Half Yearly Report - Part 2

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HON HAI PRECISION INDUSTRY CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND 2012

(EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT AS OTHERWISE INDICATED)

(UNAUDITED)

1. HISTORY AND ORGANIZATION

Hon Hai Precision Industry Co., Ltd. (the Company) was established on February 20, 1974. The Company began to be listed on the Taiwan Stock Exchange in June 1991. The Company merged with Premier Image Technology Corporation (Premier Corp.) on December 1, 2006. The Company's issued and outstanding capital was $106,890,967. The main activities of the Company are the manufacture, processing and sales of connectors, cable, enclosures, wired/wireless communication products, optics products, power supply modules, and assemblies for use in the IT, communications, automotive equipment, precision molding, automobile, and consumer electronics industries. As of June 30, 2012, the Company and its subsidiaries had approximately 1,007,000 employees.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements of the Company and its subsidiaries (collectively referred herein as the Group) are prepared in accordance with the "Rules Governing the Preparation of Financial Statements by Securities Issuers" and accounting principles generally accepted in the Republic of China. The Group's significant accounting policies are summarized below.

1) Basis for preparation of consolidated financial statements

A. All majority-owned subsidiaries and controlled entities are included in the consolidated financial statements. Effective January 1, 2008, the Company prepares consolidated financial statements on a quarterly basis. The income (loss) of the subsidiaries is included in (excluded from) the consolidated statement of income effective on the date the Company gains (losses) control over the subsidiaries. Significant intercompany transactions and assets and liabilities arising from intercompany transactions are eliminated.

B. Subsidiaries included in the consolidated financial statements and their changes in 2012:

(1) The financial statements of certain consolidated subsidiaries as of and for the six-month periods ended June 30, 2011 and 2012 were not reviewed by independent accountants, which reflect total assets of $254,261,787 and $350,380,414, constituting 16.46% and 18.28% of the consolidated total assets, and total liabilities of $255,306,108 and $184,915,719, constituting 25.21% and 14.27% of the consolidated total liabilities, as of June 30, 2011 and 2012, respectively, as well as total net income of $1,005,883 and $6,827,361, constituting 3.68% and 26.76% of the consolidated net income for the six-month periods then ended, respectively.

(2) Changes in the consolidated subsidiaries

A. In October, 2011, a subsidiary of the Company acquired 100% of Scientific-Atlanta Holdings B.V. and Scientific-Atlanta de Mexico, S. de R.L. de C.V., which were consolidated effective the acquisition date.

B. From July, 2011 to March, 2012, a subsidiary of the Company disposed 70% of Shenzhen Futaihong Bright Real Estate Co., which was excluded from consolidation effective in March, 2012, the date on which the Company lost control over the subsidiary.

(3) Majority-owned subsidiaries that were not included in the consolidated financial statements: None.

(4) Adjustments for subsidiaries with different balance sheet dates: None.

(5) Special operating risks of the foreign subsidiaries: No significant special operating risks that would affect the financial statements.

(6) Significant restriction on remittance of funds from the foreign subsidiaries to the Company: None.

(7) The Company's common stock owned by its subsidiary:

As of June 30, 2011 and 2012, Hon Jin International Investment Co., Ltd. owned 1,076,705 and 1,184,375 shares, respectively, of the Company's common stock at a cost of $18,901.

(8) Information on new issuance of convertible bonds and common stock by subsidiaries: The issuance of convertible bonds and new common stock by subsidiaries had no significant effect on stockholders' equity of the parent company.

2) Convenience translation into U.S. dollars

The financial statements are stated in New Taiwan Dollars. Translation of the 2011 New Taiwan dollar amounts into U.S. dollar amounts is included solely for the convenience of the readers, using the Bank of Taiwan exchange rate on June 30, 2012 of NT$29.88 to US$1 uniformly applied for all the financial statements accounts. Such translation amounts are unaudited and should not be construed as representations that the New Taiwan Dollars amounts represent, have been, or could be converted into U.S. dollars at this rate or any other rate of exchange.

3) Translation of financial statements of foreign subsidiaries into New Taiwan Dollars

Assets and liabilities of foreign subsidiaries are translated into New Taiwan dollars using the exchange rates at the balance sheet date. Equity accounts are translated at historical rates except for beginning retained earnings, which is carried forward from prior year's balance. Dividends are translated at the rates prevailing at the date of declaration. Profit and loss accounts are translated at weighted-average rates of the year. The resulting translation differences are included in "cumulative translation adjustments" under stockholders' equity.

4) Criteria for classifying assets and liabilities as current or non-current items

A. Assets that meet one of the following criteria are classified as current assets; otherwise they are classified as non-current assets:

1) Assets arising from operating activities that are expected to be realized or consumed, or are intended to be sold within the normal operating cycle;

2) Assets held mainly for trading purposes;

3) Assets that are expected to be realized within twelve months from the balance sheet date; and

4) Cash and cash equivalents, excluding restricted cash and cash equivalents and those that are to be exchanged or used to pay off liabilities more than twelve months after the balance sheet date.

