China Airlines, Ltd.
Financial Statements for theYears Ended December 31, 2017 and 2016 andIndependent Auditors’ ReportINDEPENDENT AUDITORS’ REPORTThe Board of Directors and the Shareholders
China Airlines, Ltd.
OpinionWe have audited the accompanying financial statements of China Airlines, Ltd. (the Company),
which comprise the balance sheets as of December 31, 2017 and 2016, and the statements ofcomprehensive income, changes in equity and cash flows for the years then ended, and the notes tothe financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2017 and 2016, and its financial
performance and its cash flows for the years then ended in accordance with the Regulations
Governing the Preparation of Financial Reports by Securities Issuers and other regulations.
Basis for Opinion
We conducted our audits in accordance with the Regulations Governing Auditing and Attestationof Financial Statements by Certified Public Accountants and auditing standards generally acceptedin the Republic of China. Our responsibilities under those standards are further described in the
Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the Company in accordance with The Norm of Professional Ethics for Certified
Public Accountant of the Republic of China, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. We believe that the audit evidence we have obtained issufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in
our audit of the financial statements for the year ended December 31, 2017. These matters wereaddressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
The key audit matters in the audit of the financial statement of the Company are stated below:
Deferred Income Tax Assets
Due to suffering tax losses in previous years, the Company was granted loss carryforwards which
can be used against taxable income in a certain period. The Company recognized the loss
carryforwards as deferred tax assets to the extent that the taxable profit in the future will beavailable against the loss carryforwards. As of December 31, 2017, the Company recognized tax
losses as deferred tax assets, in New Taiwan dollars (NT$), in the amount of NT$779,769 thousand.
Refer to Notes 4, 5 and 27 in the accompanying financial statement for the related detailed
information.

-1-

The difference between the amount representative of the Company’s financial position and its tax
base are material to the financial statements as a whole in the aviation industry. Moreover,deferred tax assets arising from tax losses are dependent on future taxable income and the reversalof existing taxable temporary differences, which involve management’s judgment when assessing
the realization of tax losses. As there is a significant level of judgment involved in valuing thedeferred tax assets, we have deemed this to be a key audit matter.
The following are the main audit procedures for the key audit matter mentioned above:1.

Acquiring the internal financial forecasts and the estimate of future taxable income, andreviewing the rationality of management’s assumptions.

2.

Acquiring information about the differences between the Company’s financial position and its
tax base, and assessing the rationality of reconciliations and the realization schedule oftemporary differences to verify whether they are consistent with management’s financial
forecasts.

Impairment Loss of Noncurrent Assets Held for Sale
The board of directors of the Company resolved to dispose of several aircrafts. According to
IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, impairment losses fromthe disposal of aircrafts were recognized as the differences between the expected transaction value
and the carrying amount of the aircrafts, and then the aircrafts were reclassified as noncurrent
assets held for sale. As of December 31, 2017, the carrying amount of the aircrafts held for sale
was NT$309,330 thousand, and the Company recognized an impairment loss of NT$3,571,301
thousand. Refer to Notes 4, 5 and 12 in the accompanying financial statements for the related
detailed information.
Due to the lack of an open trading market for aircrafts, the range of disposal prices for aircrafts
varies significantly, and the expected transaction value of aircrafts reflecting the carrying amountof noncurrent assets held for sale was difficult to evaluate. Therefore, we identified noncurrent
assets held for sale as a key audit matter.
The following were the main audit procedures for the key audit matter mentioned above:
1.

Reviewing the rationality of an assessment on the transaction value by obtaining reference
prices from authoritative publications recognized within the aviation industry, historical selling
prices of similar types of aircrafts, and the suggested price proposed by a broker and observing
the subsequent transactions.

2.

Discussing the status of the transaction with the department accountable for disposing ofaircrafts, and reviewing whether the correspondences and the latest quote were consistent withthe market value estimated by management.

Acquisition Costs of a New Fleet
In accordance with IAS 16 “Property, Plant and Equipment”, acquisition costs of aircrafts shouldbe allocated into several significant components, including airframe, airframe overhaul, engine,engine overhaul, landing gear, etc., and should be depreciated over different useful lives. As of
December 31, 2017, the carrying amount of flight equipment was NT$125,442,997 thousand.
Refer to Notes 4, 5 and 14 in the accompanying financial statements for the related detailed
information.

-2-

Since the Company introduced a brand new fleet of A350-900 this year, the adjusted allocationbase should be applied. Moreover, the carrying amount of flight equipment and the amount ofdepreciation expense recognized would be subject to the allocation of acquisition costs and theapplied useful life, which were made in accordance with management’s judgment. Therefore, we
identified the acquisition costs of the new fleet as a key audit matter.
The following were the main audit procedures for the key audit matter mentioned above:
1.

Reviewing the certificates issued by the aircraft and engine manufacturers, the suggested
operating cost of the aircraft manufacturer, and the historical experience of the maintenancedepartment to assess the rationale used to determine the division amount by management.

2.

Conducting an assessment on the rationality of useful life on the basis of fleet performance in
the industry, historical experience of fleet operations, and documents that described the basis
used by management to determine the useful life of its new fleet.

Responsibilities of Management and Those Charged with Governance for the Financial
Statements
Management is responsible for the preparation and fair presentation of the financial statements inaccordance with the Regulations Governing the Preparation of Financial Reports by Securities
Issuers, and for such internal control as management determines is necessary to enable thepreparation of financial statements that are free from material misstatement, whether due to fraud
or error.
In preparing the financial statements, management is responsible for assessing the Company’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern
and using the going concern basis of accounting unless management either intends to liquidate theCompany or to cease operations, or has no realistic alternative but to do so.
Those charged with governance, including the audit committee and supervisors, are responsible foroverseeing the Company’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditors’ reportthat includes our opinion. Reasonable assurance is a high level of assurance, but is not aguarantee that an audit conducted in accordance with the auditing standards generally accepted in
the Republic of China will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis ofthese financial statements.
As part of an audit in accordance with the auditing standards generally accepted in the Republic ofChina, we exercise professional judgment and maintain professional skepticism throughout theaudit. We also:1.

Identify and assess the risks of material misstatement of the financial statements, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a basis for our opinion. The riskof not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations,or the override of internal control.

-3-

2.

Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control.

3.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.

4.

Conclude on the appropriateness of management’s use of the going concern basis ofaccounting and, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the Company’s ability tocontinue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditors’ report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are
based on the audit evidence obtained up to the date of our auditors’ report. However, future
events or conditions may cause the Company to cease to continue as a going concern.

5.

Evaluate the overall presentation, structure and content of the financial statements, including
the disclosures, and whether the financial statements represent the underlying transactions andevents in a manner that achieves fair presentation.

6.

Obtain sufficient appropriate audit evidence regarding the financial information of the entities
or business activities within the Company to express an opinion on the financial statements.
We are responsible for the direction, supervision and performance of the audit. We remainsolely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and to communicate with them all
relationships and other matters that may reasonably be thought to bear on our independence, andwhere applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those mattersthat were of most significance in the audit of the financial statements for the year ended December
31, 2017 and are therefore the key audit matters. We describe these matters in our auditors’ report
unless law or regulation precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our report because theadverse consequences of doing so would reasonably be expected to outweigh the public interest
benefits of such communication.

-4-

The engagement partners on the audit resulting in this independent auditors’ report are Chen-Hsin
Yang and Li-Chi Chen.

Deloitte & Touche
Taipei, Taiwan
Republic of China
March 22, 2018

Notice to Readers
The accompanying financial statements are intended only to present the financial position,
financial performance 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 audit such financial statements are those generally appliedin the Republic of China.
For the convenience of readers, the independent auditors’ report and the accompanying financial
statements have been translated into English from the original Chinese version prepared and usedin 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 auditors’ report and financial statements shall prevail.

-5-CHINA AIRLINES, LTD.
BALANCE SHEETSDECEMBER 31, 2017 AND 2016
(In Thousands of New Taiwan Dollars)

2017
Amount%2016
Amount%$ 16,563,559
293

8
-

$ 19,734,590
1,200
51,4039-8,044,940
510,588532,974
24,0968,610,958
426,553
3,219,735

4
4
2

7,825,504
439,509
833,754
21,652
8,338,980
185,100
2,476,800

41
41

37,933,696

18

39,908,492

19

64,177
11,551,369
142,265,548
2,047,448
989,327
4,974,941
12,091,486

5
67
1
1
2
6

3,268
120,200
10,051,325
129,121,632
2,047,448
1,115,101
5,749,714
23,422,263

5
61
1
3
11

173,984,296

82

171,630,951

81$ 211,917,992

100$ 211,539,443

100$

900,000
20,854
638,876
1,347,007
9,634,022
2
13,404,227
2,700,000
31,816,140
1,254,000
2,624,677

1
1
5
6
1
15
1
1

ASSETS
CURRENT ASSETS
Cash and cash equivalents (Notes 4, 6 and 30)
Financial assets at fair value through profit or loss - current (Notes 4, 5, 7 and 30)
Derivative financial assets for hedging - current (Notes 4, 5, 8 and 30)
Receivables:
Notes and accounts, net (Notes 4, 5, 10 and 30)
Notes and accounts - related parties (Notes 30 and 31)
Other receivables
Current tax assets (Notes 4 and 27)
Inventories, net (Notes 4 and 11)
Noncurrent assets held for sale (Notes 4, 5 and 12)
Other current assets (Note 17)
Total current assets
NONCURRENT ASSETS
Derivative financial assets for hedging - noncurrent (Notes 4, 5, 8 and 30)
Financial assets carried at cost - noncurrent, net of current portion (Notes 9 and 30)
Investments accounted for using the equity method (Notes 4 and 13)
Property, plant and equipment (Notes 4, 5, 14 and 32)
Investment properties (Notes 4 and 15)
Other intangible assets (Notes 4 and 16)
Deferred tax assets (Notes 4, 5 and 27)
Other noncurrent assets (Notes 17, 20, 30, 32 and 33)
Total noncurrent assets
TOTAL

LIABILITIES AND EQUITYCURRENT LIABILITIESFinancial liabilities at fair value through profit or loss - current (Notes 4, 5, 7 and 30)
Short-term bills payable (Note 18)
Derivative financial liabilities for hedging - current (Notes 4, 5, 8 and 30)
Notes and accounts payable (Note 30)
Notes and accounts payable - related parties (Notes 30 and 31)
Other payables (Notes 21 and 26)
Current tax liabilities (Notes 4 and 27)
Provisions - current (Notes 4, 5 and 23)
Deferred revenue - current (Notes 4, 5 and 22)
Bonds payable and put option of convertible bonds - current portion (Notes 4, 19, 25, 30 and 31)
Loans and debts - current (Notes 18, 30 and 32)
Capital lease obligations - current portion (Notes 4, 20, 30 and 32)
Other current liabilities (Note 30)

8,655
77,639297,952
1,494,006
10,908,752
2
406,457
14,048,025
4,367,100
18,814,633
1,580,000
2,922,143

1
5
7
2
9
1
1

54,925,364

26

64,339,805

31

926
6,994
21,350,000
61,907,978
7,352,194
38,946
596,000
1,818,265
6,158,744
739,344

10
29
4
1
3
-

2,775
19,838,044
52,833,478
6,770,951
114,772
3,562,000
1,808,903
6,217,346
267,552

9
25
3
2
1
3
-

Total noncurrent liabilities

99,969,391

47

91,415,821

43

Total liabilities

154,894,755

73

155,755,626

74

54,709,846
799,99926-

54,708,901
799,932

26-

206,092
1,458,313
1,664,405(107,641)(43,372)1
1-

287,224
76,486(157,618)
206,092
112,264(43,372)-

57,023,237

27

55,783,817

26$ 211,917,992

100$ 211,539,443

100

Total current liabilities
NONCURRENT LIABILITIESFinancial liabilities at fair value through profit or loss - noncurrent (Notes 4, 5, 7 and 30)
Derivative financial liabilities for hedging - noncurrent (Notes 4, 5, 8 and 30)
Bonds payable - noncurrent (Notes 4, 19, 25, 30 and 31)
Loans and debts - noncurrent (Notes 18, 30 and 32)
Provisions - noncurrent (Notes 4, 5 and 23)
Deferred tax liabilities (Notes 4 and 27)
Capital lease obligations - noncurrent (Notes 4, 20, 30 and 32)
Deferred revenue - noncurrent (Notes 4, 5 and 22)
Accrued pension costs (Notes 4, 5 and 24)
Other noncurrent liabilities (Note 30)

EQUITY (Notes 19 and 25)
Share capital
Capital surplus
Retained earnings
Legal reserve
Special reserve
Unappropriated retained earnings (accumulated deficit)
Total retained earnings
Other equity
Treasury shares
Total equity
TOTAL
The accompanying notes are an integral part of the financial statements.

