates, prices of financial instruments, prices of commodities, foreign exchange rates, price indexes, cost indexes, credit ratings, credit indexes, and other similar variables; if the variable is a non-financial variable, there shall not exist any special relationship between such variable and any party to the contract; (2) No initial net investment is required or, as compared to other types of contracts that have similar responses to the market changes, very little initial net investment is required; (3) It is settled at a certain future date. Derivative instruments include forward contracts, futures contracts, exchanges and options, as well as the instruments that contain one or more of the features of a forward contract, futures contract, exchange or option. Article 4. The following items shall be governed by other relevant accounting standards: (1) The long-term equity investments as regulated by the Accounting Standards for Enterprises No. 2-Long-term Equity Investment shall be governed by the Accounting Standards for Enterprises No. 2-Long-term Equity Investment; (2) The share-based payments as regulated by the Accounting Standards for Enterprises No. 11-Share-based Payments shall be governed by the Accounting Standards for Enterprises No. 11-Share-based Payments; (3) For the restructuring of debts, the Accounting Standards for Enterprises No. 12-Debt Restructuring shall apply; (4) For the rights available from the settlement of anticipated debts, the Accounting Standards for Enterprises No. 13-Contingencies shall apply; (5) For the contingent consideration contracts of the combining parties in business combinations, the Accounting Standards for Enterprises No. 20-Business Combination shall apply; (6) For the rights and obligations involved in a lease, the Accounting Standards for Enterprises No. 21-Leases shall apply; (7) For the transfer of financial assets, the Accounting Standards for Enterprises No. 23-Transfer of Financial Assets shall apply; (8) For hedges, the Accounting Standards for Enterprises No. 24-Hedging shall apply; (9) For the rights and obligations involved in the original insurance contracts, the Accounting Standards for Enterprises No. 25-Original Insurance Contracts shall apply; (10) For the rights and obligations involved in a re-insurance contract, the Accounting Standards for Enterprises No. 26-Re-insurance Contracts shall apply; and (11) For the equity instruments as issued by an enterprise, the Accounting Standards for Enterprises No. 37-Presentation of Financial Instruments shall apply. Article 5. The present Standards do not regulate the irrevocable credit commitments as offered by enterprises (i.e., commitments to grant loans), with the exception of the following: (1) the designated commitments to grant loans made to the financial liabilities which are measured at their fair values and the variation of which is included into the current profits and losses; (2) the commitments to grants which can be settled with the net amount of cash or which can be settled by way of exchange or by issuing any other financial instruments; and (3) the commitments to grant loans at an interest rate that is lower than the market interest rate. For the commitments to grant loans not regulated by the present Standards, the Accounting Standards for Enterprises No. 13-Contingencies shall apply. Article 6. The present Standards do not regulate the contracts which are concluded for the stipulated purchase, sale or purposes of use, and, when the time becomes mature, non-financial items are bought or sold as a performance of the contract. However, the contracts which can be settled with cash or the net amount of other financial instruments or which can be bought or sold and settled by exchanging financial instruments shall be governed by the present Standards. CHAPTER II CLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Article 7. Financial assets shall be classified into the following 4 categories when they are initially recognized: (1) The financial liabilities which are measured at their fair values and whose variation is included into the current profits and losses, including transactional financial assets and the financial assets which are measured at their fair values and whose variation is included in the current profits and losses; (2) The investments which are held to their maturity; (3) Loans and the receivables; and (4) Financial assets available for sale. Article 8. Financial liabilities shall be classified into the following two categories when they are initially recognized: (1) The financial liabilities which are measured at their fair values and whose variation is included in the current profits and losses, including transactional financial liabilities and the designated financial liabilities which are measured at their fair values and whose variation is included in the current profits and losses; and (2) Other financial liabilities. Article 9. The financial assets and liabilities that meet any of the following requirements shall be classified as transactional financial assets or financial liabilities: (1) The said financial asset or financial liability being acquired or undertaken mainly for the purpose of selling or repurchase in the near future; (2) Forming a part of the identifiable combination of financial instruments which are managed in a centralized way, and for which there are objective evidences that prove that the enterprise will manage the combination by way of short-term profit-making in the near future; or (3) Being a derivative instrument. However, the designated derivative instruments which are effective hedging instruments, the derivative instruments which are financial guarantee contracts, and the derivative instruments which are connected with the equity instrument investments for which there is no quotation in the active market, whose fair value cannot be reliably measured, and which shall be settled by delivering the said equity instruments, shall be excluded. Article 10. Only the financial assets and financial liabilities that meet any of the following requirements can be designated, when they are initially recognized, as a financial asset or financial liability as measured at its fair value and whose variation is included in the current profits and losses: (1) The designation is able to eliminate or obviously reduce the discrepancies in the recognition or measurement of relevant