B. Liabilities that meet one of the following criteria are classified as current liabilities; otherwise they are classified as non-current liabilities:

1) Liabilities arising from operating activities that are expected to be paid off within the normal operating cycle;

2) Liabilities arising mainly from trading activities;

3) Liabilities that are to be paid off within twelve months from the balance sheet date; and

4) Liabilities for which the repayment date cannot be extended unconditionally to more than twelve months after the balance sheet date.

5) Use of estimates

The preparation of financial statements in conformity with R.O.C. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the amounts of revenues and expenses reported during the period. Actual results could differ from those assumptions and estimates.

6) Foreign currency transactions

A. Transactions denominated in foreign currencies are translated into functional currency at the spot exchange rates prevailing at the transaction dates. Exchange gains or losses due to the difference between the exchange rate on the transaction date and the exchange rate on the actual receipt and payment are recognized in current year's profit or loss.

B. Receivables, other monetary assets and liabilities denominated in foreign currencies are translated at the spot exchange rates prevailing at the balance sheet date. Exchange gains or losses are recognized in profit or loss. However, exchange gains or losses on overseas inter-company accounts that are, in nature, deemed long term is accounted for as an adjustment in stockholders' equity.

C. Non-monetary items that are measured at fair value are translated using the exchange rates prevailing at the balance sheet date. When a gain or loss on a non-monetary item is recognized directly in equity, any exchange component of that gain or loss shall be recognized directly in equity. Conversely, when a gain or loss on a non-monetary item is recognized in profit or loss, any exchange component of that gain or loss shall be recognized in profit or loss. However, non-monetary items that are measured on a historical cost basis are translated using the exchange rate at the date of the transaction.

7) Cash equivalents

Cash equivalents represent short-term, highly liquid investments which can be readily converted into fixed amount of cash and with a maturity period of less than three months. The statement of cash flows is compiled under the cash and cash equivalents basis.

8) Financial assets and financial liabilities at fair value through profit or loss

A. Equity investments are recognized using trade date accounting. Debt instruments are recognized and derecognized using settlement date accounting. All are recognized initially at fair value. A fixed price commitment between trade date and settlement date meets the definition of a derivative except for a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned is recognized by using trade date accounting or settlement date accounting.

B. Financial assets or liabilities at fair value through profit or loss are subsequently remeasured and stated at fair value, and the gain or loss is recognized in profit or loss. The fair value of listed stocks, OTC stocks, closed-end mutual funds and deposit receipts is based on latest quoted fair prices of the accounting period. The fair value of open-end and balanced mutual funds is based on the net asset value at the balance sheet date.

C. For derivatives that do not qualify for hedge accounting, if the derivative is an option, then the transaction is recognized at fair value on the trade date, and if the derivative is not an option, then the transaction is recognized at zero fair value on the trade date.

D. The derivative features (such as call options and put options) embedded in bonds payable issued by the Company are described in Note 2 (21).

9) Available-for-sale financial assets

A. Equity investments are recognized using trade date accounting. Bond investments are recognized and derecognized using settlement date accounting and are recognized initially at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

B. Available-for-sale financial assets are remeasured and stated at fair value, and the fair value changes are recognized in equity. The cumulative fair value changes are reclassified to profit and loss upon derecognition of the financial assets. The fair value of listed stocks, OTC stocks, closed-end mutual funds and deposit receipts is based on latest quoted fair prices of the accounting period. The fair value of open-end and balanced mutual funds is based on the net asset value at the balance sheet date.

C. If there is any objective evidence that the financial asset is impaired, the cumulative loss that had been recognized directly in equity shall be transferred from equity to profit or loss. Impairment losses recognized previously in profit or loss for an investment in an equity instrument shall not be reversed through profit or loss, and if, subsequently, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.

10) Financial assets carried at cost

A. Investment in unquoted equity instruments is recognized using trade date accounting and is recognized initially at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset.

B. If there is any objective evidence that the financial asset is impaired, the impairment loss is recognized in profit or loss. Such impairment loss cannot be reversed.

11) Settlement date accounting

If an entity recognizes financial assets using settlement date accounting, any change in the fair value of the asset to be received during the period between the trade date and the settlement date / balance sheet date is not recognized for assets carried at cost or amortized cost. For financial asset or financial liability classified as at fair value through profit or loss, the change in fair value is recognized in profit or loss. For available-for-sale financial assets, the change in fair value is recognized directly in equity.

12) Notes and accounts receivable, other receivables

A. Notes and accounts receivable are claims generated from the sale of goods or services. Other receivables are those receivables arising from transactions other than the sale of goods or services. Notes receivable, accounts receivable and other receivables are recognized initially at fair value and are subsequently measured at amortized cost using the effective interest method.

B. The Group recognizes impairment loss on the financial instruments when there is an objective evidence of impairment. The amount of impairment is the book value less the present value of estimated future cash flows, discounted by original effective interest rate. If, subsequently, an event, directly related to impairment, indicates a decrease in impairment, the impairment loss recognized in prior years shall be recovered. The book value of the financial instruments after recovering the impairment shall not exceed the amortized cost that would have been had no impairment been previously recognized.