-6-$

CHINA AIRLINES, LTD.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands of New Taiwan Dollars, Except Earnings Per Share)%

2016
Amount%$ 139,815,211

100$ 127,524,864

100

COSTS (Notes 4, 8, 11, 24, 26 and 31)

121,848,814

87

112,248,884

88

GROSS PROFIT

17,966,397

13

15,275,980

12

OPERATING EXPENSES (Notes 4, 24, 26 and 31)

10,608,283

810,800,273

9

OPERATING PROFIT

7,358,114

5

4,475,707

3

360,980(4,980,870)(1,277,807)

(3)
(1)

593,451(2,410,921)(1,221,588)

1
(2)
(1)

1,627,786

1

100,602-(4,269,911)(3)(2,938,456)(2)

3,088,203

2

1,537,2511

880,137-

965,7111

2,208,066

2

571,540-(645,219)(1)(589,382)-(211,952)-(234,797)-

109,687-

100,195(Continued)

REVENUE (Notes 4, 26 and 31)

NONOPERATING INCOME AND EXPENSES
Other income (Notes 9 and 26)
Other gains and losses (Notes 8, 9, 12, 13, 14 and 26)
Finance cost (Notes 8, 26 and 31)
Share of the profit of associates and joint ventures(Note 13)
Total nonoperating income and expenses
PROFIT BEFORE INCOME TAX
INCOME TAX EXPENSE (Notes 4, 5 and 27)
NET INCOME
OTHER COMPREHENSIVE INCOME
Items that will not be reclassified subsequently to
profit or loss:
Remeasurement of defined benefit plans (Notes 4
and 24)
Share of the other comprehensive loss of
associates and joint ventures accounted forusing the equity method
Income tax relating to items that will not bereclassified subsequently to profit or loss
(Note 27)

-7-

2017
AmountCHINA AIRLINES, LTD.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands of New Taiwan Dollars, Except Earnings Per Share)

2017
AmountItems that may be reclassified subsequently to profit
or loss:
Exchange differences on translating foreign
operations (Notes 4 and 25)
Cash flow hedges (Notes 4 and 25)
Share of the other comprehensive loss of
associates and joint ventures accounted forusing the equity method (Notes 4 and 25)
Income tax relating to items that may bereclassified subsequently to profit or loss
(Notes 25 and 27)$

Other comprehensive loss for the year, net ofincome tax
TOTAL COMPREHENSIVE INCOME FOR THE
YEAR$

EARNINGS PER SHARE (NEW TAIWANDOLLARS; Note 28)
Basic
Diluted%(134,857)(116,580)-(11,212)--(4,057)-42,744-(37,401)-(967,389)(1)(545,437)-

1,240,677

1

26,103

-

0.40
0.39

The accompanying notes are an integral part of the financial statements.

$%(80,104)
300,109

$
$

-8-

2016
Amount

$

$
$

0.10
0.10

(Concluded)

CHINA AIRLINES, LTD.
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands of New Taiwan Dollars)

Retained Earnings

BALANCE AT JANUARY 1, 2016

Share Capital

Capital Surplus

Legal Reserve

Special Reserve$ 54,708,901

$

$

$

798,415-

UnappropriatedEarnings(Accumulated
Deficit)-$ 2,872,235

Exchange
Differences on
Translating
Foreign
Operations

Other Equity
Unrealized
Gain (Loss) on
Available-forsale Financial
AssetsCash Flow
HedgesTreasury
Shares Held by
Subsidiaries

Total Equity

$

$

$

$

(43,372)$ 58,269,896

157,959

1,755(225,997)

Change in capital surplus from investments in associates
and joint ventures accounted for using the equity method

-

-

-

-

(1,638)

-

-

-

-

(1,638)Difference between cost of the acquisition of subsidiaries
and net value

-

-

-

-

(3,536)

-

-

-

-

(3,536)

Appropriation of 2015 earnings
Legal reserve
Special reserve
Cash dividends - $0.458522382 per share--

287,224-

76,486-(287,224)(76,486)(2,508,525)

-

-

-

-

(2,508,525)

Change in capital surplus from dividends distributed tosubsidiaries

-

1,517

-

-

-

-

-

-

-

1,517

Net income for the year ended December 31, 2016

-

-

-

-

571,540

-

-

-

-

571,540

Other comprehensive income (loss) for the year ended
December 31, 2016, net of income tax

-

-

-

-

(723,984)(79,395)(41)

257,983-(545,437)

Total comprehensive income (loss) for the year ended
December 31, 2016

-

-

-

-

(152,444)(79,395)(41)

257,983-

26,103BALANCE AT DECEMBER 31, 2016

54,708,901

799,932

287,224

76,486(157,618)

78,564

1,714

31,986(43,372)

55,783,817

Compensation of deficit - capital surplus--(81,132)(76,486)

157,618

-

-

-

-

-

945

131

-

-

-

-

-

-

-

1,076

Change in capital surplus from investments in associates
and joint ventures accounted for using the equity method

-

(64)

-

-

-

-

-

-

-

(64)

Difference between cost of the acquisition of subsidiaries
and net value

-

-

-

-

(2,269)

-

-

-

-

(2,269)Net income for the year ended December 31, 2017

-

-

-

-

2,208,066

-

-

-

-

2,208,066

Other comprehensive income (loss) for the year ended
December 31, 2017, net of income tax

-

-

-

-

(747,484)(113,550)

60(106,415)-(967,389)

Total comprehensive income (loss) for the year ended
December 31, 2017

-

-

-

-

1,460,582(113,550)

60(106,415)-

1,240,677-$ 1,458,313(43,372)$ 57,023,237

Convertible bonds converted to common shares

BALANCE AT DECEMBER 31, 2017

$ 54,709,846$

799,999$

206,092$

The accompanying notes are an integral part of the financial statements.

-9-$(34,986)

$

1,774

$

(74,429)$

CHINA AIRLINES, LTD.
STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands of New Taiwan Dollars)

2017
CASH FLOWS FROM OPERATING ACTIVITIESIncome before income tax
Adjustments to reconcile pretax profit to net cash generated from (usedin) operating activities:
Bad-debt expenses
Depreciation expenses
Amortization expenses
Net loss on fair value change of financial assets and liabilities held
for trading
Interest income
Dividend income
Share of profit of associates and joint ventures
Loss on disposal of financial assets carried at cost
Gain on disposal of property, plant and equipment
Gain on disposal of investments accounted for using the equity
method(Gain) loss on disposal of noncurrent assets held for sale
Loss on inventories and property, plant and equipment
Impairment loss recognized on property, plant and equipment
Net gain on foreign currency exchange
Loss on repurchase of bonds payable
Finance costs
Recognition of provisions
Amortization of unrealized gain on sale-leasebacks
Impairment loss recognized on financial assets carried at cost
Impairment loss recognized on noncurrent assets held for sale
Changes in operating assets and liabilities
Financial assets held for trading
Financial liabilities held for trading
Derivative financial assets for hedging
Notes and accounts receivable
Accounts receivable - related parties
Other receivables
Inventories
Other current assets
Notes and accounts payable
Accounts payable - related parties
Other payables
Deferred revenue
Provisions
Other current liabilities
Accrued pension liabilities
Cash generated from operations
Interest received
Dividends received- 10 -$

3,088,203

2016$

1,537,251

50,00017,375,194
247,725

49,878
16,588,758
138,554

33,385(176,329)(9,564)(1,627,786)(5,839)29,909(188,006)(59,099)(100,602)
346(80,617)(101,105)(252,467)
642,423
690,579(343,681)
1,277,807
2,524,079(14,512)56,023
3,571,301

26,429207,019717,758(10,773)
41,943
1,221,588
2,011,115(14,512)
347,868(32,185)
9,580(271,309)(71,079)
266,338(591,043)(733,731)(305,161)
146,999
2,073,621
653,161(1,138,140)
157,417(703,821)
26,486,083
192,138
639,454

134,448
13,096(785,159)
106,633(61,401)(359,928)(355,393)(353,373)(668)(1,490,845)
1,398,073(366,218)
275,042(3,337,565)
17,281,549
178,640
893,380(Continued)

CHINA AIRLINES, LTD.
STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands of New Taiwan Dollars)

2017

2016

$ (1,245,421)(31,203)$ (1,121,355)(44,606)

26,041,051

17,187,608(1,240,837)(953,218)
82,534
1,128,472

5,579(100,000)(2,196,021)
514,561
384,285

380,850(107,935)
180,381(24,215,469)(121,951)-(146,408)
167,312(24,724,783)
5,693,791(265,615)
206,714(24,867,173)(20,460,585)

CASH FLOWS FROM FINANCING ACTIVITIES(Decrease) increase in short-term bills payable
Proceeds from issue of bonds payable
Exercise of put options of bonds payable
Repayments of bonds payable
Proceeds from long-term debts
Repayments of long-term debts and capital lease obligations
Proceeds of guarantee deposits received
Refunds of guarantee deposits received
Dividends paid to owners of the Company(900,000)
5,850,000(2,700,000)
30,380,000(36,947,007)
233,015(192,672)-

900,000
10,000,000(994,705)(2,400,000)
34,499,000(35,052,725)
98,282(76,477)(2,508,525)

Net cash (used in) generated from financing activities(4,276,664)

4,464,850

EFFECTS OF EXCHANGE RATE CHANGES ON THE BALANCE
OF CASH HELD IN FOREIGN CURRENCIES(68,245)

35,288NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS(3,171,031)

1,227,161

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE
YEAR

19,734,590

18,507,429

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR

$ 16,563,559$ 19,734,590

Interest paid
Income tax paid
Net cash generated from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds of the sale of financial assets carried at cost
Acquisition of investments accounted for by the equity method
Payments for property, plant and equipment
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of noncurrent assets held for sale
Proceeds from disposal of investments accounted for using the equity
methodIncrease in refundable deposits
Decrease in refundable deposits
Increase in prepayments for equipment
Refunds of prepayments for aircraft
Increase in computer software costs
Decrease in restricted assets
Net cash used in investing activities

The accompanying notes are an integral part of the financial statements.
- 11 -(Concluded)

CHINA AIRLINES, LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

1. GENERAL INFORMATION
China Airlines, Ltd. (the “Company”) was founded in 1959 and its shares have been listed on the Taiwan
Stock Exchange since February 26, 1993. The Company primarily provides air transport services forpassengers and cargo. Its other operations include (a) mail services; (b) ground services and routine
aircraft maintenance; (c) major maintenance of flight equipment; (d) communications and data processing
services to other airlines; (e) sale of aircraft parts, equipment and entire aircraft; and (f) leasing of aircrafts.
The major shareholders of the Company are the China Aviation Development Foundation (CADF) and the
National Development Fund (NDF), Executive Yuan. As of both December 31, 2017 and 2016, CADF
and NDF held a combined 43.63% of the Company’s shares. As of December 31, 2017 and 2016, theCompany had 12,654 and 12,657 employees, respectively.

2. APPROVAL OF FINANCIAL STATEMENTS
The financial statements were approved by the board of directors and authorized for issue on March 22,
2018.

3. APPLICATION OF NEW, AMENDED AND REVISED STANDARDS AND INTERPRETATIONS
a. Initial application of the amendments to the Regulations Governing the Preparation of Financial Reports
by Securities Issuers (FSC) and the International Financial Reporting Standards (IFRS), International
Accounting Standards (IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC)
endorsed and issued into effect by the FSC
Except for the following, whenever applied, the initial application of the amendments to theRegulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRSs
endorsed and issued into effect by the FSC would not have any material impact on the Company’s
accounting policies:
Amendments to IAS 36 “Impairment of Assets”
The amendment “Disclosures for Non-financial Assets” clarifies that the recoverable amount of an asset
or a cash-generating unit is disclosed only when an impairment loss on the asset has been recognized orreversed during the period. Furthermore, if the recoverable amount of an item of property, plant andequipment for which impairment loss has been recognized or reversed is the fair value less costs ofdisposal, the Company is required to disclose the fair value hierarchy. If the fair value measurements
are categorized within Level 3, the valuation technique and key assumptions used to measure the fairvalue are disclosed. The discount rate used is disclosed if such fair value less costs of disposal ismeasured by using the present value technique. The amendment should be applied retrospectively
starting from January 1, 2017. Refer to Notes 12 and 14 for the related disclosures.

