UMC » Topics » Credit-linked deposits and repackage bonds

This excerpt taken from the UMC 20-F filed May 9, 2007.

Credit-linked deposits and repackage bonds

At December 31, 2005 and 2006, the Company held assets in the form of credit-linked deposits. The Company placed deposits in major financial institutions and these deposits are credit-linked to debt securities (reference securities) issued by other entities (reference entities). The ultimate repayment of the deposit is dependent on the occurrence of credit event, such as bankruptcy or default by the reference entities. The Company can receive deposit interests periodically under a rate of the sum of benchmark rate and credit spread. If a credit event occurs, the Company may suffer a loss on its credit-linked deposits because the financial institutions can terminate the interest payment and settle the Company’s credit-linked deposits with cash received from the sale of the reference securities, if any, or by transferring the reference securities to the Company.

For 2005 and prior years, under ROC GAAP, these investments were accounted for as monetary deposits and classified as current or non-current other financial assets on the consolidated balance sheet based on their terms to maturity. The

 

This excerpt taken from the UMC 20-F filed Jun 26, 2006.

Credit-linked deposits and repackage bonds

At December 31, 2002, 2003 and 2004, the Company held assets in the form of credit-linked deposits. The Company placed deposits in major financial institutions and these deposits are credit-linked to debt securities (“reference securities”) issued by other entities (“reference entities”). The ultimate repayment of the deposit is dependent on whether the credit event occurs, such as bankruptcy or default by the reference entities. The Company can receive deposit interests periodically under a rate of the sum of benchmark rate and credit spread. If a credit event occurs, the Company may suffer a loss on its credit-linked deposits because the financial institutions can stop the interest payment and settle the Company’s credit-linked deposits with cash received from the sale of the reference securities, if any, or by transferring the reference securities to the Company.

For 2005 and prior years, under ROC GAAP, these investments are accounted for as monetary deposits and classified as current or non-current other financial assets on the balance sheet based on their terms to maturity. The deposits are valued at cost and interest receivable is accrued based on the stated rate of the deposits. Pursuant to the new accounting standards ROC SFAS 34 and ROC SFAS 36, which will be effective from January 1, 2006, the credit-linked deposits shall be accounted for as a hybrid instrument with an embedded credit derivative that is not clearly and closely related to the host deposits. Thus the embedded derivative shall be bifurcated from the underlying assets and measured at fair value at each reporting date with any change in fair value recorded to the statement of income. The host contract of deposit shall be accounted for as held-to-maturity investments at amortized cost pursuant to ROC SFAS 34.

Under US GAAP, these credit-linked deposits, which are linked to the credit worthiness of the reference securities, contain an embedded derivative that is not clearly and closely related to the interest-bearing deposits. Therefore, the embedded derivative is bifurcated pursuant to SFAS 133 from the underlying deposits and measured at fair value at each reporting date with any change in fair value recorded to the statement of income. At inception, the derivative instrument was fair valued based on the difference in the present value of the interest amount earned using the risk-free interest rate plus a risk premium (“additional interest”). An offsetting asset is recognized in other financial assets to represent the additional interest payments that will be earned by the Company over the term of the credit-linked deposit. The underlying deposits have been accounted for as held-to-maturity investments at amortized cost pursuant to SFAS 115. If there are material changes to the credit-worthiness of the reference entities then the fair value of the derivative would be recalculated to determine the impact to the statement of income. If not, the change in the fair value of the derivative represents only a change in its time value which is charged to the statement of income.

 

This excerpt taken from the UMC 20-F filed Feb 13, 2006.

Credit-linked deposits and repackage bonds

 

At December 31, 2002, 2003 and 2004, the Company held assets in the form of credit-linked deposits. The Company placed deposits in major financial institutions (“Financial Institutions”) and these deposits are credit-linked to debt securities (“Reference Entities Securities”) issued by other entities (“Reference Entities”) such that ultimate repayment of deposit is dependent on whether the Credit Event occurs. For example, if the Reference Entities go bankrupt or default (“Credit Event”) on their obligations then the Company may suffer a loss on its credit-linked deposits. When a Credit Event occurs, the Financial Institutions can settle the Company’s credit-linked deposits with cash received from the sale of the Reference Entities Securities, if any, or by transferring the Reference Entities Securities to the Company. The Company can not redeem or settle the credit-linked deposits prior to the stated maturity date.

 

Under ROC GAAP, these investments are accounted for as monetary deposits and classified as current or non-current other financial assets on the balance sheet based on their terms to maturity. The deposits are valued at cost and interest receivable is accrued based on the stated coupon rate of the deposits.

 

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