gains or losses arising from the different basis of measurement of the financial asset or financial liability; or (2) The official written documents of risk management or investment strategies of the enterprise concerned have described that the said combination of financial assets, the said combination of financial liabilities, or the combination of financial assets and financial liabilities will be managed and evaluated on the basis of their fair values and will be reported to the key management personnel. The equity investment instruments for which there is no quotation in the active market and whose fair value cannot be reliably measured shall not be designated as a financial asset which is measured at its fair value and whose variation is included into the current profits and losses. The active market is one which is concurrently featured by the following: (1) The objects of transaction in the market are homogeneous; (2) Buyers and sellers are available at any time to carry out the deal at their own free will; and (3) The pricing information of the market is open. Article 11. The term "held-to-maturity investment" refers to a non-derivative financial asset with a fixed date of maturity, a fixed or determinable amount of repo price and which the enterprise holds for a definite purpose or the enterprise is able to hold until its maturity. The following non-derivative financial assets shall not be classified as investments held to their maturity: (1) The designated non-derivative financial assets which, at their initial recognition, are measured at their fair values and whose variation is included in the current profits and losses; (2) The non-derivative financial assets which are designated as sellable at their initial recognition; and (3) Loans and receivables. An enterprise shall make an appraisal of its purpose of holding and ability to hold at the date of balance sheet. Where there is any change, it shall be dealt with according to the present Standards. Article 12. The existence of any of the following circumstances shows that the enterprise concerned does not have a clear intention to hold the financial asset investment until its maturity: (1) The term of holding the financial asset is indefinite; (2) It will sell the financial asset when any of the following changes: the market interest rate, the fluid demand, the substitutive investment opportunity or the investment returns ratio, the sources and conditions of financing, or foreign exchange risk, etc., with, however, the exception of the sale of the financial assets which is caused by any uncontrollable and independent event which is anticipated not to repeat and which is difficult to be reasonably predicted; (3) The issuer of the financial asset can settle it with a sum which is obviously lower than the post-amortization cost; or (4) Any other circumstance which shows that the enterprise concerned does not have the clear intention to hold the financial asset till its maturity. Article 13. The post-amortization cost of a financial asset or financial liability refers to the following adjusted results of the initially recognized amount of the financial asset or financial liability: (1) after deducting the already paid principal; (2) after multiplying or subtracting the accumulative amount of amortization incurred from amortizing the balance between the initially recognized amount and the amount of the maturity date by employing the actual interest rate method; and (3) after deducting the impairment losses that have actually incurred (applicable to financial assets only). Article 14. The actual interest rate method refers to the method whereby the post-amortization costs and the interest incomes of different installments or interest expenses are calculated according to the actual interest rates of the financial asset or financial liabilities (including a set of financial assets or financial liabilities). The actual interest rate refers to the interest rate used to cash the future cash flow of a financial asset or financial liability within the predicted term of existence or within a shorter applicable term into the current carrying amount of the financial asset or financial liability. When determining the actual interest rate, the future cash flow shall be predicted on the basis of taking into account all the contractual stipulations concerning the financial asset or financial liability (including the right to repay the loan ahead of schedule, call options, similar options, etc.), but the future credit losses shall not be taken into account. The various fee charges, trading expenses, premiums or reductions, etc. which are paid or collected by the parties to a financial asset or financial liability contract and which form a part of the actual interest rate shall be taken into account in the determination of the actual interest rate. Where the future cash flow or term of existence of a financial asset or financial liability cannot be reliably predicted, the contractual cash flow of the financial asset or financial liability for the whole term of the contract shall be taken into account. Article 15. The existence of any of the following circumstances shows that the enterprise concerned is not able to hold the fixed term financial asset investment until its maturity: (1) Having no available financial resources to continuously provide capital support to the financial asset investment so as to hold the financial asset investment until its maturity; (2) Being subject to the restriction of any law or administrative regulation so that it is hard for the enterprise concerned to hold the financial asset investment until its maturity; or (3) Any other circumstance which shows that the enterprise concerned is not able to hold the fixed term financial asset investment until its maturity. Article 16. Where an enterprise sells any of its outstanding held-to-maturity investment within the current accounting year or re-classifies it as the amount of sellable financial asset, and the such amount is considerably large as compared to the amount before such investment is sold or re-classified, the surplus of such investment shall be re-classified as a sellable financial asset, and the said financial asset shall not be classified as a held-to-maturity investment within the current accounting year and the following two complete accounting years. However, the following circumstances shall