- 12 -

Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers
The amendments include additions of several accounting items and requirements for disclosures of
impairment of non-financial assets as a consequence of the IFRSs endorsed and issued into effect by the
FSC. In addition, as a result of the post implementation review of IFRSs in Taiwan, the amendments
also include an emphasis on certain recognition and measurement considerations and add requirements
for disclosures of related party transactions and goodwill.
The amendments stipulate that other companies or institutions of which the chairman of the board of
directors or president serves as the chairman of the board of directors or the president of the Company,or is the spouse or second immediate family of the chairman of the board of directors or president of theCompany are deemed to have a substantive related party relationship, unless it can be demonstrated thatno control, joint control, or significant influence exists. Furthermore, the amendments require thedisclosure of the names of the related parties and the relationships with whom the Company has
significant transactions. If the transactions or balance with a specific related party is 10% or more of
the Company’s respective total transactions or balance, such transactions should be separately disclosedby the name of each related party.
When the amendments are applied retrospectively from January 1, 2017, the disclosures of related party
transactions and the impairment of goodwill are enhanced. Refer to Note 31 for related disclosures.
b. The Regulations Governing the Preparation of Financial Reports by Securities Issuers and theInternational Financial Reporting Standards (IFRS)New, Amended or Revised Standards and Interpretations(the “New IFRSs”)
Annual Improvements to IFRSs 2014-2016 Cycle
Amendment to IFRS 2 “Classification and Measurement of
Share-based Payment Transactions”
Amendments to IFRS 4 “Applying IFRS 9 Financial Instruments withIFRS 4 Insurance Contracts”
IFRS 9 “Financial Instruments”
Amendments to IFRS 9 and IFRS 7 “Mandatory Effective Date of
IFRS 9 and Transition Disclosures”
IFRS 15 “Revenue from Contracts with Customers”
Amendments to IFRS 15 “Clarifications to IFRS 15 Revenue fromContracts with Customers”
Amendment to IAS 7 “Disclosure Initiative”
Amendments to IAS 12 “Recognition of Deferred Tax Assets for
Unrealized Losses”
Amendments to IAS 40 “Transfers of Investment Property”
IFRIC 22 “Foreign Currency Transactions and Advance
Consideration”

Effective Date
Announced by IASB (Note 1)
Note 2January 1, 2018
January 1, 2018
January 1, 2018
January 1, 2018
January 1, 2018
January 1, 2018
January 1, 2017
January 1, 2017
January 1, 2018
January 1, 2018

Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on
or after their respective effective dates.
Note 2: The amendment to IFRS 12 is retrospectively applied for annual periods beginning on or afterJanuary 1, 2017; the amendment to IAS 28 is retrospectively applied for annual periods
beginning on or after January 1, 2018.

- 13 -

1) IFRS 9 “Financial Instruments”
Classification, measurement and impairment of financial assets
With regard to financial assets, all recognized financial assets that are within the scope of IAS 39“Financial Instruments: Recognition and Measurement” are subsequently measured at amortizedcost or fair value. Under IFRS 9, the requirement for the classification of financial assets is statedbelow.
For the Company’s debt instruments that have contractual cash flows that are solely payments ofprincipal and interest on the principal amount outstanding, their classification and measurement are
as follows:a) For debt instruments, if they are held within a business model whose objective is to collectcontractual cash flows, the financial assets are measured at amortized cost and are assessed for
impairment continuously with any impairment loss recognized in profit or loss. Interest
revenue is recognized in profit or loss using the effective interest method; andb) For debt instruments, if they are held within a business model whose objective is achieved byboth the collecting of contractual cash flows and the selling of financial assets, the financial
assets are measured at fair value through other comprehensive income (FVTOCI) and areassessed for impairment. Interest revenue is recognized in profit or loss using the effective
interest method, and other gains or losses shall be recognized in other comprehensive income,
except for impairment gains or losses and foreign exchange gains and losses. When the debt
instruments are derecognized or reclassified, the cumulative gain or loss previously recognizedin other comprehensive income is reclassified from equity to profit or loss.
Except for above, all other financial assets are measured at fair value through profit or loss.
However, the Company may make an irrevocable election to present subsequent changes in the fairvalue of an equity investment (that is not held for trading) in other comprehensive income, with
only dividend income generally recognized in profit or loss. No subsequent impairment
assessment is required, and the cumulative gain or loss previously recognized in othercomprehensive income cannot be reclassified from equity to profit or loss.
The Company analyzed the facts and circumstances of its financial assets that exist at December 31,
2017 and performed the assessment of the impact of IFRS 9 on the classification and measurementof financial assets. Under IFRS 9:
Unlisted shares measured at cost will be measured at fair value instead.
IFRS 9 requires impairment loss on financial assets to be recognized using the “Expected Credit
Losses Model”. A loss allowance is required for financial assets measured at amortized cost,investments in debt instruments measured at FVTOCI, lease receivables, contract assets arisingfrom IFRS 15 “Revenue from Contracts with Customers”, certain written loan commitments andfinancial guarantee contracts. A loss allowance for 12-month expected credit losses is required fora financial asset if its credit risk has not increased significantly since initial recognition. A loss
allowance for full-lifetime expected credit losses is required for a financial asset if its credit risk has
increased significantly since initial recognition and is not low. However, a loss allowance forfull-lifetime expected credit losses is required for trade receivables that do not constitute a financing
transaction.
For purchased or originated credit-impaired financial assets, the Company takes into account the
expected credit losses on initial recognition in calculating the credit-adjusted effective interest rate.
Subsequently, any changes in expected losses are recognized as a loss allowance with acorresponding gain or loss recognized in profit or loss.

- 14 -

The Company elects not to restate prior reporting periods when applying the requirements for theclassification, measurement and impairment of financial assets under IFRS 9 with the cumulative
effect of the initial application recognized at the date of initial application and will provide thedisclosures related to the classification and the adjustment information upon initial application of
IFRS 9.
The anticipated impact on assets, liabilities and equity of retrospective application of therequirements for the classification, measurement and impairment of financial assets as of January 1,
2018 is set out below:

Impact on Assets and Equity

Carrying
Amount as ofDecember 31,
2017

Adjustments
Arising from
InitialApplication

Adjusted
Carrying
Amount as ofJanuary 1, 2018

$

$

$

December 31, 2017
Noncurrent assets
Financial assets at fair value through othercomprehensive income
Financial assets carried at cost
Investments accounted for using theequity method
Total effect on assets

64,177

107,196(64,177)

107,196-

11,551,369
211,917,992

4,491
47,51011,555,860
211,965,502

1,458,313(107,641)
57,023,237

60
47,45047,5101,458,373(60,191)
57,070,747

EquityUnappropriated retained earnings
Other equity
Total effect on equity
Hedge accounting
The main changes in hedge accounting amended the application requirements for hedge accounting
to better reflect the entity’s risk management activities. Compared with IAS 39, the main changes
include: (1) enhancing types of transactions eligible for hedge accounting, specifically broadening
the risk eligible for hedge accounting of non-financial items; (2) changing the way hedging
derivative instruments are accounted for to reduce profit or loss volatility; and (3) replacing
retrospective effectiveness assessment with the principle of economic relationship between thehedging instrument and the hedged item.
2) IFRS 15 “Revenue from Contracts with Customers” and related amendments
IFRS 15 establishes principles for recognizing revenue that apply to all contracts with customers,
and will supersede IAS 18 “Revenue”, IAS 11 “Construction Contracts” and a number ofrevenue-related interpretations.
When applying IFRS 15, the Company recognizes revenue by applying the following steps:






Identify the contract with the customer;
Identify the performance obligations in the contract;
Determine the transaction price;
Allocate the transaction price to the performance obligations in the contract; andRecognize revenue when the Company satisfies a performance obligation.

- 15 -

In identifying performance obligations, IFRS 15 and the related amendments require that a good orservice is distinct if it is capable of being distinct (for example, the Company regularly sells it
separately) and the promise to transfer it is distinct within the context of the contract (i.e. the natureof the promise in the contract is to transfer each good or service individually rather than to transfer
a combined output).
c. New IFRSs in issue but not yet endorsed and issued into effect by the FSC
Effective Date
Announced by IASB (Note)

New IFRSs
Annual Improvements to IFRSs 2015-2017 Cycle
Amendments to IFRS 9 “Prepayment Features with Negative
Compensation”
Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture”
IFRS 16 “Leases”
IFRS 17 “Insurance Contracts”
Amendments to IAS 28 “Long-term Interests in Associates and Joint
Ventures”
IFRIC 23 “Uncertainty Over Income Tax Treatments”

January 1, 2019
January 1, 2019 (Note 2)
To be determined by IASB
January 1, 2019 (Note 3)
January 1, 2021
January 1, 2019
January 1, 2019

Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on
or after their respective effective dates.
Note 2: The FSC permits the election for early adoption of the amendments starting from 2018.
Note 3: On December 19, 2017, the FSC announced that IFRS 16 will take effect starting fromJanuary 1, 2019.
IFRS 16 “Leases”
IFRS 16 sets out the accounting standards for leases that will supersede IAS 17 and a number of related
interpretations.
Under IFRS 16, if the Company is a lessee, it shall recognize right-of-use assets and lease liabilities for
all leases on the balance sheets except for low-value and short-term leases. The Company may elect toapply the accounting method similar to the accounting for operating leases under IAS 17 to the
low-value and short-term leases. On the statements of comprehensive income, the Company shouldpresent the depreciation expense charged on right-of-use assets separately from the interest expense
accrued on lease liabilities; interest is computed using the effective interest method. On the statementsof cash flows, cash payments for the principal portion of lease liabilities are classified within financing
activities; cash payments for the interest portion are classified within operating activities.
The application of IFRS 16 is not expected to have a material impact on the accounting of the Company
as lessor.
When IFRS 16 becomes effective, the Company may elect to apply this standard either retrospectively
to each prior reporting period presented or retrospectively with the cumulative effect of the initial
application of this standard recognized at the date of initial application.
Except for the above impact, as of the date the financial statements were authorized for issue, theCompany is continuously assessing the possible impact that the application of other standards andinterpretations will have on the Company’s financial position and financial performance, and will
disclose the relevant impact when the assessment is completed.

- 16 -

4. SIGNIFICANT ACCOUNTING POLICIESStatement of Compliance
The financial statements have been prepared in accordance with the Regulations Governing the Preparationof Financial Reports by Securities Issuers and IFRSs as endorsed and issued into effect by the FSC.
Basis of Preparation
The fair value measurements, which are grouped into Levels 1 to 3 based on the degree to which the fairvalue measurement inputs are observable and based on the significance of the inputs to the fair value
measurement in its entirety, are described as follows:a. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
b. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for an
asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); andc. Level 3 inputs are unobservable inputs for an asset or liability.
When preparing these parent company only financial statements, the Company used the equity method toaccount for its investments in subsidiaries, associates and joint ventures. In order for the amounts of the
net profit for the year, other comprehensive income for the year and total equity in the parent company only
financial statements to be the same with the amounts attributable to the owners of the Company in its
consolidated financial statements, adjustments arising from the differences in accounting treatments
between the parent company only basis and the consolidated basis were made to investments accounted forusing the equity method, the share of profit or loss of subsidiaries, associates and joint ventures, the shareof other comprehensive income of subsidiaries, associates and joint ventures and the related equity items, as
appropriate, in these parent company only financial statements.
Current and Noncurrent Assets and Liabilities
Current assets include:a. Assets held primarily for the purpose of trading;b. Assets expected to be realized within 12 months after the reporting period; andc. Cash and cash equivalents unless the asset is restricted from being exchanged or used to settle a liability
for at least 12 months after the reporting period.
Current liabilities include:a. Liabilities held primarily for the purpose of trading;b. Liabilities due to be settled within 12 months after the reporting period; andc. Liabilities for which the Group does not have an unconditional right to defer settlement for at least 12
months after the reporting period.
Assets and liabilities that are not classified as current are classified as noncurrent.

