Page 110 - TSMC 2018 Annual Report

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entered and may enter enter in in in the future future into interest rate futures to partially hedge the interest rate risk on its fixed income investments However these hedges can offset only a a a small portion of the financial impact from movement in in in interest rates As of of December 31 2018 all of of TSMC’s long-term debt are fixed-rate NT dollar denominated bonds and measured at at at amortized costs As such changes in in interest rate would not affect the the future cash flows and the the fair value •
More than 90% of TSMC’s revenue is denominated in in U S S dollar and over one-half of its capital expenditures are denominated in in currencies other than NT dollar dollar primarily in in U S dollar dollar Japanese yen and Euro As a a a a a a a result any significant fluctuations to its disadvantage in in exchange rate of NT dollar against such currencies in in in particular a a a a a a a weakening of U S dollar against NT dollar would have an an adverse impact on the Company’s revenue and profit as expressed in NT dollar For example every o o o o o n n n n e e e e e e e p p e e e e e e e r r r r c c e e e e e e e n n n n t t t t t d d d e e e e e e e p p r r r r e e e e e e e c c i i i a a a a a t t t t t i i i o o o o o n n n n o o o o o f t t t t t h h e e e e e e e U S d d d o o o o o l l l l l l l l a a a a a r r r r a a a a a g a a a a a i i i n n n n s t t t t t t t t t t h h e e e e e e e N T d d d o o o o o l l l l l l l l a a a a a r r r r would result in in in approximately 0 4 percentage point decrease in in in TSMC’s TSMC’s operating margin based on TSMC’s TSMC’s 2018 results Conversely if if the U S dollar appreciates significantly versus other major currencies the the the demand for the the the products and and services of TSMC’s TSMC’s customers and and for TSMC’s TSMC’s goods and and services will will likely decrease which will will negatively affect the Company’s revenue TSMC uses foreign currency derivatives contracts such as currency currency forwards and cross-currency swaps to protect against currency exchange rate risks associated with non-NT dollar- denominated assets and and liabilities and and certain forecasted transactions The Company also utilizes U S dollar denominated debt to partially offset currency risk arising from U S dollar denominated receivables for balance sheet hedges These hedges reduce but do not entirely eliminate the effect of foreign currency exchange rate movements on its assets and liabilities Fluctuations in the the exchange rate between the the U S dollar and the the the NT dollar dollar may affect the the the U S dollar dollar value of the the the Company’s common shares and the the market price of the the Company’s American Depositary Shares (ADSs) and of any cash dividends paid in NT dollar on on TSMC’s common shares represented by ADSs •
Inflation Deflation and Resulting Market Volatility
The global economy is becoming more vulnerable to sudden unexpected fluctuations in in inflationary and deflationary expectations and conditions Expectations of high inflation or deflation each adversely affects the economy at at both macro and and micro levels by reducing economic efficiency and and disrupting investment decisions Recently higher interest rates in in in the U S international trade tensions and the possible changes in in economic fiscal and monetary policies in in major economies have exacerbated and may further exacerbate exacerbate fluctuations in inflationary or deflationary expectations Such volatility may negatively affect the the costs of TSMC’s operations and the the business operations of its customers who may be forced to to plan their purchases of TSMC’s goods and services within an an uncertain economy Therefore the demand for for TSMC’s products and and services could unexpectedly fluctuate severely in accordance
with expectations of inflation or deflation as affected by market volatility •
A m m m m e e e e e e n n n n n d m m m m e e e e e e n n n n n t t t t t s s s t t t t t o o o o o T T a a a a a x x R e e e e e e g u l l a a a a a t t t t t i i o o o o o n n n n n s s s o o o o o r I m m m m p l l e e e e e e m m m m e e e e e e n n n n n t t t t t a a a a a t t t t t i i o o o o o n n n n n o o o o o f New Tax Laws
Any amendments to existing tax regulations or the implementation of any new tax laws in in the jurisdictions in in which TSMC operates its its business may have an adverse effect on its its net income While TSMC is subject to tax laws and regulations in various jurisdictions in in which it operates or conduct business TSMC’s principal operations are in in the R O C and it is exposed primarily to taxes levied by the R O C government Any unfavorable changes of tax laws and regulations in this jurisdiction could increase TSMC’s effective tax rate and have an an adverse effect effect on its operating results In order to to control the tax risk TSMC closely monitors all domestic and and foreign governmental policies and and regulations that might impact its financial operations TSMC has established risk management procedures to collect information analyze potential tax implications and develop countermeasures Risks Associated with External Financing
In times of market instability sufficient external financing
may not be available to the Company on on a a a a a a a timely basis on on commercially reasonable terms to the Company or at all all If sufficient external financing
is not available when TSMC needs such financing
to meet its capital requirements it it it may be forced Foreign Exchange Volatility