13) Inventories

The perpetual inventory system is adopted for inventory recognition. Inventories are stated at cost. The cost is determined using the weighted-average method. At the end of period, inventories are evaluated at the lower of cost or net realizable value, and the individual item approach is used in the comparison of cost and net realizable value. The calculation of net realizable value is based on the estimated selling price in the normal course of business, net of estimated costs of completion and estimated selling expenses. As the value of raw materials declines and the cost of finished goods is over the net realizable value, the net realizable value of raw materials is determined based on current replacement cost.

14) Long-term equity investments accounted for under the equity method

A. Long-term equity investments in which the Group holds more than 20% of the investee company's voting shares or has the ability to exercise significant influence on the investee's operational decisions are accounted for under the equity method. The excess of the initial investment cost over the acquired net asset value of the investee attributable to goodwill is no longer amortized from 2006. Retrospective adjustment of the amount of goodwill amortized in previous years is not required. Goodwill is subject to tests of impairment on an annual basis. The excess of acquired net asset value of investee over the initial investment cost is allocated proportionately and applied as a reduction to the book values of identifiable non-current assets, and any remaining amount of such excess after this allocation is credited to extraordinary gains.

B. Long-term investment in which the Group holds more than 50% of the investee company's voting shares or has the ability to control the investee's operational decisions are accounted for under the equity method and included in the consolidated financial statements on a quarterly basis.

C. For foreign investments accounted for under the equity method, the Group's proportionate share of the investee company's cumulative translation adjustment, resulting from translating the foreign investee company's financial statements into New Taiwan Dollars, is recognized by the Group and included as "cumulative translation adjustments" under stockholders' equity.

15) Property, plant and equipment

A. Property, plant and equipment are stated at cost. Costs incurred to bring the assets to the condition and location necessary for their intended uses are capitalized. Significant servicing or betterments capable of generating future economic benefits are capitalized and depreciated accordingly. Maintenance and repairs are expensed as incurred.

B. Depreciation is provided under the straight-line method based on the assets' estimated economic service lives. The useful lives of property, plant and equipment are 3 to 9 years, except for buildings, the useful life of which is 6 to 51 years.

16) Goodwill and other intangible assets

A. The excess of the initial acquisition cost over the fair value of the acquired identifiable tangible and intangible assets is attributable to goodwill.

B. Other intangible assets, mainly customer relationship, are stated at cost and amortized on a straight-line basis over 3 years.

17) Deferred charges and other assets

A. The costs of telephone network installation charges, computer software, molding and tools equipment are recorded as deferred charges and amortized over their estimated economic lives on a straight-line basis.

B. Land use rights are stated at cost and amortized over the lease period using the straight-line method.

18) Impairment of non-financial assets

The Group recognizes impairment loss when there is indication that the recoverable amount of an asset is less than its carrying amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of the asset in an arm's length transaction after deducting any direct incremental disposal costs. The value in use is the present value of estimated future cash flows to be derived from continuing use of the asset and from its disposal at the end of its useful life. When the impairment no longer exists, the impairment loss recognized in prior years shall be reversed. The recoverable amount of goodwill shall be evaluated periodically. Impairment loss will be recognized whenever the recoverable amount of the goodwill is less than its carrying amount. Impairment loss of goodwill recognized in prior years is not reversed in the following years.

19) Warranty obligation

Warranty obligation is recognized based on the estimated warranty cost per unit and the number of units sold during the period.

20) Pension plan

Under the defined benefit pension plan, net periodic pension costs are recognized in accordance with the actuarial calculations. Net periodic pension costs include service cost, interest cost, expected return on plan assets, and amortization of unrecognized net transition obligation and actuarial gains or losses. Unrecognized net transition obligation is amortized on a straight-line basis over 15 years. Under the defined contribution pension plan, net periodic pension costs are recognized as incurred.

21) Bonds payable

For bonds issued with embedded conversion, put, or call option feature after January 1, 2006, the issuer shall bifurcate the issuance price based on the substance of the contractual arrangement on initial recognition, and recognize the elements separately as a financial asset, financial liability, or an equity instrument.

These bonds are accounted for as follows:

A. The difference between the issue price and face value of convertible corporate bonds is accounted for as premium or discount which is required to be amortized over the period from the date of issuance to maturity date using the interest method and is recorded as "interest expense".

B. The value of any derivative features (such as a call option and put option) embedded in the compound financial instrument is recognized as "financial assets or financial liabilities at fair value through profit or loss". These derivative features are subsequently remeasured and stated at fair value on each balance sheet date, and the gain or loss is recognized in "gain or loss on valuation of financial assets or financial liabilities". At the maturity of the redemption period, if the fair value of common stock exceeds the redemption price, the fair value of the put option is recognized as "capital reserve"; however, if the fair value of common stock is lower than the redemption price, the fair value of the put option is recognized as "gain or loss".

C. A conversion right embedded in the bonds issued by the Company, which is convertible to an equity instrument, is recognized in "capital reserve from conversion right". When a bondholder exercises his/her conversion rights, the liability component of the bonds (including corporate bonds and embedded derivatives) shall be revalued on the conversion date, and the resulting difference shall be recognized as "gain or loss" in the current period. The book value of the common stock issued due to the conversion shall be based on the adjusted book value of the above-mentioned liability component plus the book value of the stock conversion option.

D. Costs incurred on issuance of convertible bonds are proportionately charged to the liabilities and equities of the underlying instruments based on initial recognition amount.