- 17 -

Foreign Currencies
In preparing the financial statements of the Company, transactions in currencies other than the Company’sfunctional currency (i.e. foreign currencies) are recognized at the rates of exchange prevailing at the datesof the transactions. At the end of each reporting period, monetary items denominated in foreign currencies
are retranslated at the rates prevailing at that date. Non-monetary items that are measured at historical costin a foreign currency are not retranslated. Non-monetary items measured at fair value that are
denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value wasdetermined.
Exchange differences on monetary items arising from settlement or translation are recognized in profit orloss in the period in which they arise except for:a. Exchange differences on foreign currency borrowings relating to assets under construction for future
productive use, which are included in the cost of those assets when they are regarded as an adjustment
to interest costs on those foreign currency borrowings;
b. Exchange differences on transactions entered into in order to hedge certain foreign currency risks.
Exchange differences arising on the retranslation of non-monetary items are included in profit or loss forthe period except for exchange differences arising from the retranslation of non-monetary items in respectof which gains and losses are recognized directly in other comprehensive income, in which case, theexchange differences are also recognized directly in other comprehensive income.
For the purposes of presenting financial statements, the assets and liabilities of the Company’s foreign
operations are translated into New Taiwan dollars using exchange rates prevailing at the end of eachreporting period. Income and expense items are translated at the average exchange rates for the period.
Exchange differences arising are recognized in other comprehensive income (attributed to the owners of theCompany and non-controlling interests as appropriate).
On the disposal of a foreign operation, all of the exchange differences accumulated in equity in respect ofthat operation attributable to the owners of the Company are reclassified to profit or loss.
Cash Equivalents
Cash equivalents, consisting of commercial paper and time deposits, are highly liquid financial instrumentswith maturities of three months or less when acquired and with carrying amounts that approximate their fairvalues.
Inventories
Inventories are primarily expendable and nonexpendable parts and materials, supplies used in operations
and items for in-flight sale and are stated at the lower of cost or net realizable value. The costs ofinventories sold or consumed are determined using the weighted-average method.
Noncurrent Assets Held for Sale
Noncurrent assets are classified as held-for-sale if their carrying amount will be recovered principally
through a sale transaction rather than through continuing use. This condition is regarded as met only when
the sale is highly probable and the noncurrent asset is available for immediate sale in its present condition.
To meet the criteria for the sale being highly probable, the appropriate level of management must be
committed to the sale, which should be expected to qualify for recognition as a completed sale within one
year from the date of classification.
Noncurrent assets classified as held-for-sale are measured at the lower of their previous carrying amountand fair value less costs to sell. Recognition of depreciation of those assets would cease.
- 18 -

Investments Accounted for by the Equity Method
Investments in subsidiaries, associates and jointly controlled entities are accounted for by the equity
method.
a. Investment in subsidiaries
Subsidiaries (including special purpose entities) are the entities controlled by the Company.
Under the equity method, the investment is initially recognized at cost and the carrying amount isincreased or decreased to recognize the Company’s share of the profit or loss and other comprehensive
income of the subsidiary after the date of acquisition. Besides, the Company also recognizes theCompany’s share of the change in other equity of the subsidiary.
Changes in the Company’s ownership interests in subsidiaries that do not result in the Company’s lossof control over the subsidiaries are accounted for as equity transactions. Any difference between the
carrying amounts of the investment and the fair value of the consideration paid or received isrecognized directly in equity.
When the Company’s share of losses of a subsidiary equals or exceeds its interest in that subsidiary(which includes any carrying amount of the investment in subsidiary accounted for by the equity
method and long-term interests that, in substance, form part of the Company’s net investment in thesubsidiary), the Company continues recognizing its share of further losses.
The acquisition cost in excess of the acquisition-date fair value of the identifiable net assets acquired isrecognized as goodwill. Goodwill is not amortized. The acquisition-date fair value of the net
identifiable assets acquired in excess of the acquisition cost is recognized immediately in profit or loss.
When the Company ceases to have control over a subsidiary, any retained investment is measured atfair value at that date and the difference between the previous carrying amount of the subsidiary
attributable to the retained interest and its fair value is included in the determination of the gain or loss.
Furthermore, the Company accounts for all amounts previously recognized in other comprehensive
income in relation to that subsidiary on the same basis as would be required if the Company had
directly disposed of the related assets or liabilities.
Profits and losses from downstream transactions with a subsidiary are eliminated in full. Profits andlosses from upstream with a subsidiary and side stream transactions between subsidiaries are recognizedin the Company’s financial statements only to the extent of interests in the subsidiary that are notrelated to the Company.
b. Investments in associates and joint ventures
An associate is an entity over which the Company has significant influence and that is neither asubsidiary nor an interest in a joint venture. A joint venture is a joint arrangement whereby theCompany and other parties that have joint control of the arrangement and the rights to the net assets of
the arrangement.
The Company uses the equity method to account for its investments in associates and joint ventures.
Under the equity method, an investment in an associate and jointly controlled entity is initiallyrecognized at cost and adjusted thereafter to recognize the Company’s share of the profit or loss andother comprehensive income of the associate and jointly ventures. The Company also recognizes thechanges in the Company’s share of equity of associates and jointly ventures attributable to theCompany.

- 19 -

When the Company subscribes for additional new shares of an associate and joint ventures at apercentage different from its existing ownership percentage, the resulting carrying amount of theinvestment differs from the amount of the Company’s proportionate interest in the associate and joint
ventures. The Company records such a difference as an adjustment to investments with thecorresponding amount charged or credited to capital surplus. If the Company’s ownership interest is
reduced due to the subscription of additional new shares of the associate and jointly controlled entity,
the proportionate amount of the gains or losses previously recognized in other comprehensive income inrelation to that associate and joint ventures is reclassified to profit or loss on the same basis as would be
required had the investee directly disposed of the related assets or liabilities. When the adjustment
should be debited to capital surplus, but the capital surplus recognized from investments accounted forusing the equity method is insufficient, the shortage is debited to retained earnings.
When the Company’s share of losses of an associate and joint ventures equals or exceeds its interest inthat associate and joint ventures which includes any carrying amount of the investment accounted forusing the equity method and long-term interests that, in substance, form part of the Company’s net
investment in the associate and joint ventures entity, the Company discontinues recognizing its share offurther losses. Additional losses and liabilities are recognized only to the extent that the Company has
incurred legal obligations, or constructive obligations, or made payments on behalf of that associate andjoint ventures.
Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable
assets and liabilities of an associate and joint ventures recognized at the date of acquisition isrecognized as goodwill, which is included within the carrying amount of the investment and is notamortized. Any excess of the Company’s share of the net fair value of the identifiable assets andliabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss.
The entire carrying amount of the investment (including goodwill) is tested for impairment as a single
asset by comparing its recoverable amount with its carrying amount. Any impairment loss recognized
forms part of the carrying amount of the investment. Any reversal of that impairment loss isrecognized to the extent that the recoverable amount of the investment subsequently increases.
The Company discontinues the use of the equity method from the date on which it ceases to havesignificant influence and joint control. Any retained investment is measured at fair value at that date
and the fair value is regarded as its fair value on initial recognition as a financial asset. The difference
between the previous carrying amount of the associate and the jointly controlled entity attributable to
the retained interest and its fair value is included in the determination of the gain or loss on disposal of
the associate and the jointly controlled entity. The Company accounts for all amounts previously
recognized in other comprehensive income in relation to that associate and the jointly controlled entity
on the same basis as would be required if that associate had directly disposed of the related assets or
liabilities.
When the Company transacts with its associate and joint ventures, profits and losses resulting from thetransactions with the associate are recognized in the Company’ financial statements only to the extent ofinterests in the associate and the jointly controlled entity that are not related to the Company.
Property, Plant and Equipment
Property, plant and equipment are tangible items that are held for use in the production or supply of goods
or services, for rental to others, or for administrative purposes and are expected to be used for more than
one period. The cost of an item of property, plant and equipment shall be recognized as an asset if, andonly if, it is probable that future economic benefits associated with the item will flow to the Company; andthe cost of the item can be measured reliably. Property, plant and equipment are stated at cost lessrecognized accumulated depreciation and recognized accumulated impairment loss.
Freehold land is not depreciated.

- 20 -

Depreciation is recognized using the straight-line method. Each significant part is depreciated separately.
The estimated useful lives, residual values and depreciation methods are reviewed at the end of eachreporting period, with the effects of any changes in the estimates accounted for on a prospective basis.
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned
assets. Assets are depreciated over the shorter of the lease term and their useful lives using thestraight-line method.
Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment isdetermined as the difference between the sales proceeds and the carrying amount of the asset and isrecognized in profit or loss.
Investment Properties
Investment properties are properties held to earn rentals or for capital appreciation. Investment properties
also include land held for a currently undetermined future use.
Investment properties are measured initially at cost, including transaction costs. Subsequent to initialrecognition, investment properties are measured at cost less accumulated depreciation and accumulated
impairment loss.
Any gain or loss arising on the derecognition of investment properties is calculated as the difference
between the net disposal proceeds and the carrying amount of the asset and is included in profit or loss inthe period in which the property is derecognized.
Intangible Assets
Intangible assets with finite useful lives that are acquired separately are initially measured at cost andsubsequently measured at cost less accumulated amortization and accumulated impairment loss.
Amortization is recognized on a straight-line basis. The estimated useful lifives, residual values, andamortization methods are reviewed at the end of each reporting period, with the effects of any changes inthe estimates being accounted for on a prospective basis. The residual value of an intangible asset with afinite useful life shall be assumed to be zero unless the Company expects to dispose of the intangible asset
before the end of its economic life.
Impairment of Tangible and Intangible Assets Other Than Goodwill
At the end of each reporting period, the Company reviews the carrying amounts of its tangible andintangible assets, excluding goodwill, to determine whether there is any indication that those assets havesuffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimatedin order to determine the extent of the impairment loss. When it is not possible to estimate the recoverable
amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit towhich the asset belongs. Corporate assets are allocated to the individual cash-generating units on areasonable and consistent basis; otherwise, corporate assets are allocated to the smallest Company of
cash-generating units on a reasonable and consistent allocation basis.
Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for
impairment at least annually, and whenever there is an indication that the asset may be impaired.
The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in
use, the Company uses the estimated cash flows discounted by the future pre-tax discount rate, and thediscount rate reflects current the market time value of money and the specific risks to the asset for estimatedfuture cash flows not yet adjusting to the market.
If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying
amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount.
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When an impairment loss subsequently is reversed, the carrying amount of the asset or cash-generating unit
is increased to the revised estimate of its recoverable amount, but only to the extent of the carrying amountthat would have been determined had no impairment loss been recognized for the asset or cash-generating
unit in prior years. A reversal of an impairment loss is recognized in profit or loss.
Financial Instruments
Financial assets and financial liabilities are recognized when the Company becomes a party to thecontractual provisions of the instruments.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are
directly attributable to the acquisition or issue of financial assets and financial liabilities (other thanfinancial assets and financial liabilities at fair value through profit or loss) are added to or deducted fromthe fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.
Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fairvalue through profit or loss are recognized immediately in profit or loss.
a. Financial assets
All regular way purchases or sales of financial assets are recognized and derecognized on a trade datebasis. All regular way purchases or sales of financial assets means buy or sell financial assets in the
period made by regulation or market convention.
1) Measurement category
Financial assets may be classified into the following specified categories: Financial assets at fairvalue through profit or loss, held-to maturity investments, available-for-sale financial assets andloans and receivables. The classification of financial assets depends on their nature and the
purpose identified at their original recognition. The Company’s financial assets consist of thefollowing categories: Financial assets at fair value through profit or loss, available-for-salefinancial assets and loans and receivables.
a) Financial assets at fair value through profit or loss
Financial assets are classified as at fair value through profit or loss when the financial asset iseither held for trading or it is designated as at fair value through profit or loss.
Financial assets at fair value through profit or loss are stated at fair value, with any gains orlosses arising on remeasurement recognized in profit or loss. The net gain or loss recognizedin profit or loss incorporates any dividend or interest earned on the financial asset. Fair value
is determined in the manner described in Note 30.
b) Loans and receivables
Loans and receivables (including trade receivables, cash and cash equivalents, debt investmentswith no active market, and other receivables are measured using the effective interest method atamortized cost less any impairment, except for short-term receivables when the effect of
discounting is immaterial.

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2) Impairment of financial assets
Financial assets, other than those at fair value through profit or loss and available-for-sale financial
assets, are assessed for indicators of impairment at the end of each reporting period. Financial
assets are considered to be impaired when there is objective evidence that, as a result of one or more
events that occurred after the initial recognition of the financial asset, the estimated future cash
flows of the investment have been affected.
For financial assets measured at amortized cost, such as trade receivables and other receivables,
assets are assessed for impairment on a collective basis even if they were assessed not to be
impaired individually. Objective evidence of impairment for a portfolio of receivables could
include the Group’s past experience with collecting payments, an increase in the number of delayed
payments in the portfolio past the average credit period of 60 days, as well as observable changes innational or local economic conditions that correlate with defaults on receivables.
For financial assets measured at amortized cost, the amount of the impairment loss recognized is thedifference between such an asset’s carrying amount and the present value of estimated future cash
flows, discounted at the financial asset’s original effective interest rate.
For financial assets measured at amortized cost, if, in a subsequent period, the amount of theimpairment loss decreases and the decrease can be related objectively to an event occurring after the
impairment was recognized, the previously recognized impairment loss is reversed through profit orloss to the extent that the carrying amount of the investment (at the date the impairment is reversed)
does not exceed what the amortized cost would have been had the impairment not been recognized.
For available-for-sale equity investments, a significant or prolonged decline in the fair value of the
security below its cost is considered to be objective evidence of impairment.
For all other financial assets, objective evidence of impairment could include the following:a) Significant financial difficulty of the issuer or counterparty;b) Breach of contract, such as a default or delinquency in interest or principal payments;c) It becoming probable that the borrower will enter bankruptcy or financial re-organization; ord) The disappearance of an active market for that financial asset because of financial difficulties.
When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses
previously recognized in other comprehensive income are reclassified to profit or loss in the period.
In respect of available-for-sale equity securities, impairment loss previously recognized in profit orloss is not reversed through profit or loss. Any increase in fair value subsequent to an impairment
loss is recognized in other comprehensive income. In respect of available-for-sale debt securities,
impairment loss is subsequently reversed through profit or loss if an increase in the fair value of theinvestment can be objectively related to an event occurring after the recognition of the impairment
loss.
For financial assets that are carried at cost, the amount of the impairment loss is measured as thedifference between such an asset’s carrying amount and the present value of the estimated future
cash flows discounted at the current market rate of return for a similar financial asset. Such
impairment loss will not be reversed in subsequent periods.