be excluded: (1) The date of sale or re-classification is close to the maturity date or the repo date of the said investment (e.g., within 3 months prior to maturity), and the changes of the market interest rates will produce little impact upon the fair value of the said investment; (2) The balance is sold or re-classified after almost all the initial principal has been repaid by way of repayment at fixed intervals or repayment ahead of schedule as stipulated in the contract; and (3) The sale or re-classification is caused by an independent event that the enterprise cannot control, that is predicted not to occur again, and that is hard to be reasonably predicted. Such events include: 1. The held-to-maturity investment is sold due to the serious worsening of the credit situation of the investee; 2. The held-to-maturity investment is sold due to the fact that the relevant tax regulations have canceled the relevant policies regarding the pre-tax credit of interest taxes against the held-to-maturity investment or have remarkably reduced the pre-tax creditable amount; 3. The held-to-maturity investment is sold due to any important business combination or disposal so as to maintain the prevailing interest risk position or maintain the prevailing credit risk policies; 4. The held-to-maturity investment is sold due to any significant readjustment of any law or administrative regulation to the scope of permitted investment or to the amount of investment of any particular investment product; 5. The held-to-maturity investment is sold due to the regulatory department's demand for significantly elevating the fluidity of assets or significantly elevating the risk weight of the held-to-maturity investment in the calculation of capital adequacy ratio. Article 17. "Loans and receivables" refers to the non-derivative financial assets for which there is no quotation in the active market and whose repo amount is fixed or determinable. An enterprise shall not classify any of the following non-derivative financial assets as a loan or receivable: (1) The non-derivative financial asset which is to be sold immediately or in the near future; (2) The non-derivative financial assets which are designated to be measured at their fair value when they are initially recognized and whose variation is included into the current profits and losses; (3) The non-derivative financial assets which are designated as sellable when they are initially recognized; or (4) The non-derivative financial assets whose holder finds it hard to take back almost all the initial investment due to any reason other than the worsening of the credit of the debtor. The securities investment funds and other similar funds as held by an enterprise shall not be classified as a loan or receivable. Article 18. "Sellable financial assets" refers to the non-derivative financial assets that are designated as sellable when they are initially recognized as well as the financial assets other than those as described below: (1) loans and receivables; (2) investments held until their maturity; and (3) financial assets measured at their fair values and whose variation is included into the current profits and losses. Article 19. An enterprise shall not, after classifying a financial asset or financial liability as a financial asset or financial liability measured at its fair value and whose variation is included into the current profits and losses when it is initially recognized, re-classify it as any other type of financial asset or financial liability, nor may it re-classify any other type of financial asset or financial liability as a financial asset or financial liability measured at its fair value and whose variation is included into the current profits and losses. CHAPTER III EMBEDDED DERIVATIVE INSTRUMENTS Article 20. An embedded derivative instrument is a derivative instrument which is embedded into a non-derivative instrument (e.g. principal contract) so that some or all of the cash flow of the mixed instrument changes with particular interest rates, the prices of the financial instrument, the prices of commodities, foreign exchange rates, pricing indexes, cost indexes, credit ratings, credit indexes, or any other similar variables. The embedded derivative instruments and the principal contract jointly form into a mixed instrument, e.g., the convertible company bonds, etc. Article 21. An enterprise may designate a mixed instrument as a financial asset or financial liability measured at its fair value and whose variation is included into the current profits and losses, with the exception of the following: (1) Where the embedded derivative instrument does not significantly change the cash flow of the mixed instrument; and (2) The derivative instruments embedded in similar mixed instruments shall obviously not be separated from the relevant mixed instruments. Article 22. Where a mixed instrument relating to an embedded derivative instrument fails to be designated as a financial asset or financial liability measured at its fair value and whose variation is included in the current profits and losses, and if the following conditions are simultaneously met, the embedded derivative instrument shall be separated from the mixed instrument and treated as a independent derivative instrument: (1) Where there is no close relationship between it and the principal contract in terms of economic features and risks; and (2) Where it shares the same conditions as the embedded derivative instrument, and the independently instrument satisfies the requirements of the definition of derivative instrument. Where it is impossible to make an independent measurement when it is obtained or subsequently at the balance sheet date, the mixed instrument shall be designated in entirety as a financial asset or financial liability measured at its fair value and whose variation is included in the current profits and losses. Article 23. If, after the embedded derivative instrument is separated from the mixed instrument according to the present Standards, the principal contract is a financial instrument, it shall be dealt with according to the present Standards; if the principal contract is a non-financial instrument, it shall be dealt with according to other accounting standards. CHAPTER IV RECOGNITION OF FINANCIAL INSTRUMENTS Article 24. Where an enterprise becomes a party to a financial instrument, it shall recognize a financial