E. In the event that the bondholders may exercise put options within the following year, the underlying bonds payable shall be reclassified to current liabilities. The bonds payable whose put options are unexercised during the exercisable period shall be reclassified to non-current liabilities.

22) Income tax

A. Income tax expense is provided based on accounting income after adjusting for permanent differences. The provision for income tax includes deferred income tax for the expected future tax consequences of events that have been included in different periods for financial or tax reporting purposes. Deferred income tax assets and liabilities are determined using enacted tax rates in effect for the year(s) in which the differences are expected to reverse. Valuation allowance on deferred income tax assets is recognized to the extent that it is more likely than not that the income tax benefits will not be realized. Over or under provision of income tax from the previous years is recorded as adjustment to the current year's income tax expense. In accordance with the ROC Income Tax Law, the company's undistributed income is subject to an additional 10% corporate income tax. The tax is charged to income tax expense after the appropriation of earnings is approved by the stockholders in the following year.

B. Income tax credits are provided for in accordance with R.O.C. SFAS No. 12, "Accounting for Income Tax Credits". Income tax credits arising from acquisitions of equipment or technology, expenditures for research and development, training and development of employees and investments in qualified stocks are charged to deferred income tax assets and credited to income tax expense in the period the related expenditures are incurred.

C. Effective January 1, 2006, the Company adopted the Income Basic Tax Act (the "Act"). Under the Act, the income tax payable shall be the higher of the basic tax and the regular income tax in accordance with the Income Tax Law and other relevant laws.

D. As a result of the amendment of the Income Tax Law, the Company recalculated its deferred tax assets and liabilities and recorded the resulting difference in the current year's income tax benefit or expense.

23) Government grants

In accordance with R.O.C. SFAS No. 29, "Government Grants", government grants related to assets are recognized as deferred income; for depreciable assets, it is recognized as income over the useful life period of the asset in proportion to which depreciation expense on those assets is recognized. For non-depreciable assets that require the fulfillment of certain obligations, it would then be recognized as income over the periods that bear the cost of meeting the obligations. If the government grant relates to receiving financial consideration, it is recognized as income when earned, or as deferred income (shown as "other liabilities") and recognized in periods over which the grant will be earned.

24) Treasury stock

A. When shares are bought back by the Company, the treasury stock is accounted for as a deduction of the equity.

B. Any excess of the proceeds over the cost of the treasury stock reissued is recognized as an increase in additional paid-in capital from the treasury stock transaction and if the proceeds are less than the cost, the deficit is charged to the additional paid-in capital account. Should the paid-in capital in excess of par value of common stock balance be insufficient to absorb the deficit, the balance is charged to retained earnings.

C. Treasury stock cost is determined using the weighted-average cost method.

D. The Company's common stock owned by its subsidiaries is treated as treasury stock.

25) Share-based payment - employee compensation plan

Based on the employee stock options and the share-based payment agreements, the Company shall measure the services received during the vesting period by reference to the fair value of the equity instruments granted and account for those amounts as payroll expenses during that period.

26) Employees' bonuses and directors' and supervisors' remuneration

Effective January 1, 2008, pursuant to EITF 96-052 of the Accounting Research and Development Foundation, R.O.C., dated March 16, 2007, "Accounting for Employees' Bonuses and Directors' and Supervisors' Remuneration", the costs of employees' bonuses and directors' and supervisors' remuneration are accounted for as expenses and liabilities, provided that such recognition is required under legal or constructive obligation and the amounts can be estimated reasonably. However, if the accrued amounts for employees' bonuses and directors' and supervisors' remuneration are significantly different from the actual distributed amounts resolved by the stockholders at their annual stockholders' meeting subsequently, the differences shall be recognized as gain or loss in the following year. In addition, according to EITF 97-127 of the Accounting Research and Development Foundation, R.O.C., dated March 31, 2008, "Criteria for Listed Companies in Calculating the Number of Shares of Employees' Stock Bonus", the Company calculates the number of shares of employees' stock bonus based on the closing price of the Company's common stock at the previous day of the stockholders' meeting held in the year following the financial reporting year, after taking into account the effects of ex-rights and ex-dividends.

27) Earnings per share

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by taking into account the potentially dilutive securities which are assumed to have been converted to common stock at the beginning of the period. Anti-dilutive potential common shares are ignored in calculating dilutive earnings per share.

28) Revenues and expenses

Revenues are recognized when the earning process is substantially completed and are realized or realizable. Related costs are recognized to match the timing of revenue recognition. Expenses, including research and development costs, are recognized as incurred.

29) Operating segments

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments.

In accordance with R.O.C. SFAS No. 41, "Operating Segments", segment information is disclosed in the consolidated financial statements rather than in the separate financial statements of the Company.

3. CHANGES IN ACCOUNTING PRINCIPLES

1) Notes and accounts receivable, other receivables

Effective January 1, 2011, the Group adopted the newly revised R.O.C. SFAS No. 34, "Financial Instruments: Recognition and Measurement". The Group recognizes impairment loss on notes receivable, accounts receivable and other receivables when there is an objective evidence of impairment. As a result of this change in accounting principle, the Group's consolidated net income increased by $982,020 and consolidated earnings per share increased by $0.09 (in dollars) for the six-month period ended June 30, 2011.

