SinoPac Financial Holdings Company Limited and Subsidiaries

Transcription

1 SinoPac Financial Holdings Company Limited and Subsidiaries Consolidated Financial Statements for the Nine Months Ended September 30, 2006 and 2005 and Independent Accountants Review Report

2 INDEPENDENT ACCOUNTANTS REVIEW REPORT The Board of Directors and the Stockholders SinoPac Financial Holdings Company Limited We have reviewed the accompanying consolidated balance sheets of SinoPac Financial Holdings Company Limited and its subsidiaries as of September 30, 2006 and 2005, and the related consolidated statements of income and cash flows for the nine months then ended. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to issue a report on these consolidated financial statements based on our reviews. The financial statements of AnShin Card Services Co., Ltd., a consolidated subsidiary, were reviewed by the other independent accountants, and our review, insofar as it relates to the amounts as of September 30, 2005 and for the nine months then ended included for AnShin Card Service Co., Ltd., is based solely on the review reports of the other independent accountants. The total assets of AnShin Card Service Co. were 1.31% (NT$13,711,382 thousand) of the restated consolidated assets as of September 30, The total net revenues of AnShin Card Service Co. were 6.57% (NT$1,522,717 thousand) of the restated consolidated net revenues for the nine months ended September 30, As to the amounts related to AnShin Card Services Co., included in consolidated financial statements as of September 30, 2006 and for the nine months then ended, since we have thoroughly reviewed the other independent accountants work, thus, no shared review report was issued related to the consolidated financial statements as of September 30, 2006 and for the nine months then ended. We conducted our reviews in accordance with Statement of Auditing Standards No. 36 Review of Financial Statements of the Republic of China except that described in the next paragraph. A review of interim financial statements consists primarily of applying analytical procedures, comparisons and making inquiries. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an audit opinion. As stated in Note 2 to the consolidated financial statements, some subsidiaries financial statements as of September 30, 2005 and for the nine months then ended, which were consolidated into the consolidated financial statements as of and for the nine months ended September 30, 2005, were unreviewed. As of September 30, 2005, the total assets and liabilities of those subsidiaries were 0.81% (NT$8,488,273 thousand) and 0.63% (NT$5,992,948 thousand) of the restated consolidated assets and liabilities, respectively. The total net income of those subsidiaries were 0.45% (NT$25,202 thousand) of the restated consolidated income for the nine months ended September 30, As to the financial statements of those subsidiaries consolidated into the consolidated financial statements as of and for the nine months ended September 30, 2006, were reviewed. Moreover, as stated in Note 13 to the consolidated financial statements, the carrying amounts of equity investments accounted for by the equity method as of September 30, 2005 amounted to NT$327,269 thousand, the related investment income for the nine months then ended amounted to NT$16,404 thousand, and additional disclosure of the Company and part of its investees stated in Note 47 to the consolidated financial statements, were based on the investees unreviewed financial statements

3 Based on our reviews and the reports of other independent accountants for the nine months ended September 30, 2005, except for the effects of such adjustments, if any, as might have been required had the financial statements of the subsidiaries and investees as mentioned in the preceding paragraph been reviewed by other independent accountants, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with the Criteria Governing the Preparation of Financial Reports by Financial Holding Companies, Criteria Governing the Preparation of Financial Reports by Public Banks, Criteria Governing the Preparation of Financial Reports by Securities Issuers, Criteria Governing the Preparation of Financial Reports by Securities Firms, Criteria Governing the Preparation of Financial Reports by Futures Commission Merchants and accounting principles generally accepted in the Republic of China. As stated in Note 2 to the consolidated financial statements, SinoPac Financial Holdings Company Limited acquired International Bank of Taipei through a share swap on December 26, Under an explanation issued by the Accounting Research and Development Foundation of the Republic of China, SinoPac Financial Holdings Company Limited applied the pooling of interest method and retroactively restated the consolidated financial statements as of September 30, 2005 and for the nine months then ended. As stated in Note 3 to the consolidated financial statements, effective January 1, 2006, SinoPac Financial Holdings Company Limited and its subsidiaries adopted the Statement of Financial Accounting Standards No. 34 Accounting for Financial Instruments, No. 36 Disclosure and Presentation of Financial Instruments and other standards amended for harmonizing with those two standards. October 24, 2006 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to review such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the independent accountants review report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent accountants review report and financial statements shall prevail