asset or financial liability. Article 25. Where a financial asset meets any of the following requirements, it shall be stopped from recognition: (1) Where the contractual rights for collecting the cash flow of the said financial asset are terminated; or (2) Where the said financial asset is transferred and it meets the conditions for recognizing the termination of financial assets as provided for in Accounting Standards for Enterprises No. 23-Transfer of Financial Assets. "Stop recognizing" refers to writing off the financial asset or financial liability from the account or balance sheet of the enterprise concerned. Article 26. A financial liability may not be stopped from recognition in all or in part until the prevailing obligations of financial liabilities are all or partly dissolved. Where an enterprise transfers any of its assets used for repaying its financial liabilities into any institution or to establish a trust, and the prevailing obligations to repay liabilities remain to exist, it shall not stop recognizing the said financial liability, and shall not stop recognizing the transferred asset. Article 27. Where an enterprise (debtor) enters into an agreement with a creditor so as to substitute the existing financial liabilities with any new financial liability, and the new financial liability is substantially different from the contractual stipulations regarding the existing financial liability, it shall stop recognizing the existing financial liability, and shall at the same time recognize the new financial liability. Where the enterprise makes substantial revisions to some or all of the contractual stipulations of the existing financial liability, it shall stop recognizing the existing financial liability or part of it, and at the same time recognize the financial liability after revising the contractual stipulations as a new financial liability. Article 28. Where the recognition of a financial liability is totally or partially stopped, the enterprise concerned shall include into the current profits and losses the gap between the carrying amount which has been stopped from recognizing and the considerations it has paid (including the non-cash assets it has transferred out and the new financial liabilities it has assumed). Article 29. Where an enterprise buys back part of its financial liabilities, it shall distribute, on the day of repo, the carrying amount of the whole financial liabilities according to the comparatively fair value of the part that continues to be recognized and the part whose recognition has already been stopped. The gap between the carrying amount which is distributed to the part whose recognition has stopped and the considerations it has paid (including the non-cash assets it has transferred out and the new financial liabilities it has assumed). CHAPTER V MEASUREMENT OF FINANCIAL INSTRUMENTS Article 30. The financial assets and financial liabilities initially recognized by an enterprise shall be measured at their fair values. For the financial assets and liabilities measured at their fair values and whose variation is included into the current profits and losses, the transaction expenses thereof shall be directly included into the current profits and losses; for other categories of financial assets and financial liabilities, the transaction expenses thereof shall be included into the initially recognized amount. Article 31. "Transaction expenses" refers to the newly added external expenses attributable to the purchase, distribution, or disposal of a financial instrument. The newly added external expenses are the expenses that will occur even if the enterprise concerned does not purchase, distribute, or dispose of any financial instrument. Transaction expenses include charges and commissions as well as other necessary expenditure an enterprise pays to its agency institutions, consultation companies, securities dealers, etc., but exclude the bond premiums, reductions, financing expenses, internal management costs, and other expenses that are not directly related to the transaction in question. Article 32. An enterprise shall make subsequent measurement to its financial assets according to their fair values, and shall not deduct the transaction expenses that may occur when it disposes of the said financial asset in the future. However, the following shall be excluded: (1) The investments held until their maturity, loans and receivables shall be measured on the basis of the post-amortization costs by adopting the actual interest rate method; and (2) The equity instrument investments for which there is no quotation in the active market and whose fair value cannot be reliably measured as well as the derivative financial assets which are connected with the said equity instrument and which must be settled by delivering the said equity instrument shall be measured as costs. Article 33. An enterprise shall make subsequent measurement to the financial liabilities on the basis of the post-amortization costs by adopting the actual interest rate method, with the exception of the following: (1) For the financial liabilities measured at their fair values and whose variation is included into the current profits and losses, they shall be measured at their fair values and none of the transaction expenses that may occur when the financial liabilities are settled in the future may be deducted; (2) For the derivative financial liabilities which is connected to the equity instruments for which there is no quotation in the active market and whose fair value cannot be reliably measured and which must be settled by delivering the equity instrument, they shall be measured on the basis of their costs; and (3) For the financial guarantee contracts which are not designated as a financial liability measured at its fair value and the variation thereof is included in the current profits and losses, and for the commitments to grant loans which are not designated to be measured at the fair value and whose variation is included in the current profits and losses and which will enjoy an interest rate lower than that of the market, a subsequent measurement shall be made after they are initially recognized according to the following, whichever is higher: 1. the amount as determined according to the Accounting Standards for Enterprises No. 13-Contingencies; or 2. the surplus after accumulative amortization as determined according to