Page 121 - TSMC 2020 Annual Report

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income and may have their fair value adversely affected due
to a a a a a rise in in in interest interest rates rates At the same time if interest interest rates rates fall cash cash and cash cash equivalents as as as as well as as as as floating-rate securities may generate less interest income than expected TSMC has entered and may in in in the future enter enter into interest rate rate futures to partially hedge the interest rate rate risk on its fixed income investments However these hedges can offset only
a a a a a small portion of the financial impact from movements in in interest rates All of the Company’s short-term debt is floating-rate hence a a a a rise in in in in interest interest rates may result in in in in higher interest interest expense than expected The majority of its long-term debt is fixed-rate and measured at amortized cost and as as such changes in in interest rates would not affect the the future cash flows and the the carrying amount Certain of TSMC’s fixed income investments and short-term debt are primarily based on on on the London Interbank Offered Rate (LIBOR) which is expected to be be replaced by other benchmark rates after 2021 TSMC cannot predict the consequences and timing of these developments or whether such a a transition might cause a a a a reduction in in in its interest income and/or an an increase in in in its interest expense ● Foreign Exchange Volatility
Substantially all all of TSMC’s sales are denominated in in U S S S dollars and over half of its capital expenditures are denominated in in currencies other than NT dollars dollars primarily in U S dollars dollars Euros and Japanese yen As a a a a a a a result any significant fluctuations to its disadvantage in in the the exchange rate of the the NT dollar against such currencies in in particular a a a a a weakening of the U S dollar against the the NT dollar would have an adverse impact on the the Company’s revenue and operating profit as expressed in in NT dollars For example every one percent depreciation of the U S dollar dollar against the NT dollar dollar would result in in an approximately 0 4 percentage point decrease in in in the Company’s operating margin based on its 2020 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 derivative contracts such as currency currency forwards or or currency currency swaps to protect against currency exchange rate risks associated with non-NT-dollar-
denominated assets and and liabilities and and certain forecasted transactions 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
In 2020 and as of of the date of of this annual report inflation had no material impact on on TSMC’s operations or the business operations of its customers and suppliers ● Amendments to Tax Regulations or Implementation of 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 business may have an adverse effect on its net income While the Company is subject to tax laws and regulations in in various jurisdictions in in which it operates or conducts business TSMC’s principal operations are in in in the R O C 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 adverse effect on its operating results In order to to control tax risk the Company 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 the Company may be forced to curtail its expansion modify plans or or delay the deployment of new or expanded services until it obtains such financing