4 SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2006 AND 2005 (In Thousands of New Taiwan Dollars, Except Par Value) (Reviewed, Not Audited) (Restated - Note 2) 2006 (Restated - Note 2) ASSETS Amount Amount % LIABILITIES AND STOCKHOLDERS EQUITY Amount Amount % CASH AND CASH EQUIVALENTS (Notes 2, 3 and 4) $ 27,557,751 $ 20,780, CALL LOANS AND DUE TO BANKS (Note 17) $ 96,401,181 $ 80,118, DUE FROM THE CENTRAL BANK AND OTHER BANKS (Note 5) 71,965,317 69,051,005 4 DUE TO THE CENTRAL BANK AND OTHER BANKS 7,989,778 4,910, FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 2, 3, 6, 11 COMMERCIAL PAPER PAYABLE, NET (Note 18) 9,843,664 11,445,396 (14 ) and 34) 68,056,948 40,691, FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 2, 3 SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (Notes 2 and 8) 22,831,485 15,613, and 6) 3,747,511 2,202, ACCOUNTS RECEIVABLES, NET (Notes 2, 3, 7, 32 and 34) 75,977,236 65,379, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Notes 2, 3, 6, 10, 12, 19 and 34) 39,094,773 35,798,512 9 DISCOUNTS AND LOANS, NET (Notes 2, 9 and 34) 639,793, ,465,088 1 ACCOUNTS PAYABLES (Notes 2, 20, 32 and 34) 43,823,308 31,633, AVAILABLE-FOR-SALE FINANCIAL ASSETS (Notes 2, 3, 10 and 11) 194,809, ,169, DEPOSITS AND REMITTANCES (Notes 21 and 34) 783,569, ,451, HELD-TO-MATURITY INVESTMENTS (Notes 2, 3 and 12) 4,933,538 7,143,082 (31 ) BANK DEBENTURES (Note 22) 36,457,323 33,247, EQUITY INVESTMENTS - EQUITY METHOD (Notes 2 and 13) 483, ,158 (7) EURO-CONVERTIBLE BONDS REDEEMABLE WITHIN ONE YEAR (Notes 2 and 24) 3,124, OTHER FINANCIAL ASSETS, NET (Notes 2, 3 and 14) Unquoted equity instruments 3,611,352 5,746,960 (37 ) BONDS PAYABLE (Notes 2, 23 and 26) 7,316,800 8,965,553 (18 ) Non-active market debt instruments 2,789, , Others 2,012,097 1,760, SHORT -TERM BORROWINGS (Notes 23 and 26) 12,087,924 15,280,488 (21 ) Other financial assets, net 8,412,892 7,965,798 LONG-TERM BORROWINGS (Note 25) 3,037,420 3,363,788 (10 ) PROPERTIES, NET (Notes 2, 15 and 35) OTHER FINANCIAL LIABILITIES (Notes 2 and 3) 890, ,209 (9) Land plus appreciation 6,408,682 6,526,047 (2) Buildings 5,323,947 5,225,204 2 OTHER LIABILITIES (Notes 2, 3, 31 and 32) 14,419,846 16,058,060 (10 ) Computer equipment 2,403,738 2,381,311 1 Transportation equipment 90, ,267 (11 ) Total liabilities 1,061,804, ,449,056 Office and other equipment 5,353,922 5,058, ,580,598 19,292,253 STOCKHOLDERS EQUITY OF PARENT COMPANY (Notes 2, 3, 13, 27, 28 and 34) Less: Accumulated depreciation 7,232,036 6,512, Capital stock 12,348,562 12,779,322 Common shares 71,480,556 72,182,808 (1) Advances for acquisitions of equipment and construction in progress 289, ,031 (8) Capital surplus Additional paid-in capital 1,452,345 1,419,613 2 Net properties 12,637,651 13,092,353 Treasury stock transactions 297, ,475 (60 ) Other 3,609 5,461 (34 ) OTHER ASSETS, NET (Notes 2, 3, 16, 32, 34 and 35) 22,566,035 23,219,501 (3) Total capital surplus 1,753,626 2,177,549 Retained earnings 17,296,786 18,073,847 (4) Other items on stockholders equity Revaluation increment on land 1,033,595 1,033,595 - Cumulative translation adjustment 45, ,470 (59 ) Unrealized gain on available-for-sale financial instruments 167, Treasury stock (3,414,754 ) (2,626,679 ) 30 Net loss not recognized as pension cost (227,904 ) (102,634 ) (122) Other adjustments on stockholders equity - (316,034 ) 100 Total other items on stockholders equity (2,396,696 ) (1,900,282 ) Total stockholders equity of parent company 88,134,272 90,533,922 MINORITY INTEREST 86, ,101 (20 ) CONTINGENCIES AND COMMITMENTS (Notes 2 and 36) TOTAL $ 1,150,025,209 $ 1,044,091,079 TOTAL $ 1,150,025,209 $ 1,044,091,079 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche review report dated October 24, 2006) - 3 -

5 SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) (Reviewed, Not Audited) 2005 (Restated Note 2) Amount Amount % INTEREST REVENUE (Notes 2, 3 and 43) $ 32,720,052 $ 27,012, INTEREST EXPENSE (Notes 2, 3, 34 and 43) 17,478,269 12,661, NET INTEREST 15,241,783 14,351,296 NET REVENUES OTHER THAN INTEREST Commissions and fee revenues, net (Notes 2 and 43) 5,457,645 5,713,954 (4 ) Gains from financial assets and liabilities at fair value through profit or loss (Notes 2, 3 and 6) 1,186, , Realized gains from available-for-sale financial assets (Notes 2 and 3) 261, , Realized gains from held-to-maturity investments (Notes 2 and 3) - 9,929 (100) Income from equity investments - equity method, net (Notes 2 and 13) 13,113 11, Foreign exchange gains, net 320,486 1,746,553 (82 ) Provision for other overdue receivables (Note 2) (3,458,946 ) (1,209,852 ) ( 186 ) Realized gains from unquoted equity instruments (Notes 2 and 3) 33,212 5, Gain on warrants issued, net (Notes 2 and 6) 217, , Rental revenue (Note 2) 301, , Commission income (Note 2) 413, , Other revenues, net (Notes 2, 3 and 34) 901,685 1,000,639 (10 ) Total net revenues 20,889,481 23,170,350 PROVISION FOR LOAN LOSSES (Notes 2 and 9) 3,095,811 1,765, OPERATING EXPENSES (Notes 2, 29, 31 and 34) Personnel expenses 7,278,421 7,209,751 1 Depreciation and amortization 1,081,312 1,200,729 (10 ) Others 4,787,073 5,456,116 (12 ) Total operating expenses 13,146,806 13,866,596 INCOME BEFORE INCOME TAX 4,646,864 7,538,509 INCOME TAX EXPENSE (Notes 2 and 32) 1,158,356 1,905,861 (39 ) (Continued) - 4 -

6 SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) (Reviewed, Not Audited) 2005 (Restated Note 2) Amount Amount % INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ 3,488,508 $ 5,632,648 CUMULATIVE EFFECT OF ACCOUNTING CHANGES (NET OF TAX BENEFIT $2,539) (Note 3) 742, CONSOLIDATED INCOME $ 4,231,220 $ 5,632,648 ATTRIBUTABLE TO Stockholders of the parent company $ 4,233,103 $ 5,623,313 (25 ) Minority interests (1,883 ) 9,335 (120) $ 4,231,220 $ 5,632, (Restated - Note 2) After After Pretax Tax Pretax Tax EARNINGS PER SHARE (Note 33) Basic $ 0.77 $ 0.60 $ 1.07 $ 0.80 Diluted $ 0.73 $ 0.58 $ 1.01 $ 0.76 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche review report dated October 24, 2006) (Concluded) - 5 -