the principles of the Accounting Standards for Enterprises No. 14-Revenues is subtracted from the initially recognized amount. Article 34. Where the intention of holding or the ability to hold of an enterprise changes so that it is no longer suitable to classify an investment as a held-to-maturity investment, it shall be re-classified as a sellable financial asset, and a subsequent measurement shall be made at it fair value. The gap between the carrying amount of the said investment at the day of re-classification and the fair value shall be computed into the owner's equity, and when the said sellable financial asset is impaired or transferred out when it is stopped from recognizing, it shall be included in the current profits and losses. Article 35. Where part of the held-to-maturity investment is sold or the re-classified amount thereof is considerably large, and if it does not fall within any of the exceptions as described in Article 16 herein, so that it is no longer suitable to classify the remnant of the said investment as a held-to-maturity investment, the enterprise shall re-classify the remnant of the said investment as a sellable financial asset, and shall make subsequent measurement to it according to its fair value. The gap between the carrying amount of the said remnant part of the investment at the day of re-classification and the fair value shall be computed into the owner's equity, and when the said sellable financial asset is impaired or transferred out when it is stopped from recognition, it shall be included in the current profits and losses. Article 36. For the financial assets and financial liabilities which, according to the present Accounting Standards, shall be measured at their fair values, but their prior fair values cannot be reliably measured, the enterprise shall measure them at their fair values when their fair values can be reliably measured, and the gap between the relevant carrying amount and the fair value shall be dealt with according to Article 38 of the present Accounting Standards herein. Article 37. Where the intention of holding or the ability to hold changes, or where the fair value can no longer be reliably measured, or where the term of holding has exceeded "two complete accounting years" as described in Article 16 of the present Accounting Standards herein, so that it is no longer suitable to measure the financial asset or financial liability at its fair value, the enterprise concerned may measure the said financial asset or financial liability on the basis of its cost or post-amortization cost, and such cost or post-amortization cost at the day of re-classification shall be the fair value or carrying amount of the financial asset or financial liability. The gains or losses that are related to the said financial asset and that were directly included in the owner's equity shall be dealt with according to the following provisions: (1) Where such financial asset has a fixed date of maturity, it shall be amortized within the remaining period of the said financial asset by adopting the actual interest rate method and be included in the current profits and losses. The gap between the post-amortization cost of the financial asset and the amount on the date of maturity shall also be amortized within the remaining period of the said financial asset by adopting the actual interest rate method and be included in the current profits and losses. If, during the subsequent accounting period, the financial asset is impaired, the relevant profits and losses that were included in the owner's equity shall be transferred out and be included in the current profits and losses; (2) Where such financial asset does not have a fixed date of maturity, it shall remain in the owner's equity, and when the said financial asset is transferred out at its disposal, it shall be included in the current profits and losses. Where such financial asset is impaired during the remaining period of accounting that follows, the relevant profits and losses that were included in the owner's equity shall be transferred out and be included in the current profits and losses. Article 38. The profits and losses arising from the change in the fair value of a financial asset or financial liability shall be dealt with according to the following provisions, unless it is related to hedging: (1) The profits and losses arising from the change in the fair value of the financial asset or financial liability which is measured at its fair value and whose variation is included in the current profits and losses shall be included in the current profits and losses; (2) The profits and losses arising from the change in the fair value of a sellable financial asset shall be included directly in the owner's equity with the exception of impairment losses and the gap arising from foreign exchange conversion of cash financial assets in any foreign currency, and when the said financial asset is stopped from recognition and is transferred out, it shall be included in the current profits and losses. The gap arising from the foreign exchange conversion of a sellable cash financial asset in any foreign currency shall be included in the current profits and losses. The interests of the sellable financial assets calculated according to the actual interest rate method shall be included in the current profits and losses. The cash dividends of the sellable equity instrument investments shall be included in the current profits and losses when the investee announces the distribution of dividends. The treatment of the profits and losses arising from the change in the fair value of a financial asset or financial liability relating to hedging shall be governed by the Accounting Standards for Enterprises No. 24-Hedging. Article 39. For the financial assets and financial liabilities measured at the post-amortization costs, the profits and losses that arise when such financial assets or financial liabilities are stopped from recognition, are impaired, or amortized, shall be included in the current profits and losses. However, if a financial asset or financial liability is designated as an item of hedging, the treatment of the relevant profits and losses shall be governed by the Accounting Standards for Enterprises No. 24-Hedging. CHAPTER VI IMPAIRMENT OF FINANCIAL ASSETS Article 40. An enterprise shall carry out an inspection, on the balance sheet day, onto the carrying amount