- 23 -

The carrying amount of a financial asset is reduced by the impairment loss directly for all financial
assets with the exception of trade receivables and other receivables, where the carrying amount isreduced through the use of an allowance account. When a trade receivable and other receivables
are considered uncollectable, it is written off against the allowance account. Subsequent
recoveries of amounts previously written off are credited against the allowance account. Changes
in the carrying amount of the allowance account are recognized in profit or loss except foruncollectable trade receivables and other receivables that are written off against the allowanceaccount.
3) Derecognition of financial assets
The Company derecognizes a financial asset only when the contractual rights to the cash flows fromthe asset expire, or when it transfers the financial asset and substantially all the risks and rewards ofownership of the asset to another party.
On derecognition of a financial asset in its entirety, the difference between the asset’s carrying
amount and the sum of the consideration received and receivable and the cumulative gain or loss
that had been recognized in other comprehensive income is recognized in profit or loss.
b. Equity instruments
Debt and equity instruments issued by the Company are classified as either financial liabilities or as
equity in accordance with the substance of the contractual arrangements and the definitions of afinancial liability and an equity instrument.
An equity instrument is the residual interest in any contract after all liabilities are deducted from theCompany’s assets. Equity instruments issued by the Company are recognized at the proceeds received,
net of direct issue costs.
The repurchase of the Company’s own equity instruments is recognized in and deducted directly fromequity. No gain or loss is recognized in profit or loss on the purchase, sale, issuance or cancellation of
the Company’s own equity instruments.
c. Financial liabilities
1) Subsequent measurement
Except for derivative financial instruments, all the financial liabilities are measured at amortizedcost using the effective interest method.
2) Derecognition of financial liabilities
The Company derecognizes financial liabilities only when the obligation is discharged, canceled or
expired. The difference between the carrying amount of such a financial liability derecognized
and the consideration paid, including any non-cash assets transferred or liabilities assumed, isrecognized in profit or loss.
d. Convertible bonds
The component parts of compound instruments (i.e. convertible bonds) issued by the Company areclassified separately as financial liabilities and equity in accordance with the substance of thecontractual arrangements and the definitions of a financial liability and an equity instrument.

- 24 -

On initial recognition, the fair value of the liability component is estimated using the prevailing market
interest rate for similar non-convertible instruments. This amount is recorded as a liability on anamortized cost basis using the effective interest method until extinguished upon conversion or the
instrument’s maturity date. Any embedded derivative liability is measured at fair value.
The conversion option classified as equity is determined by deducting the amount of the liability
component from the fair value of the compound instrument as a whole. This is recognized andincluded in equity, net of income tax effects, and is not subsequently remeasured. In addition, theconversion option classified as equity will remain in equity until the conversion option is exercised, inwhich case, the balance recognized in equity will be transferred to capital surplus - share premium.
When the conversion option remains unexercised at maturity, the balance recognized in equity will betransferred to capital surplus - share premiums.
Transaction costs that relate to the issue of the convertible notes are allocated to the liability and equity
components in proportion to the allocation of the gross proceeds. Transaction costs relating to theequity component are recognized directly in equity. Transaction costs relating to the liability
component are included in the carrying amount of the liability component.
e. Derivative financial instruments
The Company enters into a variety of derivative financial instruments to manage its exposure to interest
rate, foreign exchange rate and fuel price risks, including foreign exchange forward contracts, interest
rate swaps, currency options and fuel swaps.
Derivatives are initially recognized at fair value at the date the derivative contracts are entered into andare subsequently remeasured to their fair value at the end of each reporting period. The resulting gainor loss is recognized in profit or loss immediately unless the derivative is designated and effective as ahedging instrument, in which event, the timing of the recognition in profit or loss depends on the natureof the hedging relationship. When the fair value of a derivative financial instrument is positive, thederivative is recognized as a financial asset; when the fair value of a derivative financial instrument isnegative, the derivative is recognized as a financial liability.
Hedge Accounting
The Company enters into some derivative transactions that aim to manage interest rates, foreign exchange
rates, fuel prices, and other factors affecting gains or losses on assets and liabilities. The hedging
transactions are defined as cash flow hedges. When entering into hedging transactions, the Company has
prepared official documents that describe the hedging relationship between hedging instruments and items
which have been hedged, the objective of risk management, the hedging strategy, and the way to evaluate
the effectiveness of the hedging instrument.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow
hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion isrecognized immediately in profit or loss.
The associated gains or losses that were recognized in other comprehensive income are reclassified fromequity to profit or loss as a reclassification adjustment in the line item relating to the hedged item in thesame period as when the hedged item affects profit or loss. If a hedge of a forecasted transaction
subsequently results in the recognition of a non-financial asset or a non-financial liability, the associatedgains and losses that were recognized in other comprehensive income are removed from equity and areincluded in the initial cost of the non-financial asset or non-financial liability.

- 25 -

Hedge accounting is discontinued prospectively when the Company revokes the designated hedging
relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when it nolonger meets the criteria for hedge accounting. The cumulative gain or loss on the hedging instrument thathas been previously recognized in other comprehensive income from the period when the hedge was
effective remains separately in equity until the forecasted transaction occurs. When a forecasted
transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately
in profit or loss.
Provisions
The Company recognizes provisions when the Company has a present obligation (legal or constructive)
arising from past events (legal or constructive obligation), payment for the obligation is probable, and theexpenditure for settling the obligation can be estimated reliably.
The amount recognized as a provision is the best estimate of the expenditure required to settle the present
obligation, taking into account the risks and uncertainties surrounding the obligation as of the balance sheet
date. When a provision is measured using the cash flows estimated to settle the present obligation, its
carrying amount is the present value of those cash flows. When the aircraft lease contracts expire and will
be returned to lessor, should assess if existing obligations exist and required to recognize as provision whensigning of the lease contract.
Revenue Recognition
a. Rendering of services
Passenger fares and cargo revenue are recognized when transport service is provided. The value of
unused passenger tickets is recognized as “advance tickets - sales”.
b. Dividend and interest income
Dividend income from investments is recognized when a shareholder’s right to receive payment has
been established provided that it is probable that the economic benefits will flow to the Company andthe amount of income can be measured reliably.
Interest income from a financial asset is recognized when it is probable that the economic benefits willflow to the Company and the amount of income can be measured reliably. Interest income is accrued
on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks andrewards of ownership to the lessee. All other leases are classified as operating leases.
a. Financial leases
The Company as lessee
Assets held under finance leases are initially recognized as assets of the Company at the lower of theirfair value at the inception of the lease or the present value of the minimum lease payments. The
corresponding liability to the lessee is included in the balance sheets as a finance lease obligation.

- 26 -

Minimum lease payments are apportioned between finance expenses and reductions of the leaseobligation so as to achieve a constant rate of interest on the remaining balance of the liability. Financeexpenses are recognized immediately in profit or loss, unless they are directly attributable to qualifying
assets, in which case, they are capitalized in accordance with the Company’s general policy on
borrowing costs. Contingent rentals are recognized as expenses in the periods in which they are
incurred.
b. Sales and leasebacks
For a sale and leaseback transaction, if it meets the condition whereby all the risks and rewards ofownership of the leased asset are essentially transferred to the lessee, the sale and leaseback transaction
is classified as a finance lease. If part of the significant risks and rewards of ownership of the leased
asset remain with the lessor (i.e. the buyer), the sale and leaseback transaction is classified as an
operating lease.
1) Financial leases
This transaction does not actually dispose of the assets. The accounting treatment used treats thetransaction as if it did not occur, and the assets are continuously recognized at the book value of theasset before sale.
2) Operating leases
If the selling price is equal to the fair value, the transaction gain or loss should be recognized
immediately. If the selling price is above fair value, the difference between the fair value and thebook value of the gain or loss should be recognized immediately; only the part of the selling pricewhich is above fair value shall be deferred and amortized over the period of the lease.
c. Operating lease1) The Company as lessor
Rental income from operating leases is recognized on a straight-line basis over the term of therelevant lease unless another systematic basis is representative of the time pattern of the lessee’s
benefit from the use of the leased asset.
2) The Company as lessee
Operating lease payments are recognized as expenses on a straight-line basis over the lease term,
except where another systematic basis is more representative of the time pattern in which economic
benefits from the leased asset are consumed. Contingent rentals arising under operating leases arerecognized as expenses in the period in which they are incurred.
In the event that lease incentives are received when entering into operating leases, such incentives
are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction ofrental expense on a straight-line basis, except where another systematic basis is more representativeof the time pattern in which economic benefits from the leased asset are consumed.
Employee Benefits
a. Short-term employee benefits
Liabilities recognized in respect of short-term employee benefits are measured at the undiscounted
amount of the benefits expected to be paid in exchange for the related services.

- 27 -

b. Retirement benefits
Payments to the defined contribution retirement benefit plan are recognized as expenses whenemployees have rendered services entitling them to the contributions.
Defined benefit costs (including service cost, net interest and remeasurement) under the defined
contribution retirement benefit plan are determined using the projected unit credit method. Service
cost (including current service cost and past service cost) and net interest on the net defined benefit
liabilities (assets) are recognized as employee benefits expense in the period in which they occur.
Remeasurement, comprising actuarial gains and losses and the return on plan assets (excluding interest),
is recognized in other comprehensive income in the period in which it occurs. Remeasurement
recognized in other comprehensive income is reflected immediately in retained earnings and will not bereclassified to profit or loss.
Net defined benefit liabilities (assets) represent the actual deficit in the Company’s defined benefit
plans.
Borrowing Costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets(assets which are substantially ready for their intended use or sale through a fairly long period) are added tothe cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on
qualifying assets is deducted from the borrowing costs eligible for capitalization.
Other than that which is stated above, all other borrowing costs are recognized in profit or loss in the period
in which they are incurred.
Frequent Flyer Programs
The Company has a “Dynasty Flyer Program” through which program members can convert accumulated
mileage to a cabin upgrade, free tickets and other member reward.
A portion of passenger revenue attributable to the rewards for the frequent flyer program is deferred. The
entity should recognize this deferred revenue as revenue only when the entity has fulfilled its obligations on
the granting of rewards or when the period for converting the mileage to rewards has expired.
Share-based Payment Arrangements
Equity-settled share-based payments to employees are measured at the fair value of the equity instruments
at the grant date.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on astraight-line basis over the vesting period, based on the Group’s estimate of equity instrument that will
eventually vest, with a corresponding increase in capital surplus - employee share options. The fair value
determined at the grant date of the equity-settled share-based payments is recognized as an expense in fullat the grant date when the granted share options vest immediately.
Taxation
Income tax expense represents the sum of the current tax and deferred tax.

- 28 -

a. Current tax
The current tax liabilities are based on current taxable profit. Since part of the income and expenses
are taxable or deductible in other periods, or in accordance with the relevant tax laws are taxable ordeductible, current taxable profit differs from net profit reported in the statements of comprehensive
income.
The Company’s current tax liabilities are calculated by the tax rate was legislated or substantiallylegislated at the balance sheet date.
According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided foras income tax in the year the shareholders approve the retention of these earnings.
Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.
b. Deferred tax
Deferred tax is recognized on temporary differences between the carrying amounts of assets andliabilities in the financial statements and the corresponding tax bases used in the computation of taxable
profit. Deferred tax liabilities are generally recognized for all taxable temporary differences.
Deferred tax assets are generally recognized for all deductible temporary differences, unused loss
carryforwards and unused tax credits for purchases of machinery, equipment and technology, researchand development expenditures, and personnel training expenditures to the extent that it is probable thattaxable profit will be available against which those deductible temporary differences can be utilized.
Deferred tax liabilities are recognized for taxable temporary differences associated with investments in
subsidiaries and associates and interests in joint ventures, except where the Company is able to control
the reversal of the temporary difference and it is probable that the temporary difference will not reversein the foreseeable future. Deferred tax assets arising from deductible temporary differences associatedwith such investments and interests are only recognized to the extent that it is probable that there will be
sufficient taxable profit against which to utilize the benefits of the temporary differences and they are
expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced
to the extent that it is no longer probable that sufficient taxable profit will be available to allow all orpart of the assets to be recovered. A previously unrecognized deferred tax asset is also reviewed at theend of each reporting period and recognized to the extent that it has become probable that future taxable
profit will allow the deferred tax asset to be recovered.
Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period inwhich the liabilities are settled or the assets are realized, based on tax rates (and tax laws) that havebeen enacted or substantively enacted by the end of the reporting period. The measurement ofdeferred tax liabilities and assets reflects the tax consequences that would follow from the manner inwhich the Company expects, at the end of the reporting period, to recover or settle the carrying amountof its assets and liabilities.
c. Current and deferred taxes for the year
Current and deferred taxes are recognized in profit or loss, except when they relate to items that arerecognized in other comprehensive income or directly in equity, in which case, the current and deferredtaxes are also recognized in other comprehensive income or directly in equity, respectively.
Maintenance and Overhaul Costs
Routine maintenance costs are recognized in profit or loss in the period in which they are incurred.