7 SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited) (Restated - Note 2) CASH FLOWS FROM OPERATING ACTIVITIES Consolidated income $ 4,231,220 $ 5,632,648 Cumulative effect of accounting changes (742,712 ) - Adjustments to reconcile consolidated income to net cash provided by operating activities Depreciation and amortization 1,078,196 1,018,071 Impairment loss on goodwill - 6,888 Impairment loss on guarantee deposits 8,000 - Impairment loss on available-for-sale financial assets 1,284 - Impairment loss on unquoted equity instruments 24,538 29,510 (Reversal of) provision for allowance for decline in market value of collaterals assumed (33 ) 34,451 Provision for credit and trading losses 6,634,435 2,992,321 Other loss Amortization of Euro-convertible bonds deferred issuance cost - 9,668 Foreign exchange loss on bond payable 52,884 89,034 Accrued interest premium on Euro-convertible bonds 104, ,850 Amortization of premium or discount on held-to-maturity financial assets 9, ,729 (Gain) loss on disposal of unquoted equity instruments, net (43,049 ) 29,017 Unrealized loss on financial assets and liabilities at fair value through profit or loss 213, ,873 Cash dividends received from investments under equity method 10,753 33,213 Income from equity investments - the equity method, net (13,113 ) (11,284 ) Gain on warrants issued, net (217,381 ) (167,207 ) Loss on disposal of properties, net 8,113 8,650 Loss on disposal of leased assets, net 58 59,511 Gain on disposal of collaterals assumed, net (792 ) (31,061 ) Decrease in accrued pension cost 30,260 10,917 Change in deferred income taxes 154,655 (205,819 ) Change in securities brokerage accounts, net (48,662 ) (47,865 ) (Increase) decrease in held for trading financial assets (3,823,907 ) 20,208,785 Increase (decrease) in held for trading financial liabilities 2,071,164 (1,429,402 ) Decrease in other financial liabilities (192,689 ) (108,590 ) Proceeds from asset securitization 9,783,451 6,674,662 (Increase) decrease in accounts, interests and other receivables (16,995,735 ) 3,065,025 Increase (decrease) in accounts, interests and other payables 6,352,593 (4,587,216 ) Net cash provided by operating activities 8,691,233 34,042,379 (Continued) - 6 -

8 SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited) (Restated - Note 2) CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in due from the Central Bank and other banks $ 28,734,932 $ (12,818,740 ) Decrease in financial assets designated at fair value through profit or loss 1,187, ,568 Decrease (increase) in discounts and loans 4,335,655 (56,538,832 ) Increase in unquoted equity instruments (370,080 ) (2,920,036 ) Proceeds from sale of unquoted equity instruments 450, ,642 Capital reduction on unquoted equity instruments 166,180 - (Increase) decrease in non-active market debt instruments (1,487,966 ) 2,914 (Increase) decrease in securities purchased under agreements to resell (6,926,825 ) 9,265,554 (Increase) decrease in available -for-sale financial assets (69,250,131 ) 4,530,698 Increase in held-to-maturity investments (1,285,376 ) (1,209,356 ) Proceeds from held-to-maturity investment matured 2,564,980 1,273,941 Proceeds from capital reduction of equity investments under equity method 1,800 - Decrease in equity investments - equity method 1,297 27,820 Acquisition of properties (511,286 ) (1,067,059 ) Proceeds from sale of properties 11, ,331 Increase in other financial assets (883,613 ) (1,461,854 ) Acquisition of leased assets (307,222 ) (257,800 ) Proceeds from sales of leased assets 66, ,327 Decrease (increase) in long-term lease and installment receivables 154,850 (199,420 ) (Increase) decrease in other assets (626,835 ) 896,828 Acquisition of collaterals assumed (2,812 ) (40,480 ) Proceeds from sales of collaterals assumed 76, ,410 Net cash used in investing activities (43,901,090 ) (58,772,544 ) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term borrowings (981,608 ) (1,966,179 ) Decrease in commercial paper payable (318,336 ) (1,457,500 ) Decrease in securities sold under agreements to repurchase (6,287,710 ) (14,429,337 ) Increase (decrease) in due to the Central Bank and other banks 3,401,324 (8,466,791 ) Increase in call loans and due to banks 22,558,048 9,638,219 Increase in deposits and remittances 27,386,012 45,201,311 Redemption of Euro-convertible bonds (65,720 ) (38,014 ) Decrease in long-term borrowings (3,091,464 ) (1,612,845 ) Increase in bonds payable 1,500,000 - Increase in other financial liabilities 148, ,646 (Decrease) increase in other liabilities (213,996 ) 5,922,980 (Continued) - 7 -

9 SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited) (Restated - Note 2) Adjustments for the pooling of interest method applied $ - $ (2,223,312 ) Cash dividends paid (4,971,113 ) (3,617,573 ) Remuneration to directors and supervisors and bonus to employees (117,520 ) (91,630 ) Purchase of treasury stock (2,112,002 ) (2,292,706 ) Cash received from employees by exercising stock options 241, ,732 Minority interest (11,891 ) (18,071 ) Net cash provided by financing activities 37,063,476 25,088,930 INCREASE IN CASH AND CASH EQUIVALENTS 1,853, ,765 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,688,018 20,107,327 EFFECTS OF EXCHANGE RATE CHANGES 16, ,461 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,557,751 $ 20,780,553 SUPPLEMENTAL INFORMATION Interest paid $ 16,120,335 $ 11,083,445 Income tax paid $ 1,328,536 $ 3,117,198 NONCASH INVESTING AND FINANCING ACTIVITIES Euro-convertible bonds due within one year $ 3,124,610 $ - Cancellation of treasury stock $ 1,678,999 $ 1,490,917 Beneficiary certificates - retained interest of credit card receivables securitization $ 447,403 $ 425,372 Euro-convertible bonds converted to common stocks $ - $ 4,249,695 Current portion of long-term borrowings due within one year $ - $ 2,000,000 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche review report dated October 24, 2006) (Concluded) - 8 -

10 SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) (Reviewed, Not Audited) 1. ORGANIZATION AND OPERATIONS SinoPac Financial Holdings Company Limited (the Company/SPH) was formed pursuant to the Financial Holding Company Act and related regulations on May 9, Following the incorporation, SPH issued stocks to swap for the shares of Bank SinoPac, National Securities Corporation (NSC), and SinoPac Securities Co., Ltd. (SPS), resulting in all three companies becoming wholly owned subsidiaries of SPH. The shares of Bank SinoPac and NSC then ceased to be traded on the Taiwan Stock Exchange (TSE) and GreTai Securities Market (GTSM), respectively, while SPH became listed on the TSE. SPH convened the provisional shareholders meeting on August 26, 2005 and reached the decision of share swap with International Bank of Taipei (IBT). As to the share swap between SP H and IBT, both parties agree that IBT will become a wholly owned subsidiary of SPH through share swap in accordance with Financial Holding Company Act. Through a swap at ratios of (with 1 representing the SPH s share), IBT became a wholly owned subsidiary of SPH on December 26, The shares of IBT were ceased to be traded on the TSE. On July 21, 2006, the boards of directors of Bank SinoPac resolved a merger with IBT in order to boost the operating performance through cross selling of pooling business channels, as well as harnessing the synergy of integration of diversified business operations. Under this merger, Bank SinoPac will acquire the assets and liabilities of IBT through a share swap at ratios of shares of Bank SinoPac to swap for 1 share of IBT, on which Bank SinoPac will be the surviving entity and IBT will be the company ceasing to exist. The preliminary effective date of the share swap and merger s recording date will be November 13, In order to provide the customer-leading products and services, pursue the growth of market share and profit, AnShin Card Services Co., Ltd. ( AnShin Card Services ) acquired IBT credit card business segment on the books pursuant to resolutions reached by the Boards of both companies in April and May, 2006, respectively. AnShin Card Services acquired the Financial Supervisory Commission of Executive Yuan (FSC) approved letter on June 22, 2006, and the credit card business and related net assets had been transferred on August 4, SPH engages in the business of investing and managing of the financial related institution. Bank SinoPac obtained government approval to incorporate on August 8, 1991 and started operations on January 28, Bank SinoPac, which engages in commercial banking and trust, established an International Division and Offshore Banking Unit to (OBU) manage foreign exchange operations allowed under the Banking Law. As of September 30, 2006, Bank SinoPac s operating units included Banking, Trust, International Division of the Head Office, an OBU, 44 domestic branches, 2 overseas branches and 1 overseas representative office. The operations of Bank SinoPac s Trust Department are: (1) trust planning, managing and operating; and (2) custody of nondiscretionary trust funds in domestic and overseas securities and mutual funds. These operations are regulated under both the Banking Law and the Trust Law