2) Operating segments

Effective January 1, 2011, the Company adopted the newly issued SFAS No. 41, "Operating Segments." This statement supersedes SFAS No. 20, "Segment Reporting." The Company conformed to the disclosure requirements as of and for the six-month period ended June 30, 2011. The information for the six-month period ended June 30, 2010 has also been restated to reflect the new segment reporting requirement. This accounting change did not have a significant effect on the net income and earnings per common share for the six-month period ended June 30, 2011.

4. DETAILS OF SIGNIFICANT ACCOUNTS

(1)Cash and cash equivalents

Cash equivalents include the Sweep Fund, short-term commercial paper and bonds purchased with resale agreements with maturity of less than three months.

(2)Financial assets and liabilities at fair value through profit or loss

1) For the six-month period ended June 30, 2011 and 2012, the Group recognized a net loss of $125,016 and $4,448,693, including unrealized loss of $91,163 and $4,481,928.

2) On March 27, 2012, the Company's board of directors resolved to sign a equity subscription contract that the Company and its subsidiary, Foxconn (Far East) Limited, to acquire 50,000 and 31,143 thousand shares of a listed company in Japan, Sharp Corporation, with amount of JPY 27,500,000 thousand and JPY 17,128,650 thousand, respectively, and the Group holds total percentage of 6.584%. This equity subscription contract meets the recognition criteria of a forward contract specified in ROC SFAS No. 34, "Accounting for Financial Instruments". The Company and its subsidiary should evaluate gain or loss based on fair value for this arrangement and also recognize related financial assets/liabilities. As of June 30, 2012, the Company and its subsidiary had recognized loss on valuation and financial liabilities by $4,513,255, respectively, for this arrangement. Information about this equity subscription contract is given in Note 9: significant subsequent events.

(3)Available-for-sale financial assets

The fair value of available-for-sale financial assets decreased by $7,963,507 and increased by $1,578,104 for the six-month periods ended June 30, 2011 and 2012, respectively, and is shown as an adjustment to stockholders' equity as unrealized gain or loss on financial instruments. The transfers from this equity account to profit and loss amounted to $0 and $704,227 (shown as "gain on disposal of investment") for the years ended June 30, 2011 and 2012, respectively.

(4)Notes and accounts receivable

1. The Group factored its accounts receivable to certain financial institutions without recourse. Under the agreement, the Group is not required to bear uncollectible risk of the underlying accounts receivable, but is liable for the losses incurred on any business dispute, and did not provide any collateral. Accordingly, these accounts receivable meet the derecognition criteria for financial assets. The Group has derecognized the accounts receivable sold to financial institutions, net of the amount estimated for business disputes.

As of June 30, 2011 and 2012, the relevant information of accounts receivable factored but unsettled were as follows:

2. As of June 30, 2011 and 2012, the Group has signed promissory notes amounting to $4,453,150(US$155,000 thousand) and $4,631,400 (US$155,000 thousand) as guarantee for those accounts receivables in commercial dispute, respectively.

3. For the six-month periods ended June 30, 2011 and 2012, the financing charges (expenses) incurred from accounts receivable factoring were $150,627 and $123,803 (shown as "financing charges"), respectively.

(5)Other receivables

(6)Inventories

Expenses and loss incurred on inventories for the six-month periods ended June 30, 2011 and 2012 were as follows:

(7)Financial assets carried at cost

These investments have no active quoted market price and their fair values cannot be measured reliably. Therefore, they were measured at cost.

(7)Long-term equity investments accounted for under the equity method

Some of the amounts were based on the financial statements of the investee companies for the same periods which were not audited or reviewed by independent accountants. The consolidated financial information for the aforementioned unaudited or unreviewed investee companies includes the related long-term investments of $7,262,443 and $8,472,232, constituting 0.47% and 0.44% of the consolidated total assets as of June 30, 2011 and 2012, respectively and investment income accounted for under the equity method of $118,871 and $61,888, constituting 0.43% and 0.24% of the consolidated net income for the six-month periods ended June 30, 2011 and 2012, respectively,.

(9)Property, plant and equipment

The Group recognized impairment loss of $0 and $1,780,642 (shown as "impairment loss") for the six-month periods ended June 30, 2011 and 2012, respectively.

 (10)Business combinations and intangible assets

1) Business combinations

In October, 2011, the Company's subsidiary, PCE Paragon Solutions kft., acquired from Cisco System, Inc. 100% ownership of its subsidiaries, Scientific-Atlanta Holdings BV and Scientific-Atlanta de Mexico S. de R.L. de C.V., for a cost of US$ 43,697 thousand.

2) Goodwill

The above amount mainly represents goodwill arising from the company's subsidiary's acquisition of Scientific-Atlanta Holdings BV and Scientific-Atlanta de Mexico S. de R.L. de C.V. in 2011.

3) Other intangible assets - customer relationship

In February 2008, the Company's subsidiary, Foxteq Holding Inc. - Cayman, signed an assets purchase agreement with Sanmina-SCI Corporation, Sanmina-SCI USA Inc., SCI Technology, Inc., Sanmina-SCI Systems De Mexico S.A. De C.V., Sanmina-SCI Hungary Electronics Manufacturing LLC. and Sanmina-SCI Australia Pty Ltd. for the acquisition of certain assets and liabilities of these companies. The acquisition cost was US$70 million. The acquisition was effective on July 7, 2008. The intangible assets - customer relationship arising from the above acquisition amounted to $965,100, as appraised by the Company and experts. As of June 30, 2011, the intangible assets - customer relationship was fully amortized.

