Page 218 - TSMC 2019 Annual Report

Note: The transfer from level 3 to level 2 is because observable market data became available for the equity investments.
Valuation techniques and assumptions used in Level 2 fair value measurement
The fair values of financial assets and financial liabilities are determined as follows:
 The fair values of corporate bonds, agency bonds, agency mortgage-backed securities, asset- backed securities, government bonds, commercial papers and non-publicly traded equity investments are determined by quoted market prices provided by third party pricing services.
 Forward exchange contracts are measured using forward exchange rates and the discounted curves that are derived from quoted market prices.
 The fair value of accounts receivables classified as at FVTOCI are determined by the present value of future cash flows based on the discount rate that reflects the credit risk of counterparties.
Valuation techniques and assumptions used in Level 3 fair value measurement
The fair values of non-publicly traded equity investments are mainly determined by using the asset approach, income approach and market approach.
The asset approach takes into account the net asset value measured at the fair value by independent parties. On December 31, 2019 and 2018, the Company uses unobservable inputs derived from discount for lack of marketability by 10%. When other inputs remain equal, the fair value will decrease by NT$34,843 thousand and NT$31,420 thousand if discounts for lack of marketability increase by 1%.
The income approach utilizes discounted cash flows to determine the present value of the expected future economic benefits that will be derived from the investment. On December 31, 2019 and 2018, the Company uses unobservable inputs, which include expected returns, discount rate of 10%, discount for lack of marketability of 10%, and discounts for lack of control of 10%.
For the remaining few investments, the market approach is used to arrive at their fair values, for which the recent financing activities of investees, the market transaction prices of the similar companies and market conditions are considered.
In addition, the fair values of convertible bonds are determined by the present value of future cash
flow based on a discount rate reflecting issuer’s credit spread and market conditions, combined with
the fair value of conversion option estimated by the option pricing model considering recent financing activities of the investee and market transaction prices of the similar companies.
3) Fair value of financial instruments that are not measured at fair value
Except as detailed in the following table, the Company considers that the carrying amounts of financial instruments in the consolidated financial statements that are not measured at fair value approximate their fair values.
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