11 On August 15, 1997, Bank SinoPac acquired Far East National Bank (FENB), through SinoPac Bancorp, by purchasing 100% of its shares. FENB was established in Los Angeles in It is a commercial bank engaging mainly in the business of deposit taking and lending. As of September 30, 2006, FENB had 15 branches in Los Angeles and San Francisco areas, Ho Chi Minh City branch and Beijing representative office. It also had a wholly-owned subsidiary - Far East Capital Corporation. In 1978, the Taipei Regional Mutual Loans and Savings Company was converted into the Taipei Business Bank (TBB). In May 1998, the Ministry of Finance (the MOF) approved TBB s conversion into a commercial bank, and TBB changed its name to the International Bank of Taipei on May 14, As a commercial bank, IBT engages in the following: (a) businesses prescribed by the Banking Law and Trust Law; (b) operating an offshore banking unit (OBU); and (c) other businesses authorized by the MOF. IBT s Trust Department mainly engages in trust planning, managing and operating. SinoPac Life Insurance Agent Co., Ltd. ( SinoPac Life Insurance Agent ) and IBT Life Insurance Agent Co., Ltd. ( IBT Life Insurance Agent ) were incorporated on July 25, 2000 and March 21, 2001, respectively, in the Republic of China (R.O.C.). As their company names indicate, they are life insurance agents. On August 28, 2006, the boards of directors of SinoPac Life Insurance Agent and IBT Life Insurance Agent resolved to merge these two companies, with IBT Life Insurance Agent as the surviving entity. The effective merger date is November 13, SinoPac Property Insurance Agent Co., Ltd. ( SinoPac Property Insurance Agent ) and IBT Property Insurance Agent Co., Ltd. ( IBT Property Insurance Agent ) were incorporated on July 24, 2000 and May 28, 2001, respectively in the R.O.C. As their company names indicate, they are property insurance agents. On August 28, 2006, the boards of directors of SinoPac Property Insurance Agent and IBT Property Insurance Agent resolved to merge these two companies, with IBT Property Insurance Agent as the surviving entity. The effective merger date is November 13, SinoPac Leasing Corporation ( SinoPac Leasing ) obtained government approval to be incorporated by Bank SinoPac on September 2, SinoPac Leasing mainly leases out land, buildings, transportation equipment and machineries and also engages in the factoring business. Grand Capital International Limited ( Grand Capital ) is a wholly owned subsidiary of SinoPac Leasing and was incorporated in British Virgin Islands on January 2, It provides lease financing; installment sales of machinery and equipment and materials; factoring; and other financing activities. SinoPac Capital Limited ( SinoPac Capital ) was established in Hong Kong in It mainly engages in the business of lending and financing. Its 3 subsidiaries - SinoPac Capital (B.V.I.) Ltd. (incorporated in British Virgin Island, 1999), SinoPac Insurance Brokers Ltd. (incorporated in Hong Kong, 2004), and SinoPac (Hong Kong) Naminess Ltd. (incorporated in Hong Kong, 2004) mainly engage in financial advisory, insurance brokerage and custody securities business. SinoPac Securities was established on October 11, It engages in transactions involving marketable securities such as: (a) underwriting, dealing (securities and futures) and brokerage, (b) financing customers acquisitions and short-sales, (c) trading foreign securities on behalf of customers, (d) assistance activities in futures trading, and (e) bill financing business and other businesses approved by competent authority. As of September 30, 2006, the SinoPac Securities had 47 branches supporting its head office. AnShin Card Services Co., Ltd. ( AnShin Card Services ) was established on March 14, 2000, and its main business is to issue credit cards to card members and provide rela ted services. SinoPac Venture Capital Co., Ltd. ( SinoPac Venture ) was established on January 21, It mainly engages in venture capital investments and also provides advisory services on business operation and administration

