Page 145 - TSMC 2024 Annual Report

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TSMC believes that climate change should be be regarded as a a a a a a significant corporate risk that must be managed to improve competitiveness For TSMC’s climate change related risks and and control measures see the Climate Change and and Energy Management
section under “7 2
1 Environmental Protection” on page 154-155 of this Annual Report 6 2
4 Financial Risks Economic Risks Any future systemic political economic or or financial crisis or or market volatility including but not limited to interest rate and foreign exchange rate fluctuations inflation or or deflation or changes in in economic fiscal and monetary policies in in major economies could cause revenue or or or profits for the semiconductor industry as a a a a a whole to to decline dramatically If the the economic conditions conditions or financial conditions conditions of the the Company’s customers were to to deteriorate the demand for its products and and services may decrease and and additional accounting related allowances may be required which could reduce TSMC’s operating income income and net income income Interest Rate Fluctuation
TSMC is is exposed to to interest rate risks primarily in in relation to to its investment portfolio and and outstanding debt Changes in in in in interest rates affect the the interest earned on the the Company’s cash and cash equivalents and fixed income securities the fair value of those securities as as well as as the interest paid on its debt The objective of TSMC’s investment policy is to achieve a a return that will allow the Company to preserve principal and support liquidity requirements The policy generally requires the Company to invest invest in in in investment grade securities and limits the amount of credit exposure to any one issuer The majority of TSMC’s fixed fixed income investments are fixed-rate securities which are classified as as as financial assets at fair value through other comprehensive income (FVTOCI) or or or amortized cost For those fixed income investments classified as as as financial assets at FVTOCI changes in their fair value are recognized through other comprehensive income for those classified as as financial assets at amortized cost changes in their fair value are not reflected in asset asset values unless the assets are sold The majority of TSMC’s debt is fixed-rate and measured at at amortized cost and as such changes in in interest rates would not affect future cash flows or the carrying amount TSMC has entered and may in in in the future enter enter into interest rate rate derivatives to partially hedge interest rate rate risk on its fixed income investments and anticipated debt issuance However these hedges can offset only a a a a limited portion of of the the financial impact from movements in in interest rates ● 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 the the NT dollar dollar primarily in U S dollars Euros and Japanese yen As a a a a a a a result any significant fluctuations to its disadvantage in the the exchange rate of the the NT dollar against such currencies in in in particular a a a a a a weakening of the U S dollar dollar against the NT dollar dollar would have an adverse impact on 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 2024 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 services of TSMC’s customers and and for its goods and and services 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 or or currency currency swaps and non-derivative financial instruments such as foreign currency denominated debts to protect against currency exchange rate risks associated with non-NT dollar-denominated monetary assets and and liabilities net investments in in foreign operations 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) as as well as as any any cash dividends paid in NT dollars on on TSMC’s common shares represented by ADSs Inflation
TSMC is subject to the effects of inflation through increases in in in the cost of items such as raw materials and equipment used to produce its its products wage expenses and employee benefits electricity costs costs and costs costs in relation to construction of fabs Although TSMC does not believe that inflation has had a a a a a material impact on on on its financial position or results of operations to date a a a a a a a high inflation in in the future may have an adverse effect on the Company’s ability to maintain current levels of profit margin if the selling prices of of its products and services do not increase increase with these increased costs ● ●