(11)Other assets

For the six-month periods ended June 30, 2011 and 2012, the land use rights were as follows:

(12)Short-term loans

(13)Short-term notes and bills

(14)Accrued expenses

(15)Income tax

1) Income tax expense and income tax payable are reconciled as follows:

2) As of June 30, 2011 and 2012, the deferred income tax assets and liabilities were as follows:

3) The temporary differences and related amounts of deferred tax assets (liabilities) are listed as follows:

4) As of June 30, 2012, the Company's income tax returns have been approved by the R.O.C. Tax Authority through 2009.

(16) Bonds payable

1) 2006 1st domestic convertible bonds payable

The 2006 1st domestic convertible bonds payable had been matured on November 10, 2011 without converting to common stocks. The unexercised conversion right in the amount of $1,195,200 recognized in "Capital reserve from conversion right" had been reclassified to "Paid-in capital in excess of par value of common stocks". Additionally, the Company had redeemed the unexercised convertible bonds in the amount of $12,039,400.

2) 2010 1st unsecured euro convertible bonds

A. On August 18, 2010, following the approval from the SFB, the Company issued 1st unsecured euro zero coupon convertible bonds in the amount of US$1 billion. These convertible bonds cover a period of three years from October 12, 2010 to October 12, 2013.

B. The conversion price shall be adjusted based on the terms of the convertible bonds. As of June 30, 2012, the convertible bonds have not been converted. The conversion price was adjusted to $111.592 (in dollars) per share as a result of the resolution approved at the stockholders' meeting in 2012 with a fixed exchange rate applicable on conversion of bonds of NTD$31.251=USD$1.

C. Under the terms of the convertible bonds, all the bonds repurchased, previously redeemed or converted bonds will be retired and not to be re-issued.

D. Under the terms of the convertible bonds, the rights and obligations of the new shares converted from convertible bonds are the same as those of the issued and outstanding common stock.

E. The effective interest rate of the bonds was 2.02%.

F. The fair value of conversion right in the amount of $2,034,440 was separated from bonds payable at issuance date, and was recognized in "Capital reserve from conversion right" in accordance with SFAS No. 36.

3) First unsecured corporate bonds issue in 2005

A. On September 14, 2005, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $11,500,000. As of June 30, 2012, Bond Aa to Af and Bond Ba to Bf had been redeemed in the amount of $6,000,000. The amount of the unredeemed bonds is $5,500,000.

The terms of these domestic unsecured bonds are summarized as follows:

B. 2005 1st unsecured corporate bonds payable, Bond Ca to Cf, had been reclassified to "Current liabilities" in the third quarter of 2011.

4) First debenture issue of 2008

A. On December 9, 2008, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $5,180,000. The terms of these domestic unsecured bonds are summarized as follows:

B. First unsecured corporate bonds issue in 2008 had been fully redeemed on December 19, 2011.

5) First debenture issue of 2009

On January 12, 2009, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $6,820,000. The terms of these domestic unsecured bonds are summarized as follows.

6) First debenture issue of 2010

On December 17, 2010, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $6,000,000. The terms of these domestic unsecured bonds are summarized as follows.

7) First debenture issue of 2011

On January 7, 2011, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $6,000,000. The terms of these domestic unsecured bonds are summarized as follows.

8) Second debenture issue of 2011

On June 1, 2011, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $7,050,000. The terms of these domestic unsecured bonds are summarized as follows.

9) Third debenture issue of 2011

On July 6, 2011, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $4,950,000. The terms of these domestic unsecured bonds are summarized as follows.

10) First debenture issue of 2012

On December 28, 2011, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $9,000,000. The terms of these domestic unsecured bonds are summarized as follows.

11) Second debenture issue of 2012

On May 11, 2012, following the approval from the SFB, the Company issued domestic unsecured bonds in the amount of $6,000,000. The terms of these domestic unsecured bonds are summarized as follows.

(17) Long-term loans

1) In 2008, Foxconn (Far East) Limited, a subsidiary of the Company entered into a syndicated credit facility agreement with Mizuho Corporate Bank Ltd. as the lead bank and obtained a credit line in the amount of US$1,035 million, among which an amount of US$292,500 thousand had been repaid in advance. As of June 30, 2012, the credit line is US$742,500 thousand, and the Company is the guarantor of the loan.

2) On March 21, 2011, The Company entered into a syndicated credit facility agreement with Mizuho Corporate Bank Ltd. etc. as the lead bank and obtained a credit line in the amount of JPY$51 billion.

3) Foxconn Slovakia, SPOL. S R.O., a subsidiary of the Company entered into a syndicated credit facility agreement with ING Bank N.V. etc. as the lead bank and obtained a credit line in the amount of EUR$410 million, among which an amount of EUR$265,500 thousand had been repaid in advance in the fourth quarter of 2011. Starting from the fourth quarter in 2011, the credit line is EUR$145,000 thousand, and the Company is the guarantor of the loan.