12 SinoPac Securities Investment Trust Corporation ( SinoPac Securities Investment Trust, formerly named United Investment Trust Corporation) was established on September 15, Its main businesses are (1) issuing beneficiary certificates for raising securities investment trust fund; (2) investing in the securities and related products using the securities investment trust fund; (3) accepting consignment of discretionary account investment; and (4) other relevant businesses approved by competent authorities. SPH was approved by the FSC to acquire all the shares of United Investment Trust Corporation. On October 12, 2006, to meet the requirements under the Securities Investment Trust and Consulting Act, the board of directors of SinoPac Securities Investment Trust resolved to transfer all funds amounting to $6,244,257 as of October 11, 2006 to Grand Cathay Securities Investment Trust Co., a 24.7% subsidiary of IBT, free of charge. As of October 24, 2006, whether SinoPac Investment Trust will be liquidated or be merged with Grand Cathay Trust Securities Investment is to be decided. As of September 30, 2006 and 2005, SPH and the aforementioned consolidated subsidiaries had 7,832 and 8,185 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cons olidation The consolidated financial statements include the accounts of the (1) SPH; (2) Bank SinoPac, as consolidated with SinoPac Bancorp and its subsidiaries SinoPac Financial Services (USA) Ltd. and FENB alone with its subsidiaries, SinoPac Leasing Corporation consolidated with Grand Capital International Limited (SinoPac Leasing and its subsidiary, thereafter), SinoPac Capital Limited consolidated with SinoPac Capital (B.V.I.) Ltd., SinoPac Insurance Brokers Ltd., SinoPac (Hong Kong) Naminess Ltd. (completed the legal dissolution process in June 2006), Cyberpac Holding Ltd. (completed the legal dissolution process in June 2006), Shanghai International Asset Management (Hong Kong) Co., Ltd., Pinnacle Investment Management Ltd., and RSP Information Service Company Limited (SinoPac Capital Limited and its subsidiaries, thereafter). Bank SinoPac and its subsidiaries thereafter refers to Bank SinoPac and FENB as consolidated with SinoPac Leasing and its subsidiaries and SinoPac Capital Limited and its subsidiaries; (3) IBT, as consolidated with IBT Life Insurance Agent and IBT Property Insurance Agent (IBT and its subsidiaries, thereafter); (4) SinoPac Securities and its subsidiaries SinoPac Futures consolidated with SinoPac Managed Futures Co., Ltd., SinoPac Capital Management Corporation, SinoPac Asset Management Corp. (B.V.I.) (completed the legal dissolution process in June 2005), SinoPac Securities (Cayman) consolidated with SinoPac Capital (Asia), SinoPac Futures (Asia) Ltd., SinoPac Securities (Europe) Ltd., SinoPac Asset Management (Asia) Ltd., SinoPac Securities (USA) Ltd., SinoPac Securities (Asia) Ltd. and its subsidiaries - SinoPac Securities (Asia) Nominess Ltd. and SinoPac (Asia) Nominess Ltd., SinoPac Asia Limited completed the legal dissolution process in September 2006, and SinoPac Asset Management (Asia) Ltd. and its subsidiaries - SPS Asset Management Limited; (5) SinoPac Life Insurance Agent; (6) SinoPac Property Insurance Agent; (7) AnShin Card Services; (8) SinoPac Venture and its subsidiaries; and (9) SinoPac Securities Investment Trust (the Company and its subsidiaries, thereafter). All significant inter-company transactions and balances have been eliminated for consolidation purposes. On December 26, 2005, SPH acquired IBT through a share swap, under an explanation issued by the Accounting Research and Development Foundation of the ROC (the ARDF of the ROC ), SPH adopted the pooling of interest method and retroactively restated the consolidated financial statements as of September 30, 2005 and for the nine months then ended. The Company s restated financial statements please refer to Tables 10 to

13 In order to simplify the Group s framework of investments, the Company decided to commence the reorganization in Thus, the SinoPac Capital s investees, Allstar Venture Ltd. (B.V.I.), Wal Tech International Corporation and Intellisys Corp. were transferred to SinoPac Venture Capital Co., Ltd., and became the subsidiaries of SinoPac Venture Capital Co., Ltd. The subsidiaries of SPH - SinoPac Call Center Co., Ltd., SinoPac Marketing Consulting Co., Ltd. and SinoPac Asset Management International, the subsidiary of Bank SinoPac- SinoPac Financial Consulting Co., Ltd. and the subsidiaries of SinoPac Securities (Cayman) - SPS Asia Ltd. were not included in the consolidated entities since the management of SPH consider those subsidiaries immaterial to the consolidated financial statements. The information regarding consolidated entities were summarized as Table 7, and the subsidiaries excluded from consolidated entities were summarized as Table 8. The accompanying consolidated financial statements have been prepared in conformity with the Criteria Governing the Preparation of Financial Reports by Financial Holding Companies, Criteria Governing the Preparation of Financial Reports by Public Banks, Criteria Governing the Preparation of Financial Reports by Securities Issuers, Criteria Governing the Preparation of Financial Reports of Securities Firms, Criteria Governing the Preparation of Financial Reports by Futures Commission Merchants, and accounting principles generally accepted in the Republic of China (ROC). In determining fair value of certain financial instruments, credit losses, depreciation for fixed assets and assets held for leasing, impairments, pension, income taxes, amortization of deferred charges, losses on suspended lawsuit and provision for losses on guarantees, the Company and its subsidiaries need to make estimates based on judgment and available information. Actual results could differ from those estimates based on judgement at available information. The significant accounting policies of SPH and consolidated subsidiaries are summarized as follows: Current and Noncurrent Assets and Liabilities Since the operating cycle in the banking industry cannot be reasonably identified, accounts included in the consolidated financial statements of Bank SinoPac, IBT and FENB are not classified as current or non-current. Nevertheless, these accounts are properly categorized according to the nature of each account and sequenced by their liquidity. Please refer to Note 43 for maturity analysis of assets and liabilities. In addition to cash equivalents mentioned in the next section, assets to be converted or consumed within one year are classified as current. Obligations to be liquidated or settled within one year are classified as current. All other assets and liabilities are classified as noncurrent. As the banking industry accounts for a large proportion in the consolidation, accounts in the consolidated financial statements are categorized according to the nature of each account and sequenced by their liquidity rather than classified as current or noncurrent assets/liabilities. Cash Equivalents Short-term bills, maturing within three months from the investing date, are classified as cash equivalents. The book value of short-term bills approximates to fair value. Repurchase and Reverse Repurchase Transactions Securities purchased under agreement to resell (reverse repurchase) agreements and securities sold under agreements to repurchase are generally treated as collateralized financing transactions. Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is recognized as interest income or interest expense over the life of each agreement