- 29 -

The overhaul costs of an owned or leased aircraft that meet the criteria for fixed asset capitalization andengines as replacement parts for aircraft and engines are capitalized and amortized over the expected annual
overhaul cycle using the straight-line depreciation method.

5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATIONUNCERTAINTY
In the application of the Company’s accounting policies shown on Note 4, management is required to makejudgments, estimates and assumptions about the carrying amounts of assets and liabilities that are notreadily apparent from other sources. The estimates and associated assumptions are based on historicalexperience and other factors that are considered relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognized in the period in which the estimates are revised if the revisions affect only that
period or in the period of the revisions and future periods if the revisions affect both current and future
periods.
Key Sources of Estimation Uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the end of thereporting period that have a significant risk of causing a material adjustment to the carrying amounts ofassets and liabilities within the next financial year are discussed below.
Income Taxes
The Company is subject to income taxes in numerous jurisdictions. Where the final tax payable differsfrom the amounts that were initially recognized, these differences will affect the income tax and deferred
tax provisions in the period in which the differences are determined. Deferred tax assets are recognizedfor deductible temporary differences to the extent that it is probable that taxable profit will be available
against which the deductible temporary differences can be used. When evaluating the realizability of adeferred tax asset, management uses significant accounting judgments and estimates, including expected
future revenue growth and profit margins, income tax exemption periods, the use of tax credits, tax
planning and certain assumptions. Changes in the industry environment and regulations will result in amaterial adjustment of the deferred tax asset.
Estimated Impairment of Trade Receivables
The Company assesses the receivables portfolio monthly for impairment. Impairment evidence may
include observable changes in debtors’ solvency and national or local economic conditions that correlatewith defaults on receivables settlement. Management’s analysis of expected cash flows is based on pastexperience of loss on assets with similar credit risk characteristics. The Company periodically reviews themethods of determining, and assumptions on, the expected amount and timing of cash flows to reduce thedifference between the estimated and the actual losses.
Fair Value of Derivatives and Other Financial Instruments
The Company’s management uses its judgment in selecting an appropriate valuation technique for financial
instruments with no quoted market prices in an active market. Valuation techniques commonly used bymarket practitioners are applied. For derivative financial instruments, assumptions are based on quoted
market rates adjusted for specific features of the instruments. Other financial instruments are valued using
a discounted cash flow analysis based on assumptions supported, where possible, by observable market
prices, interest rates or oil prices (if applicable). The chosen valuation techniques and assumptions used
may affect the fair value of financial instruments.

- 30 -

Depreciation of Property, Plant and Equipment - Flight Equipment
Flight equipment is depreciated on a straight-line basis at rates that can be used to write down their cost to
their estimated residual values at the end of their useful lives. The estimates of the useful lives andresidual values of the flight equipment are made by the Company on the basis of past experience and fleet
operation performance in the industry. Due to changes in the fleet plan, the board of directors of theCompany has decided to change the useful lives of four 747-400 (GE) from 20 to 16-17 years since January
1, 2018 in order to meet the economic benefits and number of years of consumption. It is estimated thatthe depreciation expense will increase by approximately NT$770 million annually.
Defined Benefit Obligations
The present value of defined benefit obligations at the end of the reporting period are calculated using
actuarial assumptions. Those assumptions, which are based on management’s judgment and estimates,
comprise the discount rate and expected return on plan assets. Changes in actuarial assumptions may havea material impact on the amount of defined benefit obligations.
Maintenance Reserve for Operating Lease Aircrafts
Maintenance reserve is based on the requirement under lease contracts to reflect maintenance costs that may
arise on lease expirations. Estimation of this reserve is based on the past maintenance experience with thesame or similar type of aircraft; incurred overhaul costs; and historical operating performance data.
Changes in judgment or estimations may have a material impact on the amount of maintenance reserve.
Frequent Flyer Programs
As stated in Note 4, “Frequent Flyer Programs”, a portion of passenger revenue attributable to the awardingof frequent flyer benefits is deferred until the awards are given out. The deferment of the revenue isestimated on the basis of historical trends of breakage and redemption, which is then used to project the
expected claiming of these benefits. Changes in fair value per mileage or the redemption rate may have amaterial impact on deferred revenue.
Impairment of Flight Equipment
The impairment of flight equipment was based on the recoverable amount of those assets, which is thehigher of fair value less costs to sell or value-in-use of those assets. Any changes in the market price or
future cash flows will affect the recoverable amount of those assets and may lead to the recognition of
additional or reversal of impairment losses.
Impairment of Noncurrent Assets Held for Sale
When the carrying amount of noncurrent assets held for sale is lower than fair value, the difference between
the carrying amount and fair value is recognized as impairment loss, and the fair value was determinedbased on the quote of potential buyers, the market price of similar assets, etc.

- 31 -

6. CASH AND CASH EQUIVALENTS
December 31
2017Cash on hand and revolving funds
Checking accounts and demand deposits
Cash equivalents
Time deposits with original maturities of less than three months
Repurchase agreements collateralized by bonds

$

2016

46,287
8,284,609$

34,1297,208,550

3,098,063
5,134,600

3,078,150
9,413,761$ 16,563,559$ 19,734,590

The market rate intervals of cash in banks and cash equivalents at the end of the reporting period were as
follows:
December 31

Bank balanceTime deposits with original maturities of less than three months
Repurchase agreements collateralized by bonds

2017

2016

0%-2%
0.59%-4.2%
0.38%-2.2%

0.08%-2%
1.3%-12.9%
0.42%-1.40%

7. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (FVTPL)
December 31
2017

2016

Financial assets held for trading - current
Derivative financial instruments (not under hedge accounting)Foreign exchange forward contracts

$

-

$

1,200

$

8,655
926

$

-

$

9,581

$

-

Financial liabilities held for trading
Derivative financial instruments (not under hedge accounting)Current
Noncurrent

At the end of the reporting period, outstanding foreign exchange forward contracts not under hedge
accounting were as follows:
Notional Amount(In Thousands)

Currency

Maturity Date

NTD/USD

2018.01.13-2019.01.31

NTD194,030/USD6,500

NTD/USD2017.01.26

NTD32,258/USD1,000

December 31, 2017
Buy forward contracts
December 31, 2016
Buy forward contracts- 32 -

8. DERIVATIVE FINANCIAL INSTRUMENTS FOR HEDGING
December 31
2017

2016

Derivative financial assets under hedge accounting
Cash flow hedges
Foreign exchange forward contracts
Current
Noncurrent$

293$ 54,671$

293-$ 51,403
3,268

$

293

$ 54,671$

84,633

Derivative financial liabilities under hedge accounting
Cash flow hedges
Interest rate swaps
Foreign exchange forward contracts

Current
Noncurrent

$

3,855
19,774$ 84,633$ 23,629$ 77,639
6,994$ 20,854
2,775$ 84,633$ 23,629

The fair value of each derivative contract is determined using quotes from financial institutions.
a. Interest rate swaps
The Company entered into interest rate swap contracts to mitigate the risk of changes in interest rates on
the cash flow exposure related to the outstanding floating rate debt. All swapped fixed interest rate
swap out the floating rate interest rate swap contracts are designated as cash flow hedges.
The outstanding interest rate swap contracts at the end of the reporting period were as follows:

Notional Amount(In Thousands)

Maturity Date

Range ofInterest Rates
Paid

Range of Interest Rates
Received2017.03.09-2017.06.22

1.01%-1.14%

TAIBOR rate

December 31, 2016
NT$ 2,500,000

The interest rate swaps settle on a quarterly basis.
fixed and floating interest rates on a net basis.

The Company will settle the difference between theb. Foreign exchange forward contracts
The Company entered into foreign exchange forward contracts to minimize the risk of changes inforeign currency rates on the cash flow exposure related to fuel payments and aircraft payments, which
will be paid in U.S. dollars.

- 33 -

The outstanding foreign exchange forward contracts at the end of the reporting period were as follows:

Currency

Maturity Date

Notional Amount(In Thousands)

NTD/USD

2018.01.16-2019.06.21

NTD6,649,254/USD222,750

NTD/USD2017.01.13-2018.10.25

NTD5,019,355/USD155,600

December 31, 2017
Buy forward contracts
December 31, 2016
Buy forward contracts

Gains and losses on hedging instruments reclassified from equity to profit or loss were included in thefollowing line items in the statements of comprehensive income:For the Year Ended December 31
2017
2016
Increase in operating costs
Increase in finance costs
Other foreign exchange losses$ (52,034)(2,814)(11,654)$ (345,675)(10,390)(71,630)$ (66,502)$ (427,695)

The amount of gains and losses on hedging instruments for the year ended 2017 and 2016 reclassified
from profit or loss to prepayments for equipment was $100,367 thousand and $154,970 thousand,respectively.

9. FINANCIAL ASSETS CARRIED AT COST
December 31
2017
2016
Carrying% ofCarrying% ofAmountOwnership
AmountOwnership
Unlisted common shares
Everest Investment Holdings Ltd.
(AH)
Jardine Air Terminal Services
Chung Hwa Express Co.

$

Unlisted preference shares
Everest Investment Holdings Ltd.
(AH)

Classified according to financial asset
measurement categories
Available-for-sale financial assets

52,704
11,00063,704

14
15
11

473

-

$

52,70456,023
11,000119,727

14
15
11

473

-

$

64,177$ 120,200$

64,177$ 120,200- 34 -

On the reporting date, the above unlisted share investments held by the Company were measured at cost
after deducting impairment losses because their ranges of reasonable fair value estimates were significant
and unable to be reasonably evaluated. Thus, the management considered their fair values unable to bemeasured.

10. NOTES RECEIVABLE AND ACCOUNTS RECEIVABLE
December 31
2017$

Notes receivable2016

361,910$522,523

Accounts receivable
Accounts receivable
Less: Allowance for impairment loss

7,825,667(142,637)
7,683,030

7,450,185(147,204)
7,302,981$ 8,044,940$ 7,825,504

The average credit period was 7 to 45 days. In determining the recoverability of an account receivable,
the Company considered any change in the credit quality of the account receivable since the date credit was
initially granted to the end of the reporting period, and the allowance for impairment loss was based on theestimated irrecoverable amounts determined by reference to the Company’s past default experience with therespective counterparties and analyses of their current financial positions.
Movements in the allowance for impairment loss recognized on notes receivable and accounts receivable
were as follow:
For the Year Ended December 31
2017
2016
Beginning balance
Impairment loss recognized on receivables
Amounts written off during current period$ 147,204
50,000(54,567)$

99,78849,878(2,462)Ending Balance$ 142,637$ 147,204

11. INVENTORIES
December 31

Aircraft spare parts
Items for in-flight sale
Work in process - maintenance services

2017

2016

$ 7,970,618
569,294
71,046$ 7,625,731
546,565
166,684$ 8,610,958$ 8,338,980

The operating costs for the years ended December 31, 2017 and 2016 included losses from inventory
write-downs of $324,447 thousand and $196,000 thousand, respectively.

- 35 -

12. NONCURRENT ASSETS HELD FOR SALE
December 31

Aircrafts held for saleLong-term equity investments held for sale - Asian Compressor
technology services

2017

2016

$ 309,330$ 185,100

117,223-$ 426,553$ 185,100

To enhance its competitiveness, the Company plans to introduce new aircrafts and retire old aircrafts
according to a planned schedule. Such aircrafts, classified as noncurrent assets held for sale, had an
original book value which was higher than the expected sale price and which was recognized as an
impairment loss. However, the actual loss shall be identified by the actual sale price.
In 2017 and 2016, the Company recognized impairment losses of $3,571,301 thousand and $347,868
thousand, respectively. In 2017 and 2016, the Company recognized disposal gains and losses of $252,467
thousand and $(26,429) thousand, respectively. The fair value was determined by transactions of therelated market, and the proposed sale price was based on the current status of the aircrafts. The fair value
is classified as level 3.
Long-term equity investments in Asian Compressor Technology Services were reclassified to noncurrent
assets held for sale. For related information, refer to Note 13,b.

13. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
December 31
2017$

Investments in subsidiaries
Investments in associates
Investments in jointly controlled entities2016

9,827,299
793,477
930,593$ 11,551,369$

7,925,771
1,319,526
806,028$ 10,051,325

a. Investment in subsidiaries
December 31
2017

2016

$ 1,522,696
1,211,739
1,185,323
1,339,450
915,135
654,104
478,933
450,600
435,965
259,459
83,014$ 1,529,375
1,125,057
1,244,328
1,261,894
362,861
649,189
450,305
438,502387,375
231,316
71,534(Continued)

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Cal Hotel
Taiwan Airport Services
Hwa Hsia- 36 -

December 31
2017
Taiwan Aircraft Maintenance And Engineering Co., Ltd.
Yestrip
Dynasty Holidays
Global Sky Express
Freighter Princess Ltd.
Freighter Prince Ltd.

2016

$ 1,231,548
25,90425,992
7,437-$

110,128
25,46430,9617,418
32
32$ 9,827,299$ 7,925,771(Continued)

At the end of the reporting period, the proportion of ownership and voting rights in subsidiaries held by
the Company were as follows:
December 31

Tigerair Taiwan Co., Ltd.
Taiwan Air Cargo Terminal
Cal Park
Mandarin Airlines
Cal-Dynasty International
Taoyuan International Airport Services
Cal-Asia Investment
Sabre Travel Network (Taiwan)
Taiwan Airport Services
Cal Hotel
Hwa Hsia
Taiwan Aircraft Maintenance And Engineering Co., Ltd.
Dynasty Holidays
Yestrip
Global Sky Express
Freighter Princess Ltd.
Freighter Prince Ltd.

2017

2016

90%
54%
100%
94%
100%
49%
100%
94%
47%
100%
100%
100%
51%
100%
25%
-

80%
54%
100%
94%
100%
49%
100%
94%
47%
100%
100%
100%
51%
100%
25%
100%
100%

Each of the Company’s holdings of the issued share capital of Taoyuan International Airport Service,Taiwan Airport Service and Global Sky Express did not exceed 50%, but since the Company had
control over these investees, they were listed as subsidiaries.
The Company liquidated Freighter Princess Ltd. and Freighter Prince Ltd., because the lease contracts
related to these subsidiaries expired. A disposal loss of $61 thousand was recognized.
The Company increased its investment in Taiwan Aircraft Maintenance and Engineering Co., Ltd., withpayments of $490,000 thousand, $700,000 thousand and $100,000 thousand in April and November
2017 and October 2016, respectively, for the purpose of building hangars.
The board of directors reached an agreement to purchase 10% of the shares of Tigerair Taiwan Co., Ltd.,
which was held by Roar Aviation III Pte. Ltd., in December 2016. The transaction was completed in
January 2017.

- 37 -

The share of profit or loss of subsidiaries recognized under the equity method was as follows:
2017

2016

$ 1,146,623

The share of profit or loss$

(391,718)

b. Investments in associates
December 31
2017

2016

Unlisted companies
China Aircraft Services
Kaohsiung Catering Services
Asian Compressor Technology Services
Science Park Logistics$

493,077
300,400-$

515,051
267,371
279,176
257,928$

793,477$ 1,319,526

As the end of the reporting period, the proportion of ownership and voting rights in associates held by
the Company were as follows:
December 31

China Aircraft Services
Kaohsiung Catering Services
Asian Compressor Technology Services
Science Park Logistics

2017

2016

20%
36%
-

20%
36%
25%
26%

The recognized investment income of associates accounted for using the equity method were as
follows:
2017$

China Aircraft Services
Kaohsiung Catering Services
Asian Compressor Technology Services
Science Park Logistics

24,47086,757
88,943
21,819$ 221,989

2016$

51,02875,674
109,815
26,136$ 262,653

In August 2017, the Company sold all of its holdings of Science Park Logistics to a non-related party,
HCT Logistics Co., Ltd. The agreed upon price was $380,850 thousand, and a disposal gain of$101,166 thousand was recognized.
In October 2017, the Company signed a contract with a non-related party, MB Aerospace, to sell all of
its holdings of Asian Compressor Technology Services, and the Company reclassified its holdings ofAsian Compressor Technology Services as noncurrent assets held for sale at book value. The
transaction was completed and all payments were settled in January 2018.

- 38 -

c. Investments in jointly controlled entities
The investments in jointly controlled entities were as follows:
December 31

China Pacific Catering Services
China Pacific Laundry Services
Nordam Asia

2017

2016

$ 756,965
171,2292,399$ 638,980
167,048-$ 930,593$ 806,028

At the end of the reporting period, the percentages of ownership and voting rights in jointly controlled
entities held by the Company were as follows:
December 31

China Pacific Catering Services
China Pacific Laundry Services
Nordam Asia

2017

2016

51%
55%
49%

51%
55%
-

The Company signed a joint venture agreement with the Taikoo Company to invest in China Pacific
Catering Services and China Pacific Laundry Services. According to the agreement, both parties havethe majority power in the board of directors to pose a motion for veto, and therefore the Company does
not have control.
To enhance the Company's maintenance capabilities, the Company established a joint venture with the
US Nordam Aerospace Company in December 2017 to provide thrust reversers and composite repair
services in Asia under the Nordam brand.
Details of the investment income attributable to investments in jointly controlled entities were as
follows:
December 31

China Pacific Catering Services
China Pacific Laundry Services
Nordam Asia

2017

2016

$ 235,871
23,354(51)$ 208,039
21,628-$ 259,174$ 229,667

The Company’s shares of other comprehensive income of subsidiaries, associates and jointly controlled
entities were losses of $(223,164) thousand and $(238,854) thousand in 2017 and 2016, respectively.
The financial statements used as a basis of the amounts of and related information on the investments
accounted for using the equity method and the share of profit or loss and other comprehensive incomeof those investments for the years ended December 31, 2017 and 2016 were all independently audited,
except of China Aircraft Services and Nordam Asia Limited. However, the management determinedthat there would have been no significant adjustments had this investee’s financial statements been
independently audited.

- 39 -

For details on services, major business offices and the country where the above associates and jointly
controlled entities are registered, refer to Table 6, “Names, Locations, And Other Information of
Investees Over Which the Company Exercises Significant Influence” and, Table 7, “Investments In
Mainland China”, following the Notes to Financial Statements.

14. PROPERTY, PLANT AND EQUIPMENT

Freehold Land

FlightEquipment

Buildings

Equipment
under FinanceLeasesOthersTotal

Cost
Balance at January 1,
2016
Additions
Disposals
Reclassification
Balance at December 31,
2016$

193,013-$

7,323,803
61,704(108,160)406$ 228,454,181
1,814,211(6,336,888)
22,377,045$

27,481,679(393,403)
1,218,979$

5,892,037
320,106(158,177)
22,261$ 269,344,713
2,196,021(6,996,628)
23,618,691$

193,013$

7,277,753$ 246,308,549$

28,307,255$

6,076,227$ 288,162,797

$

-

$

(3,449,160)(174,689)
73,847-$ (128,886,336)(14,058,579)
5,609,896(717,758)
2,923,255$ (13,715,235)(2,031,998)
393,403
6,690$(4,847,510)(323,492)
155,518983$ (150,898,241)(16,588,758)
6,232,664(717,758)
2,930,928$-$(3,550,002)$ (135,129,522)$ (15,347,140)$(5,014,501)$ (159,041,165)$

193,013-$

7,277,753
32,517(5,942)-$ 246,308,549
662,706(4,549,486)
18,692,862$

28,307,255(479,936)(2,232,883)$

6,076,227
257,995(211,216)
40,430$ 288,162,797
953,218(5,246,580)
16,500,409$

193,013$7,304,328$ 261,114,631$

25,594,436$

6,163,436$ 300,369,844

$

-

$

(3,550,002)(170,979)
3,926-$ (135,129,522)(15,017,928)
4,022,065(690,579)
11,144,330$ (15,347,140)(1,889,207)
619,775
3,003,549$(5,014,501)(297,080)
200,761
8,236$ (159,041,165)(17,375,194)
4,846,527(690,579)
14,156,115

$

-

$

(3,717,055)$ (135,671,634)$ (13,613,023)$(5,102,584)$ (158,104,296)

Accumulated depreciationand impairment
Balance at January 1,
2016
Depreciation expense
Disposals
Impairment losses
Reclassification
Balance at December 31,
2016
Cost
Balance at January 1,
2017
Additions
Disposals
Reclassification
Balance at December 31,
2017
Accumulated depreciationand impairment
Balance at January 1,
2017
Depreciation expense
Disposals
Impairment losses
Reclassification
Balance at December 31,
2017

Reclassification is mainly from prepaid equipment.

- 40 -

The above items of property, plant and equipment were depreciated on a straight-line basis over theestimated useful life of the asset:
Building
Main buildings
Others
Machinery and equipment
Electro-mechanical equipment
Others
Office equipment
Leasehold improvements
Building improvements
OthersFlight equipment and equipment under finance leases
Airframes
Aircraft cabins
EnginesHeavy maintenance on aircrafts
Engine overhauls
Landing gear overhauls
Repairable spare parts
Improvement of aircrafts

45-55 years
10-25 years
25 years
3-13 years
3-15 years
5 years
3-5 years
18-25 years
10-20 years
12-20 years
6-8 years
3-10 years
8-12 years
3-15 years
5-12 years

Regarding changes in fleet composition, current and forecasted market values, and other technical factors,
the Company recognized impairment losses on a part of aircraft equipment of $690,579 thousand and$717,758 thousand in 2017 and 2016, respectively.
Refer to Note 32 for the carrying amounts of property, plant and equipment pledged by the Company.
Based on the particularity of risk in the aviation industry, all of the Company’s assets such as aircrafts, realestate, and movable property are adequately insured to diversify the potential risk related to operations.

15. INVESTMENT PROPERTIES
December 31

Carrying amount
Investment properties

2017

2016

$ 2,047,448$ 2,047,448

The investment properties (land) held by the Company located in Nankan were leased to others.
The fair value of the investment properties held by the Company are $2,473,771 thousand and $2,316,300
thousand as of December 31, 2017 and 2016, respectively. The fair value valuation was performed byindependent qualified professional valuers, and the future income evaluated by management was based onmarket transactions.
All of the Company’s investment properties were held under freehold interest.

- 41 -

16. OTHER INTANGIBLE ASSETS
Computer
Software Costs

Accumulated
Amortization

Net Value

Balance at January 1, 2016
Additions
Amortization expense
Reclassification$ 1,520,055
265,615(2,267)$(529,748)(138,554)-$

Balance at December 31, 2016

$ 1,783,403$(668,302)$ 1,115,101

Balance at January 1, 2017
Additions
Amortization expense$ 1,783,403
121,951-$(668,302)(247,725)$ 1,115,101
121,951(247,725)

Balance at December 31, 2017

$ 1,905,354$(916,027)$

990,307265,615(138,554)(2,267)989,327

The above items of other intangible assets were amortized on a straight-line basis over 2-10 years.

17. OTHER ASSETS
December 31
2017

2016

Current
Temporary payments
Prepayments
Others$315,372
2,391,132
513,231$

166,236
2,091,371
219,193$3,219,735$

2,476,800

Noncurrent
Prepayments for aircrafts
Prepayments - long-term
Refundable deposits
Other financial assets$ 10,578,892
1,069,595
424,196
18,803$ 21,845,682
1,036,525
521,229
18,827$ 12,091,486$ 23,422,263

The prepayments for aircrafts comprised the prepaid deposits and capitalized interest from the purchase of
A350-900 aircrafts. For details of the A350-900 aircrafts purchase contracts, refer to Note 33. The
rights to purchase the six confirmed orders of 777-300ER aircrafts were transferred to the aircraft leasing
company upon delivery of the aircrafts. Then, all six aircrafts were leased back. As of May 2016, all theaircrafts had been delivered, and the Company was refunded with deposits for the aircraft purchases.

- 42 -

18. BORROWINGSa. Short-term bills payable
December 31
2017
Commercial paper
Less: Unamortized discount on bills payable

Annual discount rate

2016

$

-

$ 900,000-$-$ 900,000-

0.758%

b. Long-term debts
December 31

Unsecured bank loans
Secured bank loans
Commercial paper
Proceeds from issue
Less: Unamortized discountLess: Current portion

2017

2016

$ 23,949,000
30,711,508$ 31,183,999
16,329,805

26,100,000
37,89780,722,611
18,814,633

37,200,000
64,186
84,649,618
31,816,140$ 61,907,978$ 52,833,478

For information on secured bank loans which were secured by buildings, machinery equipment andflight equipment, refer to Note 32.
Bank loans (New Taiwan dollars and U.S. dollars) are repayable quarterly, semiannually or in lumpsum upon maturity. Related information is summarized as follows:
Currency
New Taiwan
Dollars
U.S. Dollars
Original currency$ 54,660,508
46,464,267

December 31, 2017
December 31, 2016$

32,536

Translated to New Taiwan dollars
December 31, 2017
December 31, 2016

54,660,508
46,464,267

1,049,537

0.92%-1.56%
0.92%-1.60%

0.8539%-4.39%(Continued)

Interest rates
December 31, 2017
December 31, 2016

- 43 -

Currency
New Taiwan
Dollars
U.S. Dollars
Periods
2007/5/242029/11/9
2005/3/42028/10/18

December 31, 2017
December 31, 20162005/1/182017/9/21(Concluded)

The Company has note issuance facilities (NIFs) obtained from certain financial institutions. The
NIFs, with various maturities until December 2021, were used by the Company to guarantee
commercial paper which it issued. The commercial paper was issued at discount rates of
0.9983%-1.2897% in 2017 and 1.0510%-1.4580% in 2016.