of the financial assets other than those measured at their fair values and whose variation is included in the current profits and losses. Where there is any objective evidence that proves such financial asset has been impaired, an impairment provision shall be made. Article 41. The expression "objective evidence that proves the financial asset has impaired" refers to the actually incurred events which, after the financial asset is initially recognized, have an impact upon the predicted future cash flow of the said financial asset and such impact can be reliably measured by the enterprise. The objective evidences that can prove the impairment of a financial asset include: (1) Where a serious financial difficulty occurs to the issuer or debtor; (2) Where the debtor breaches any of the contractual stipulations, e.g., fails to pay or delays the payment of interests or the principal, etc.; (3) Where the creditor makes any concession to the debtor which is in financial difficulties due to economic or legal considerations, etc.; (4) Where the debtor will probably become bankrupt or carry out other financial reorganizations; (5) Where the financial asset can no longer continue to be traded in the active market due the serious financial difficulties of the issuer; (6) Where it is impossible to identify whether the cash flow of a certain asset within a certain combination of financial assets has decreased or not, but it is found after making an overall appraisal according to the public data available that the predicted future cash flow of the said combination of financial assets has indeed decreased since it was initially recognized and such decrease can be measured, e.g., the ability of the debtor of the said combination of financial assets worsens gradually, the unemployment rate of the country or region where the debtor is situated increases, the prices of the region where the guaranty is situated are obviously dropping, the industrial sector concerned is in slump, etc.; (7) Where any seriously disadvantageous change occurs to technical, market, economic, or legal environment, etc. wherein the debtor operates its business, so that it is impossible for the investor of an equity instrument to take back its investment; (8) Where the fair value of the equity instrument investment drops significantly or not contemporarily; and (9) Other objective evidences that show the impairment of the financial asset. Article 42. Where a financial asset measured on the basis of post-amortization costs is impaired, the carrying amount of the said financial asset shall be written down to the current value of the predicted future cash flow (excluding the loss of future credits not yet occurred), and the amount as written down shall be recognized as loss of the impairment of the asset and shall be included in the current profits and losses. The current value of the predicted future cash flow shall be determined according to the capitalization of the original actual interest rate of the said financial asset, taking into account the value of the relevant guaranty (but the expenses arising from the acquisition or sale of the guaranty shall be deducted). The original actual interest rate is the actual interest rate as determined when the financial asset was initially recognized. With regard to the floating interest rate loans, receivables, and the investments held until their maturity, the current actual interest rate as stipulated in the contract shall be used as the capitalization rate in the calculation of current value of the cash flow. Where there is a very small gap between the predicted future cash flow of a short-term receivable item and the current value thereof, the predicted future cash flow is not required to be capitalized when determining the relevant impairment-related losses. Article 43. A impairment test shall be made to the financial assets with significant single amounts. If any objective evidence shows that it has impaired, the impairment-related losses shall be recognized and shall be included in the current profits and losses. With regard to the financial assets with insignificant single amounts, an independent impairment test may be carried out, or they may be included in a combination of financial assets with similar credit risk features for the purpose of carrying out an impairment-related test. Where, upon independent test, the financial asset (including those financial assets with significant single amounts and those with insignificant amounts) is not found to have been impaired, it shall be included in a combination of financial assets with similar risk features so as to carry another impairment test. The financial assets which have suffered from an impairment loss in any single amount shall not be included in any combination of financial assets with similar risk features for any impairment test. Article 44. Where any financial asset measured on the basis of post-amortization costs is recognized as having suffered from any impairment loss, if there is any objective evidence that can prove that the value of the said financial asset has been restored, and it is objectively related to the events that occur after such loss is recognized (e.g., the credit rating of the debtor has been elevated, etc.), the impairment-related losses as originally recognized shall be reversed and be included in the current profits and losses. However, the reversed carrying amount shall not be any more than post-amortization costs of the said financial asset on the day of reverse under the assumption that no provision is made for the impairment. Article 45. Where an equity instrument investment for which there is no quotation in the active market and whose fair value cannot be reliably measured or a derivative financial asset which is connected with the equity instrument and which must be settled by delivering the equity instrument suffers from any impairment, the gap between the carrying amount of the equity instrument investment or derivative financial asset and the current value of the future cash flow of similar financial assets capitalized according to the returns ratio of the market at the same time shall be recognized as impairment-related losses and be included in the current profits and losses. Article 46. Where a sellable financial asset is impaired, even if the recognition of the financial asset has not stopped, the accumulative losses arising