14 The proceeds from sale of government bonds which purchased under resale agreements by SinoPac Securities and its subsidiaries for trading purpose are accounted for as bonds purchased under resell agreements - short sales. Bonds purchased under resell agreement - short sales are stated at fair value. The fair value is based on the reference price on the balance sheet date published by the GreTai Securities Market (the GTSM ). Gains or losses from valuation on the balance sheet date are recognized in the current period as gains (or losses) from securities transaction - RS short covering. When bonds are repurchased, the difference between the covering cost and carrying value are accounted for as gain (or loss) from securities transactions - RS short covering. The cost of bonds is determined by the moving-average method. Securities Lending and Borrowing The proceeds from the sale of bonds or stocks borrowed by the SinoPac Securities and its subsidiaries for trading purposes are accounted for as borrowed securities payable - non-hedging. They are carried at fair value. The fair value is based on the reference price or closing price on the balance sheet date published by the GTSM. Gains or losses from valuation on the balance sheet date are recognized as gains (or losses) from valuation of securities lending and borrowing. When securities are returned, the difference between the covering cost and the carrying value are accounted for as gain (or loss) from short covering. Margin Loans and Stock Loans Margin loans pertain to the provision of funds to customers for them to buy securities. Margin loans receivable represents the amount given to customers. The securities bought by customers are used to secure these loans and are recorded through memo entries as collateral securities. The collateral securities are returned when the loans are repaid. The refinancing of margin loans with securities finance companies is recorded as refinancing borrowings, which are collateralized by securities bought by customers. The collateral securities are disposed of by SinoPac Securities when their market value fall below a pre-agreed level and the customer fails to maintain to this level. If the proceeds from the disposal of collateral security cannot cover the balance of the loan and the customer cannot timely settle the deficiency, then the balance of the margin loan is reclassified to overdue receivables. If a collateral security cannot be sold in the market, the balance of the loan is reclassified to other receivables or overdue receivables. Stock loans represent securities lent to customers for short sales. The deposits received from customers on securities lent out are credited to deposits on short sales. The securities sold short are recorded through memo entries as stock loans. The proceeds from sales of securities lent to customers less any dealer s commission, financing charges and securities exchange tax are recorded under short sales proceeds payable. When the customers return the stock certificates to SinoPac Securities, SinoPac Securities gives back to customers the deposits received and the proceeds from sales of securities. The margin deposited by securities firms to securities finance companies are recorded as loan from refinanced margin. The refinancing securities delivered to SinoPac Securities are recorded through memo entries as refinancing stock loans. A portion of the proceeds from the short-sale of securities borrowed from securities finance companies is retained by the securities finance companies as collateral and is recorded as refinancing deposits receivable. Customer Margin Account and Futures Traders Equity SinoPac Futures engages in futures brokerage business and received margin deposits from customers as required under existing regulations. The proceeds are deposited in a bank and presented as customer margin account and futures traders equity. Gains or losses from daily marking to market of the carrying amounts of the contracts and related commission are charged to customer margin account and futures

15 traders equity. Futures traders equity accounts cannot offset each other except when the kind of equity accounts are the same and belong to someone. The debit balance of futures traders equity, which results from losses on futures transactions in excess of the margin deposited, is recorded as accounts receivable - futures margin deposits. Financial Instruments at Fair Value Through Profit or Loss Financial instruments at fair value through profit or loss consist of any financial assets and liabilities that are designated on initial recognition as one to be measured at fair value with fair value changes in profit or loss and financial assets and liabilities which should be classified as held for trading. Those assets are required to be recognized at fair value and to be measured at fair value through profit or loss on the balance sheet date. The Company and its subsidiaries use trade date accounting when recording transaction, except for operating securities - bonds used settlement day accounting. Derivative instruments transaction which do not meet the specified criteria to obtain hedge accounting treatment are classified as financial assets or liabilities held for trading when the fair value of a derivative is positive, it is carried as an asset and where negative as a liability. Fair value are determined as follows: (a) listed stocks and GTSM stocks - closing prices as of the balance sheet date; (b) beneficiary certificates (open-end fund) - net asset values as of the balance sheet dates; (c) beneficiary certificates (index-stock fund) - closing prices as of the balance sheet date; (d) bonds - period-end reference prices published by the GTSM or Bloomberg; and (e) for the financial instruments without active markets, fair value is determined using valuation techniques. Any financial asset and any financial liability may be designated as financial instruments at fair value through profit or loss to eliminate measurement anomalies for items that provide a natural offset of each other. Besides, the set of financial assets, financial liabilities or combined by both of them managed according to the Company and its subsidiaries risk management policies and investment strategies will be designated as financial instruments at fair value through profit or loss. Available -for-sale Financial Assets Available-for-sale financial assets are carried at fair value. Unrealized gains or losses on available-for-sale financial assets are reported in equity attribute to the shareholders. On disposal of an available -for-sale financial asset, the accumulated, unrealized gain or loss in equity attributable to the shareholders is transferred to net profit and loss for the period. The Company and its subsidiaries use trade date accounting when recording available -for-sale portfolio transactions except for the SinoPac Securities and its subsidiaries investments in bonds are uses settlement date accounting. Dividend income from equity securities is recognized on ex-dividend dates. Cash dividends received a year after investment acquisition are recognized as income, otherwise as a reduction of the carrying value of the investments. The effective interest rate method of amortization and accretion is used, the straight line method is used if there is no significant difference. If an available-for-sale financial asset is determined to be impaired, the accumulative unrealized loss previously recognized in equity attributable to the shareholders is recognized as impairment loss and reported in income statement. For equity investments, loss reversal is adjusted to the equity attributable to the shareholders. For debt investments, loss reversal is credited to current income. Sales of Accounts Receivable AnShin Card Services has transferred its credit card receivables conforming to the following criteria and surrendered controls over the transferred assets and has recorded the transfer as sales of accounts receivable

16 a. Transferred accounts receivable has been isolated from AnShin Card Services. AnShin Card Services, along with its creditors, is unable to control the future economic benefits. b. The transferee has the right to pledge or transfer accounts receivable purchased, and there will be no condition constrains the transferee from its right to pledge or transfer. c. The transferee has no right to return the transferred accounts receivable purchased before their maturity. AnShin Card Services is neither obligated nor entitled to repurchase or redeem such accounts receivable. Where a repurchase transaction has been entered into, the amount of the repurchase price shall be the fair value of accounts receivable at the time the transaction occurs. AnShin Card Services derecognizes the credit card receivables sold at carrying value from its balance sheet on the transfer date. The difference between the amount of proceeds after deducting the estimated bad debt provision and the carrying value is recorded as income (loss) for the current period. Nonperforming Loans Under guidelines issued by the Banking Bureau of FSC (the Banking Bureau), the balance of loans and other credits extended by Bank SinoPac and IBT and the related accrued interest thereon are classified as nonperforming when the loan is overdue and shall be authorized by a resolution passed by the board of directors. Nonperforming loans reclassified from loans are classified as discounts and loans; otherwise, are classified as other financial assets. Receivables past due transferred to non-performing accounts and receivables deemed by AnShin Card Services to be uncollectible are written off upon the approval of the board of directors. Recovery of written-off receivables is recorded as non-operating income. Allowance for Credit Losses and Provision for Losses on Guarantees In determining the allowance for credit losses and provision for losses on guarantees, Bank SinoPac and its subsidiaries, together with IBT and its subsidiaries assesses the collectibility on the balances of discounts and loans, accounts receivables, interest receivables, other receivables, lease receivables, nonperforming loans, and other financial assets as well as guarantees and acceptances as of the balance sheet dates. Pursuant to Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing/Non-accrual Loans (the Regulations ) issued by the Banking Bureau, Bank SinoPac and its subsidiaries, together with IBT and its subsidiaries evaluate credit losses on the basis of its borrowers /clients financial positions, repayments for principal and interest by borrowers/clients, collateral provided, and estimated collectibility. In accordance with the Regulations stated above, the minimum provision for credit losses should not be less than the aggregate of 50% of the doubtful credits and 100% of the unrecoverable credits. Since July 2005, the Regulations amended the classification of loan assets, whic h divided the loan assets into different class subjects to assets that require special mention, assets that are substandard, assets that are doubtful, and assets for which there is loss. The minimum allowance for credit losses and provision for losses on guarantees for the aforementioned classes should be 2%, 10%, 50% and 100% of outstanding credits, respectively. The amendments on the classification of loan assets have insignificant impact on Bank SinoPac and its subsidiaries, together with IBT and its subsidiaries financial statements. For Bank SinoPac and its subsidiaries, together with IBT and its subsidiaries, write-offs of loans falling under the Banking Bureau guidelines, upon approval by the board of directors, are offset against the recorded allowance for credit losses

