Page 226 - TSMC 2020 Annual Report
P. 226

Reconciliation of Level 3 fair value measurements of financial assets
The financial assets measured at Level 3 fair value were financial assets at FVTPL and equity investments classified as financial assets at FVTOCI. Reconciliations for the years ended December 31, 2020 and 2019 were as follows:
   Balance, beginning of year
Recognized in profit or loss
Recognized in other comprehensive income
Disposals and proceeds from return of capital of investments Transfers out of level 3 (Note)
Effect of exchange rate changes
Balance, end of year
4,208,900 175,202
(3,821) 409,014
(51,060) -
(223,295) 4,514,940
3,910,681 372,315 - 129,497
(76,532) (43,610) (83,451)
Years Ended December 31
      Note: The transfer from Level 3 to Level 2 is because observable market data became available for
such equity investment.
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 and non-publicly traded equity investments - equity investments trading on the Emerging Stock Board are determined by quoted market prices provided by third party pricing services.
 Forward exchange contracts are measured using forward exchange rates and discount rates derived from quoted market prices.
 The fair value of accounts receivable classified as at FVTOCI is 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 (excluding those trading on the Emerging Stock Board) are mainly determined by using the asset 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, 2020 and 2019, 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$39,006 thousand and NT34,843 thousand if discounts for lack of marketability increase by 1%.
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.
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