from the decrease of the fair value of the owner's equity what was directly included shall be transferred out and included into the current profits and losses. The accumulative losses that are transferred out shall be the surplus obtained from the initially obtained costs of the sold financial asset after deducting the principals as taken back, the current fair value, and the impairment-related losses as was included in the profits and losses. Article 47. As for the sellable debt instruments whose impairment-related losses have been recognized, if, within the accounting period thereafter, the fair value has risen and are objectively related to the subsequent events that occur after the originally impairment-related losses were recognized, the originally recognized impairment-related losses shall be reversed and be included in the current profits and losses. Article 48. The impairment-related losses incurred to a sellable equity instrument investment shall not be reversed through profits and losses. However, the impairment-related losses incurred to an equity instrument investment for which there is no quotation in the active market and whose fair value cannot be reliably measured or incurred to a derivative financial asset which is connected with the said equity instrument and which shall be settled by delivering the said equity instrument may not be reversed. Article 49. After an impairment occurs to a financial asset, the interest incomes shall be recognized at the interest rate which was used as the capitalization rate in the capitalization of the future cash flow when the impairment-related losses were determined. CHAPTER VII DETERMINATION OF THE FAIR VALUE Article 50. "Fair value" refers to the amount at which both knowledgeable parties at their own free wills, exchange their assets or clear off their debts under fair conditions. In a fair deal, both parties to a deal shall be enterprises of going concern, do not plan or do not need to carry out any liquidation, significantly reduce their operational scale, or carry out deals notwithstanding the unfavorable conditions they face. Article 51. For the financial assets and financial liabilities for which there is an active market, the quotations in the active market shall be employed to determine the fair values thereof. The quotations in the active market refer to the prices easily available from the stock exchanges, brokers, industrial associations, pricing service institutions, etc. at a fixed term, and which represent the prices at which actually occurred market deals are made under fair conditions: (1) In the active market, the quotation of an enterprise for the financial assets it holds or the financial liabilities it plans to assume shall be the available offer, while the quotation of an enterprise for the financial assets it plans to acquire or the financial liabilities it has assumed shall be the available charge; (2) Where an enterprise holds any asset or liability which can be used to counteract the market risks, it may adopt the middle price of the market to determine the fair value of the positions that can counteract the risks of the market, and in the meanwhile, the offer or charge shall be the basis for determining the fair value of net exposure; (3) Where there is no available offer or charge for a financial asset or financial liability, but the economic environment has not undergone any significant change after the latest transaction day, the enterprise shall adopt the market quotation of the latest deal to determine the fair value of the said financial asset or financial liability. If the economic environment after the latest transaction day has undergone any significant change, the enterprise concerned shall adjust its market quotation of the latest deal by referring to the available prices or interest rates of similar financial assets or financial liabilities so as to determine the fair value of the said financial asset or financial liability. Where the enterprise has adequate evidences to prove that the market quotation of the latest deal is not a fair value, it shall make appropriate adjustment to the market quotation of the latest deal so as to determine the fair value of the said financial asset or financial liability; (4) The fair value of a combination of financial instruments shall be determined on the basis of both the number of the single financial instruments within the combination and the unit quotation of the market; (5) The fair value of a demand deposit shall not be any lower than the amount the depositor shall pay when it becomes drawable. The fair value of a deposit at notice shall not be any lower than the current value of payable amount as of the first day it becomes drawable upon the request of the depositor for draw. Article 52. Where there is no active market for a financial asset, the enterprise concerned shall adopt value appraisal techniques to determine its fair value. The result obtained by adopting value appraisal techniques shall be able to reflect the transaction prices that may be adopted in fair dealings on the value appraisal day. The value appraisal techniques shall include the prices employed by the parties, who are familiar with each other, in the latest market transactions upon their own free will, the current fair value obtained by referring to other financial instruments of essentially the same nature, the cash flow capitalization method, and the option pricing model, etc. To determine the fair value of a financial asset, an enterprise shall select those value appraisal techniques which are generally acknowledged by market participants and which have been proved by the past actual transaction prices of the market as reliable: (1) In the determination of the fair value of a financial asset by adopting any value appraisal technique, one shall employ, where possible, all the market parameters that market participants take into account in pricing financial instruments, including the risk-free interest rates, credit risks, foreign exchange rates, commodity prices, stock prices or stock indexes, the future fluctuation rate of financial instrument prices, risks of repayment ahead of schedule, the service costs of financial assets or financial liabilities, etc. and try its best to avoid using those parameters that relate to particular enterprises; (2) An enterprise shall use, at regular intervals, the open transaction prices