17 For AnShin Card Services, allowance for doubtful accounts of receivables and nonperforming accounts on the balance sheet date is provided based on the evaluation of their collectibility. For SinoPac Securities and SinoPac Futures, allowance for bad debts is provided on the basis of reviewing the collectibility of notes and accounts receivables, other receivables and nonperforming loans. After providing this allowance, pursuant to a directive of SFB, SinoPac Securities and SinoPac Futures set aside an additional amount as bad-debt reserve and allowance for bad debts, respectively, to save 3% on the value-added tax before July 1, According to a directive of the authority, SinoPac Securities and SinoPac Futures stop providing the aforesaid reserve since July 1, Those reserve can only be used to write off nonperforming loans. Ruled by Tai-Tsai-Zhen (4) of the MOF, SinoPac Securities Investment Trust set aside an additional amount as bad-debt reserve to save 3% on the value-added tax for four years since July 1, Under the ruling of Tai-Tsai-Zhen (4) , SinoPac Securities Investment Trust ceased making provision for the aforementioned reserve since July 1, Until June 30, 2003, the remaining reserve should be use for write-off the overdue claims. Held-to-maturity Investments Held-to-maturity investments are carried at amortized cost, which are valued by interest method, otherwise use the straight line method if there is no significant difference. At initial recognition, the costs of the financial assets are valued at fair value of the financial assets together with acquire or issue costs. The net profit and loss of the held-to-maturity investments for the period are reported in to income statement when on disposal, impairment or amortization. The Company and its subsidiaries use trade date accounting when recording transaction. If a held-to-maturity investment is determined to be impaired, the impairment loss is recognized and reported in income statement. For equity investments, loss reversal is adjusted to the equity attributable to the shareholders. For debt investments, loss reversal is credited to current income. Equity Investments - Equity Method Under an explanation issued by the ARDF of the ROC, a financial holding company should treat the investees net worth as paid-in capital if the holding company is incorporated through shares swap. The par value of stocks issued by the holding company is accounted for as capital stock, while any excess of par value is accounted for as capital surplus. Equity investments are accounted for by the equity method if the Company and its subsidiaries has significant influence over the investees. Under this method, investments are stated at cost plus (or minus) a proportionate share in net earnings (losses) or changes in net worth of the investees. Cash dividends received are accounted for as reduction in the carrying value of the investments. On the acquisition date, any difference between the acquisition cost and the equity in the investee is amortized on the straight-line basis over 5 to 15 years. Effective on January 1, 2006, goodwill is not amortized but test annually for impairment. Beginning with January 1, 2006, premium between the acquisition cost and the equity in the investee is not amortized but test for impairment annually, but discount between the acquisition cost and the equity in the investee is amortized. If an investee issues new shares and the Company and its subsidiaries does not acquire new shares in proportion to its current equity in the investee, the resulting increase of the Company s together with its subsidiaries equity in the investee s net asset is credited to capital surplus. Any decrease of the Company s together with its subsidiaries equity in the investee s net asset is debited to capital surplus. If capital surplus is not enough for the debiting purpose, the remaining is debited to unappropriated retained earnings

18 Properties and Non-operating Assets Properties and non-operating assets are stated at cost or cost plus appreciation and less accumulated depreciation. Cost of major addition, renovation and improvements are capitalized, while repairs and maintenance are expensed when incurred. Upon sale or disposal of properties, their cost and related accumulated depreciation are removed from the respective accounts. Any resulting gain or loss is accounted for in the current period. Depreciation computed using the straight-line method over service lives estimated as follows: buildings, 5 to 60 years; computer equipment, 3 to 15 years; transportation equipment, 2 to 15 years; office and other equipment, 3 to 15 years; leasehold improvement, 1 to 15 years. If the leasing period is shorter, depreciation is calculated over the leasing period. Depreciation on revalued property is computed on the basis of their remaining useful lives at the time of the revaluation. For assets still in use beyond their original service lives, depreciation is calculated over newly estimated useful lives. Upon the sale or other disposal of items of properties, the related cost, appreciation and accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to income. Borrowing interest expenses for acquiring lands and constructing buildings are capitalized and recognized as construction in progress during the construction period. Clearing and Settlement Fund According to the Regulations Governing Securities Firms, Regulations Governing Futures Firms and overseas clearing regulation, SinoPac Securities and its domestic subsidiaries, as well as overseas subsidiaries, accepting consignment for trading on the centralized securities exchange market shall deposit a settlement/clearing fund (included in other assets) to the Stock Exchange, GTSM, Taiwan Futures Exchange and overseas stock and futures exchange before or after commencement of business operation. Deferred Charges and Amortization of Issuance Costs of Euro-convertible Bonds For SPH, Bank SinoPac and SinoPac Investment Trust, costs of computer software (included in other assets) were amortized on the straight-line basis over 2 to 5 years. Deferred charges of SinoPac Securities (included in other assets), which include amounts paid for acquiring computer software as well as network construction and decoration or renovations, are capitalized and amortized over 3 to 5 years. AnShin Card Services deferred charges which are consisted of credit cards franchise fees, computer software and costs for the subsidy of utilities, arrangement fees for syndicated loans, fees arising from sales of accounts receivables on a revolving basis and asset securitization and the issue cost of corporate bonds are amortized using the straight-line method over the economic benefit period. Credit cards franchise fees are amortized over the estimated economic benefit period of 5 years. Computer software and utilities subsidy are amortized over 3 to 7 years. Arrangement fees paid by AnShin Card Services for syndicated loans are amortized over the loans term of 5 years. Fees arising from sales of accounts receivable on a revolving basis and asset securitization are amortized over the contract term of 3 to 4 years. For SPH and IBT, the direct and necessary costs related to the issuing of Euro-convertible bonds (included in other assets) are amortized using the straight-line method and recognized as issuance expenses over the period from its issuance date to the expiration date of the put option. Collateral Assumed Collateral assumed are recorded at cost (included in other assets) and revalued at the lower of cost or net fair value on the balance sheet dates, and resulting loss is charged to current income