4) The Company entered into a comprehensive credit contract with China Development Industrial Bank on August 3, 2011, and obtained a credit line in the amount of $2 billion.

5) Syntrend Creative Park Co., Ltd., a subsidiary of the Company, had entered into a comprehensive credit contract with First Commercial Bank on April 18, 2011, and obtained a credit line in the amount of $2.5 billion.

6) Hongfujin Precision Electronics (Chengdu) Limited, a subsidiary of the Company, had entered into a syndicated credit facility agreement with Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Bank on June 11, 2012, and obtained a credit line in the amount of JPY$11 billion.

7) The original syndicated loan over twelve months has been reclassified as long-term loan.

8) Throughout the term of Mizuho Corporate Bank Ltd., China Development Industrial Bank, First Commercial Bank, etc. syndicated term loan agreement, the Group shall maintain the agreed financial ratios, to be tested semi-annually and annually on an audited consolidated basis.

 (18)Retirement plan

1) The Company has a non-contributory and funded defined benefit pension plan in accordance with the Labor Standards Law, covering certain eligible employees. The Company contributes monthly an amount equal to 2.1% of the employees' monthly salaries and wages to the retirement fund deposited with Bank of Taiwan, the trustee, under the name of the independent retirement fund committee. The calculation and terms and conditions of the actual pension payment are in accordance with the Labor Standards Law. The pension expenses under the defined benefit plan amounted to $29,900 and $37,963 for the six-month periods ended June 30, 2011 and 2012, respectively. The balance of the fund which is deposited with Bank of Taiwan was $620,328 and $632,949 as of June 30, 2011 and 2012, respectively.

2) In accordance with the Labor Pension Act, the Company has a defined contribution employee retirement plan covering all domestic employees. The Company contributes monthly an amount based on 6% of the employees' monthly salaries and wages to the employees' personal pension accounts with the Bureau of Labor Insurance. Upon retiring, employees may choose to receive the pension payment on a monthly basis or on a one-time basis from their pension accounts. The pension expenses under this plan amounted to $148,526 and $150,503 for the six-month periods ended June 30, 2011 and 2012, respectively.

3) The subsidiaries in mainland China have defined contribution pension plans and contribute an amount monthly based on 8%~9% of employees' monthly salaries and wages to an independent fund administered by a government agency. Other than the aforementioned contributions, the subsidiaries have no further obligations.

4) As of June 30, 2011 and 2012, the subsidiaries which participated in defined contribution pension plans recognized reserve according to the respective local laws for retirement plan in the amount of $188,980 and $221,515, respectively. Pension expenses in the amount of $4,390,453 and $6,674,078were recognized for the six-month periods ended June 30, 2011 and 2012, respectively.

(19)Capital stock

1) As of June 30, 2012, the Company's authorized shares were 12,230,000 thousand shares (including 200 million shares reserved for employee stock options or convertible bonds) and the issued and outstanding common stock were 10,689,097 thousand shares with a par value of $10 (in dollars) per share.

2) On June 18, 2012, the Company's shareholders adopted a resolution to increase the authorized shares to 15,000 million shares and approved employees' stock bonus amounting to $5,874,552 for 2011. The employee stock bonus of 77,860 thousand shares was determined based on the closing price of $75.45 (in dollars) on June 15, 2012, the previous day of the 2011 shareholders' meeting after taking into account the effects of ex-rights and ex-dividends. In addition, the Company's shareholders adopted a resolution to issue stock dividends at par value amounting to $10,689,097. Pursuant to the approval by the SFC on July 5, 2012, the ex-dividend date is on August 18, 2012. The amount to be distributed was accounted for as "stock dividends distributable" temporarily.

3) Pursuant to the resolution adopted at the stockholders' meeting held on June 1, 1999, and after obtaining approval from the SFC, the Company issued 25 million units of global depository receipts (GDRs) in Europe, Asia and the USA, comprising 50 million shares of common stock (Deposited Shares). The issuance amounted to USD$347,250,000, and the main terms and conditions of the GDRs are as follows:

A. Voting

Holders of GDRs have no right to directly exercise voting rights or attend the Company's stockholders' meeting, except when a motion is on the election of directors or supervisors.

A holder or holders together holding at least 51% of the GDRs outstanding at the relevant record date of the stockholders' meeting can instruct the Depositary to vote in the same direction in respect of one or more resolutions to be proposed at the meeting.

B. Sale and withdrawal of GDRs

Under the current R.O.C. law, shares represented by the GDRs may be withdrawn by holders of GDRs commencing three months after the initial issue of GDRs. A holder of a GDR may, provided that the Company has delivered to the custodian physical share certificates in respect of the Deposited Shares, request the Depositary to sell or cause to be sold on behalf of such holder the shares represented by such GDRs.

C. Dividends

GDR holders are entitled to receive dividends to the same extent as the holders of common stock subject to the terms of the Deposit Agreement and applicable laws of the R.O.C.

D. As of June 30, 2012, 107,798,000 units of GDRs were outstanding, which represents 215,596 thousand shares of common stock.