of the financial instruments that have never been revised or reorganized to rectify the value appraisal techniques it employs, and test the effectiveness of the said value appraisal techniques; (3) The transaction price of a financial asset shall be the best evidence for initially recognizing the fair value thereof. However, if any objective evidence shows that it is more fair to adopt the open transaction price of identical financial instrument, or it is more fair to adopt the result determined by employing the value appraisal techniques that only take open market parameters into account, it shall not take the transaction price as the fair value for its initial recognition, instead, it shall employ a more fair transaction price or the value appraisal result to determine the fair value. Article 53. For the financial assets initially obtained or produced at source and the financial liabilities assumed, the fair value thereof shall be determined on the basis of the transaction price of the market. The fair value of a liability instrument shall be determined on the basis of the market situation of the day when it is acquired or issued and the current market situation, or the current market interest rate of other similar liability instruments (i.e., having a similar remaining period, mode of cash flow, pricing currency, credit risks, basis of guaranty and interest rate, etc.). Where the credit risks of the debtor and the credit risk premium applied remain unchanged after the issuance of the liability instrument, the benchmark interest rate may be employed to estimate the interest rate of the current market so as to determine the fair value of the liability instrument. If the credit risks of the debtor and the corresponding risk premium have undergone any change after the issuance of the liability instrument, the current price or interest rate of similar liability instruments shall be referred to and the adjustment of the differences between different financial instruments shall be taken into consideration in the determination of the fair value of the liability instrument. Article 54. Where an enterprise employs the method of capitalizing future cash flows to determine the fair value of a financial instrument, it shall use the market returns ratio of other financial instruments with essentially the same contractual stipulations and features as the rate of capitalization. The stipulations and features of a financial instrument include the credit quality of the financial instrument itself, the remaining period for calculating the interest at fixed interest rates as stipulated in the contract, the remaining period for repaying the principal, and the currency used at the time of payment, etc. Where there is little difference between the current value of the short-term receivables and payables whose interest rate has not been indicated and the actual transaction price, it may be measured at the actual transaction price. Article 55. For the equity instrument investments for which there is no quotation in the active market and the derivative instruments which are connected with the said equity instrument and which must be settled by delivering the said equity instrument, the satisfaction of any of the following conditions would mean that the fair value thereof could be reliably measured: (1) Where there is a very small range for the variation of the reasonable estimate of the said financial instrument; (2) Where, within the range of variation of the said financial instrument, the various probabilities employed to determine the estimate of the fair values thereof could be reasonably determined. CHAPTER VIII DEFINITION OF FINANCIAL ASSETS, FINANCIAL LIABILITIES, AND EQUITY INSTRUMENTS Article 56. "Financial assets" refers to the following assets of an enterprise: (1) cash; (2) the equity instruments of other entities it holds; (3) the cash it collected from other entities or the contractual rights to other financial assets it holds; (4) the contractual rights it obtained through the exchange of financial assets or financial liabilities with other entities under potentially favorable conditions; (5) the contractual rights to non-derivative instruments which must be settled or may be settled by the enterprise with its own equity instruments in the future, whereby the enterprise will receive an unfixed amount of equity instruments of its own according to the said contract; and (6) the contractual rights to non-derivative instruments which must be settled or may be settled by the enterprise with its own equity instruments in the future, but with the exception of the contractual rights to the derivative instruments for which the enterprise will exchange for a fixed amount of its own equity instruments with a fixed amount of cash or any other financial assets. In particular, the enterprise's own equity instruments do not include the contracts which are the basis for the enterprise to collect or pay the equity instruments of its own. Article 57. "Financial liabilities" refers to the following liabilities of an enterprise: (1) the contractual obligations to deliver cash or any other financial assets to any other entity; (2) the contractual obligations to exchange with any other entity financial assets or financial liabilities under potentially unfavorable conditions; (3) the contractual obligations to non-derivative instruments which must be settled or may be settled by the enterprise with its own equity instruments in the future, whereby the enterprise will deliver an unfixed amount of equity instruments of its own according to the said contract; and (4) the contractual obligations to non-derivative instruments which must be settled or may be settled by the enterprise with its own equity instruments in the future, but with the exception of the contractual obligations to the derivative instruments for which the enterprise will exchange for a fixed amount of its own equity instruments with a fixed amount of cash or any other financial assets. In particular, the enterprise's own equity instruments do not include the contracts which are the basis for the enterprise to collect or pay the equity instruments of its own. Article 58. "Equity instruments" refers to the contracts which can prove that a certain enterprise holds the surplus equities of the assets after all the debts have been deducted. |
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