19 Collect Payment for Exercising Warrants and Subscription of Shares for an Underwriter Collect payment, which the SinoPac Securities receives from clients to exercise warrants and subscribe shares for an underwriter, are presented as other assets - cash and cash equivalents - collect payment for exercising warrants (or collect payment for subscription of shares for an underwriter and other liabilities - collect payment for exercising warrants or collect payment for subscription of shares for an underwriter). Asset Impairment The Company and its subsidiaries began applying ROC Statement of Financial Accounting Standards (SFAS) No. 35, Accounting for Asset Impairment, on January 1, 2005, which requires that cash-generating units (CGUs) and certain assets, including equity investments - equity method, properties, assets leased to others, goodwill, etc., be subject to an impairment review. SFAS No. 35 requires the impairment review on equity investments - equity method and properties to be made on each balance sheet date. If assets or CGUs are deemed impaired, then the Company and its subsidiaries must calculate their recoverable amounts. An impairment loss should be recognized whenever the recoverable amount of the assets or the CGUs is below the carrying amount, and this impairment loss either is charged to accumulated impairment or reduces the carrying amount of the assets or CGUs directly. After the recognition of an impairment loss, the depreciation (amortization) should be adjusted in future periods by the revised asset/cgus carrying amount (net of accumulated impairment), less its salvage value, on a systematic basis over its remaining service life. If the recoverable amount of the assets (excluding goodwill) are than its carrying amount, the carrying amount of the assets will be reduced to its recoverable amount. That reduction is an impairment loss. If the recoverable amount increases, the amount recovery is recognized as income. However, the increased carrying amount of the assets due to a reversal of an impairment loss should not exceed the carrying amount that would have been determined (net depreciation) had no impairment loss been recognized for the asset in prior years. An impairment loss on a revalued asset is recognized directly against capital surplus from revaluation for the asset to the same asset. A reversal of an impairment loss on a revalued asset is credited directly to capital surplus from revaluation under the heading capital surplus from revaluation. However, to the extent that an impairment loss on the same revalued asset was previously recognized as profit or loss, a reversal of that impairment loss is also recognized as profit or loss. Goodwill is tested for impairment annually, or more frequently if events or changes in circumstance indicate goodwill impairment. Impairment is recorded if the book value exceeds value in use. The increase in the recoverable amount of goodwill in the period following the recognition of an impairment loss is likely to be an increase in internally generated goodwill rather than the reversal of the impairment loss recognized for the acquired goodwill. Thus, reversal of impairment loss on goodwill is prohibited. Other Financial Assets Non-active market debt instruments are those which do not have a quoted market price in an active market, and whose fair value cannot be reliably measured. Non-active market debt instruments are carried at amortized cost. The accounting treatment of non-active market debt instruments is similar to the one of held-to maturity investments but there s no prohibition on sale of non-active market debt instruments. Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measure, are measured at cost. If there is objective evidence that a financial asset is impaired, an impairment loss is recognized and reversal of impairment loss is prohibited. Interest Premium Euro-convertible bonds with put option can be redeemed according to the offering terms. If the bonds are to be redeemed at their principal amount plus interest premium on final redemption, the interest premium should be accrued over the life of bonds as expenses, and recorded as an adjunctive account of liability on the balance sheet

20 Euro-convertible Bonds The Euro-convertible bonds issued before December 31, 2005 were recognized as liabilities by its issued price. Under the book value method applied for the conversion of Euro-convertible bonds, the carrying value, interest premium and the related issuance costs were converted into capital stocks in the amount of face value, while the remaining amount were recorded into capital surplus on the conversion date. Upon repurchase of the Euro convertible bonds, the face amount plus the premium and bond issuance expense accrued to the date of repurchase are removed from the accounts, and any resulting gain or loss is credited or charged to income. Securities Brokerage Accounts These accounts pertain to open brokerage transactions. Under the Criteria Governing the Preparation of Financial Reports by Securities Firms, the following unsettled brokerage transactions are recorded as: (i) debit accounts (such as cash in bank - settlement, accounts receivable - customers purchases, net exchange clearing receivable, margin transaction, and accounts receivable - settlement) and (ii) credit accounts (such as accounts payable - customers sales, net exchange clearing payable, margin transaction, and accounts payable - settlement). These accounts are presented in the financial statements at net amounts. Reserve for Default Accounts As required by the Rules Governing Securities Firms, for securities traded for customers accounts, SinoPac Securities should allocate % of the transaction price of the traded securities as a reserve for default accounts every month. When the accumulated reserve for default accounts reaches $200,000, allocation will be suspended. This reserve should be used only for covering losses caused by breach of contracts for trading on customers account or for other purposes as approved by the SFB. As required by the Rules Governing Futures Commission Merchants, for futures traded for customers accounts, SinoPac Futures should allocate 2% of commission revenues from futures transactions as the reserve for default accounts. When the accumulated reserve for default accounts reaches the minimum paid-in capital of, allocation will be suspended. This reserve should only be used for covering the losses caused by breach of contracts for trading on customers accounts or for other purposes approved by the SFB. SinoPac Futures stopped allocating reserve for default account, as instructed by SFC, from July 1, 1999 to September 30, 2003 since the credit losses reserve had been provided by then. However, SinoPac Futures returned to original allocating policy started July 1, Reserve for Trading Losses An amount equal to 10% of the net gain from sale of securities and futures is recognized monthly as reserve for trading losses under the Rules Governing Securities Firms and Rules Governing Future Commission Merchants. This reserve is recognized until its accumulated balance reaches (a) $200,000 for the trading department, (b) the minimum paid-in capital of the SinoPac Securities and SinoPac Futures futures department, respectively. This reserve can be used only to offset actual losses from securities and futures dealings. Derivative Financial Instruments a. Foreign exchange forward Foreign-currency assets and liabilities arising from forward exchange contracts, which are mainly for accommodating customers needs or managing currency positions, are recorded at the contracted forward rates. Gains or losses arising from the differences between the contracted forward rates and spot rates on settlement are credited or charged to current income. Contracts outstanding on the balance sheet dates are measured at fair value through profit or loss