(20) Share-based payment - employee compensation plan

As of June 30, 2011 and 2012, the share-based payment transactions of Foxconn International Holdings Ltd. (Cayman), a subsidiary of the Company (listed on the Stock Exchange of Hong Kong), are set forth below:

Note:

(1)Vested upon completion of certain years of services.

(2)Of the shares granted, 2,737,718 shares cannot be sold within one to three years from the grant date.

(3)Of the shares granted, 407,000 shares cannot be sold within one to two years from the grant date.

(4)Of the shares granted, 20,362,078 shares cannot be sold within one to three years from the grant date.

(5)Of the shares granted, 13,939,379 shares cannot be sold within 1 to 2 years from the grant date.

1) Employee stock options

For the stock options granted with the compensation cost accounted for using the fair value method, their fair value on the grant date is estimated using the Black-Scholes option-pricing model. The weighted-average parameters used in the estimation of the fair value are as follows:

For the six-month periods ended June 30, 2011 and 2012, the weighted-average exercise price of employee stock options outstanding were US$0 and US$0.71 (in dollars) per share, respectively, and expenses incurred on employee stock options transactions were $22,936 (US$789 thousand) and 118,584 (US$3,998 thousand) , respectively. Details of the employee stock options are set forth below:

2) Share appreciation rights

There is no stock appreciation rights outstanding as of June 30, 2011 and 2012.

3) Other share-based payment plans

These share-based payments were granted to employees free. For the six-month periods ended June 30, 2011 and 2012, expenses incurred on other share-based payments were $56,832 (US$1,955 thousand) and $146,264 (US$4,931 thousand) , respectively.

(21) Capital reserve

1) Pursuant to the R.O.C. Company Law, capital reserve arising from paid-in capital in excess of par value on issuance of common stocks and donations can be used to cover accumulated deficit or to issue new stocks or cash to shareholders in proportion to their share ownership, provided that the Company has no accumulated deficit. Further, the R.O.C. Securities and Exchange Law requires that the amount of capital reserve to be capitalized mentioned above should not exceed 10% of the paid-in capital each year. Capital reserve should not be used to cover accumulated deficit unless the legal reserve is insufficient.

2) Please see Note 4 (16) for information on "Capital reserve from conversion right"

(22) Retained earnings

1) In accordance with the Company's Articles of Incorporation, current year's earnings must be distributed in the following order:

A. Covering accumulated deficit;

B. Setting aside as legal reserve equal to 10% of current year's net income after tax and distribution pursuant to clause (A);

C. Setting aside a special reserve in accordance with applicable legal and regulatory requirement;

D. 8% as bonuses to employees; qualified employees include employees of affiliates per criteria set by Board of Directors; and

E. the remainder shall be distributed pursuant to the proposal of the board of directors in accordance with the Company's dividend policy.

The Company's dividend policy requires the board of directors to consider the Company's budget for future capital expenditures and funding needs when proposing the distribution of earnings. The proposal should be resolved in the Meeting of the Stockholders. Dividends may be distributed in the form of cash or shares, or a combination of both, provided, however, that share dividends distributed in respect of any fiscal year shall not exceed 90 percent of total dividends to stockholders.

2) Except for covering accumulated deficit or issuing new stocks or cash to shareholders in proportion to their share ownership, the legal reserve shall not be used for any other purpose. The use of legal reserve for the issuance of stocks or cash to shareholders in proportion to their share ownership is permitted, provided that the balance of the reserve exceeds 25% of the Company's paid-in capital.

3) The details of the undistributed earnings were as follows:

4) The details of imputation system were as follows:

5) The appropriation of 2010 and 2011 earnings had been resolved at the stockholders' meeting on June 8, 2011 and June 18, 2012, respectively. Details are summarized below:

The earnings distribution information is posted on the "Market Observation Post System" at the website of the TSEC.

6) The estimated amounts of employees' bonus and directors' and supervisors' remuneration are $5,555,128 and $0 for 2010, respectively, and $5,874,552 and $0 for 2011, respectively, based on a certain percentage (8% and 0%) of net income, is recognized as operating costs and expenses in current year. The information on employees' bonus and directors' and supervisors' remuneration is posted on the "Market Observation Post System" at the website of the TSEC. The employee stock bonus amounting to $5,874,552 for 77,860 thousand shares was determined based on the closing price of the Company's common stock, $75.45 (in dollars), on June 15, 2012, the previous day of the 2012 shareholders' meeting after taking into account the effects of ex-rights and ex-dividends. The expense recognized in 2011 financial statements is the same as the amount actually paid. For the six-month period ended June 30, 2012, the estimated employees' bonus amounted to $1,982,411.

 (23) Earnings per common share

1) The number of shares had retroactively been adjusted by the stock dividends as of June 30, 2012.

2) Effective January 1, 2008, as employees' bonus could be distributed in the form of stock, the diluted EPS computation shall assume that distribution will be in the form of stocks in the calculation of the weighted-average number of common shares outstanding during the reporting year, taking into account the dilutive effects of stock bonus on potential common shares; whereas, the basic EPS shall be calculated based on the weighted-average number of common shares outstanding during the reporting year, which shall include the shares of employees' stock bonus from the appropriation of prior year earnings, which have already been resolved at the stockholders' meeting held in the reporting year.

 (24)Personnel, depreciation and amortization expenses