19. BONDS PAYABLE
December 31

Unsecured corporate bonds first-time issued in 2013
Unsecured corporate bonds first-time issued in 2016
Unsecured corporate bonds second-time issued in 2016
Unsecured corporate bonds first-time issued in 2017
Unsecured corporate bonds second-time issued in 2017
Convertible bonds - fifth issue
Less: Current portion and put option of convertible bonds

2017

2016

8,200,000
5,000,000
5,000,000
2,350,000
3,500,000
1,667,100
25,717,100
4,367,100$ 10,900,000
5,000,000
5,000,000
1,638,044
22,538,044
2,700,000$ 21,350,000$ 19,838,044

Rate
(%)

$

Related issuance conditions were as follows:

Category

PeriodConditions

Five-year private unsecured bonds - issued
at par in January 2013; repayable in
January 2017 and 2018; 1.6% interestp.a., payable annually
Seven-year private unsecured bonds issued at par in January 2013; repayable
in January 2019 and 2020; 1.85% interestp.a., payable annually
Five-year unsecured bonds - issued at par in
May 2016; repayable in May 2020 and2021; 1.19% interest p.a., payableannually

2013.01.172018.01.17

Principal repayable in
January of 2017 and2018; indicator rate;
payable annuallyPrincipal repayable in
January of 2019 and2020; indicator rate;
payable annuallyPrincipal repayable in May
of 2020 and 2021; interest
p.a. payable annually2013.01.172020.01.17

2016.05.262021.05.26

1.6

1.85

1.19

(Continued)- 44 -

Rate(%)

Category

PeriodConditions

Five-year unsecured bonds - issued at par in
September 2016; repayable in September
2020 and 2021; 1.08% interest p.a.,payable annually
Three-year private unsecured bonds - issued
at par in May 2017; repayable on due
date; interest of 1.2% p.a., payableannually
Seven-year private unsecured bonds issued at par in May 2017; repayable ondue date; interest of 1.75% p.a., payableannually
Three-year private unsecured bonds - issued
at par in October 2017; repayable on due
date; interest of 1.14% p.a., payableannually
Five-year private unsecured bonds - issued
at par in October 2017; repayable in
October 2021 and 2022; 1.45% interestp.a., payable annually
Five-year convertible bonds - issued at
discount in December 2013; repayable inlump sum upon maturity; 1.8245%
discount rate p.a.

2016.09.272021.09.27

Principal repayable in
September of 2020 and2021; interest p.a. payableannually
Principal repayable on due
date; indicator rate;
payable annually

1.08

2017.5.192024.5.19

Principal repayable on due
date; indicator rate;
payable annually

1.75

2017.10.122020.10.12

Principal repayable on due
date; indicator rate;
payable annually

1.14

2017.10.122022.10.12

Principal repayable in
1.45
October of 2021 and2022; indicator rate;
payable annually
Except for converting toshare capital or buying
back, principal repayable
in December of 2018
(Concluded)2017.5.192020.5.19

2013.12.262018.12.26

1.20

The Company issued its 2016 first unsecured corporate bonds with a face value of $5,000,000 thousand,and the purchasers of the bonds included Mandarin Airlines Co., Ltd. and Sabre Travel Network (Taiwan)Co., Ltd., who held a face value of $300,000 thousand which were eliminated in the Company’s
consolidated financial statements.
The Company issued the fifth issue of unsecured convertible bonds, and the issuance conditions were as
follows:
a. The holders may demand a lump-sum payment for the bonds upon maturity.
b. The holders can request that the Company repurchase their bonds at 100.75% face value on the third
anniversary of the offering date. Because the holders can exercise selling rights on December 26,
2016, the Company reclassified the bonds payable to “current portion of bonds payable” in December
2015. The Company paid $994,705 thousand to the holders of the bonds payable who exercised theput options, and the difference between the payment amount and carrying amount recognized was a loss
on the bonds payable buy back of $41,943 thousand, for which the Company reclassified the remaining
face value to noncurrent assets.
c. The Company may redeem the bonds at face value between March 26, 2014 and November 16, 2018
under certain conditions.

- 45 -

d. Between January 26, 2014 and December 16, 2018 (except for the period between the former dividend
date and the date of the dividend declaration on record), holders may convert the bonds to theCompany’s common shares. The initial conversion price was set at NT$12.24, which is subject toadjustment if there is a capital injection by cash, share dividend distribution, and the proportion of cash
dividends per share in market price exceeding 1.5%. Because the Company distributed cash dividends
as of July 31, 2016, there was adjustment the conversion price to NT$11.64, corporate bonds with aface value of $3,316,800 thousand had been converted to 270,985 thousand units of common shares.
The convertible bonds contain both liability and equity components. The equity component was presented
in equity under the heading of capital surplus - options. The effective interest rate of the liability
component was 1.8245% per annum on initial recognition.
Proceeds from issuance
Equity component$ 6,000,000(518,621)

Liability component at the date of issuance$ 5,481,379

On November 5, 2017, the Company’s board of directors resolved to issue its 2018 second, five-year
unsecured convertible bonds for $6,012,000 thousand, at a coupon rate of 100.2% and a conversion priceset at NT$13.2, on January 30, 2018.

20. LEASING
a. Sale-leasebacks - finance leases
December 31
2017

2016

Within one year
Beyond one year and within five years$ 1,580,000
596,000$ 1,254,000
3,562,000

Present value of minimum lease payments$ 2,176,000$ 4,816,000

Current
Noncurrent$ 1,580,000
596,000$ 1,254,000
3,562,000$ 2,176,000$ 4,816,000

1.0617%1.1317%

1.0323%1.0980%

Minimum lease payments - flight equipment

Interest rate

The Company had leased A330-300 aircrafts, totaling three aircrafts, under sale-leaseback financeleases as of December 31, 2017. The lease terms are from June 2006 to April 2019. During the leaseterm, the Company retained all risks and rewards attached to the aircrafts and engines and enjoyed thesame substantive rights as were enjoyed prior to the transaction. Interest rate underlying all
obligations under finance leases were floated. Therefore, the minimum lease payments under thesale-leaseback aircraft contracts are not inclusive of interest expense.
b. Operating leases (including sale-leasebacks - operating leases)
The Company rented planes, headquarters, and hangars under various operating lease contracts expiring
on various dates until May 2028. The Company does not have a bargain purchase option to acquire
the leased planes and hangars at the expiration of the lease periods.
- 46 -

The rental rates stated in the aircraft lease agreements are fixed or floated. If the agreed-upon rental
rate is floating and will be revised monthly or semiannually. Subleasing is not allowed for all the leasearrangements. As of December 31, 2017, the Company has rented eleven A330-300 aircrafts, fifteen
737-800 aircrafts and ten 777-300ER aircrafts under operating contracts; the lease terms range from 8 to
12 years.
As of December 31, 2017 and 2016, the refundable deposits paid by the Company under operating lease
contracts were $208,995 thousand and $293,188 thousand, respectively. Part of the refundable
deposits is secured by credit guarantees. The credit guarantees were $1,394,791 thousand and$1,459,935 thousand, respectively.
The minimum lease payments in the future for the non-cancelable operating lease commitments were as
follows:
December 31
2017
Up to 1 year
Over 1 year to 5 years
Over 5 years

2016$ 10,145,139
39,313,550
26,841,927$

9,889,910
38,106,256
33,266,660$ 76,300,616$ 81,262,826

The lease payments recognized in profit or loss for the current period were as follows:
For the Year Ended December 31
2017
2016
$ 9,989,732

Minimum lease payments$ 9,662,625

21. OTHER PAYABLES
December 31
2017$

Fuel costs
Ground service expenses
Repair expenses
Interest expenses
Short-term employee benefits
Terminal surcharges
Commission expenses
Others- 47 -

2016

3,243,742
1,089,306
842,845
290,9022,332,644
659,454407,109
2,042,750$

2,490,290
1,158,563
848,200
288,038
1,668,366
668,710
391,857
2,119,998$ 10,908,752$

9,634,022

22. DEFERRED REVENUE
December 31
2017$Frequent flyer programs
Advance ticket sales

Current
Noncurrent

2016

2,450,702
13,415,588$

2,427,565
12,785,565$ 15,866,290$ 15,213,130$ 14,048,025
1,818,265$ 13,404,227
1,808,903$ 15,866,290$ 15,213,130

23. PROVISIONS
December 31
2017

2016

Operating leases - aircrafts$ 7,758,651$ 6,770,951

Current
Noncurrent$$

406,457
7,352,194$ 7,758,651

6,770,951$ 6,770,951

The Company rented flight equipment under operating lease agreements. Under the contracts (some of theleased flight equipment’s lease payments are calculated monthly), when the lease expires and the equipment
is returned to the lessor, the flight equipment has to be repaired according to the expected years of use,
number of flight hours, flight cycle and the number of engine revolutions. The Company had existingobligations to recognize provisions when signing a lease or during the lease term.
Aircraft Lease
Contract
Balance at January 1, 2016
Additional provisions recognized
Usage
Effect of exchange rate changes$ 5,033,257
2,011,115(366,218)
92,797

Balance at December 31, 2016

$ 6,770,951

Balance at January 1, 2017
Additional provisions recognized
Usage
Effect of exchange rate changes$ 6,770,951
2,524,079(1,138,140)(398,239)

Balance at December 31, 2017

$ 7,758,651- 48 -

24. RETIREMENT BENEFIT PLANS
a. Defined contribution plans
The Company adopted a pension plan under the Labor Pension Act (the “LPA”), which is astate-managed defined contribution plan. Under the LPA, an entity makes monthly contributions toemployees’ individual pension accounts at 6% of monthly salaries and wages.
b. Defined benefit plans
The Company adopted the defined benefit plan under the Labor Standards Law, under which pension
benefits are calculated on the basis of the length of service and average monthly salaries of the six
months before retirement. The Company contribute amounts equal to 15% of total monthly salaries
and wages to a pension fund administered by the pension fund monitoring committee. Pension
contributions are deposited in the Bank of Taiwan in the committee’s name.
Before the end of each year, the Company assesses the balance in the pension fund. If the amount of
the balance in the pension fund is inadequate to pay retirement benefits for employees who conform toretirement requirements in the next year, the Company is required to fund the difference in one
appropriation that should be made before the end of March of the next year. The pension fund ismanaged by the Bureau of Labor Funds, Ministry of Labor (“the Bureau”); the Company has no right toinfluence the investment policy and strategy.
The amounts included in the balance sheets in respect of the Company’s defined benefit plans were as
follows:
December 31
2017

2016

Present value of defined benefit obligation
Fair value of plan assets$ 11,956,223(5,797,479)$ 11,176,204(4,958,858)

Net defined benefit liabilities$$

6,158,744

6,217,346

Movements in net defined benefit liabilities (assets) were as follows:

Balance at January 1, 2016
Service cost
Current service cost
Net interest expense (income)
Recognized in profit or loss
Remeasurement
Return on plan assets (excluding amounts
included in net interest)
Actuarial gain - changes in financial
assumptions
Actuarial loss - experience adjustments
Recognized in other comprehensive income

Present Valueof the Defined
BenefitObligation

Fair Value ofthe Plan Assets

Net Defined
BenefitLiabilities(Assets)$ 10,769,419$ (1,803,890)$

639,972
114,773754,745(18,079)(18,079)

639,972
96,694
736,666-(4,826)(4,826)(147,479)
741,687594,208(4,826)(147,479)
741,687
589,382(Continued)- 49 -

8,965,529

Present Valueof the Defined
BenefitObligation

Fair Value ofthe Plan Assets

Net Defined
BenefitLiabilities(Assets)(776,190)$ (3,908,253)
776,190$ (3,908,253)-(165,978)11,176,204(4,958,858)(165,978)6,217,346

832,125
126,826
958,951(61,568)(61,568)

832,125
65,258897,383-

15,362

15,362372,284
257,573
629,857(690,295)

15,362(1,482,710)
690,295

372,284
257,573645,219(1,482,710)(118,494)

Contributions from the employer
Benefits paid
Payment to employees direct from theemployer
Balance at December 31, 2016
Service cost
Current service cost
Net interest expense (income)
Recognized in profit or loss
Remeasurement
Return on plan assets (excluding amounts
included in net interest)
Actuarial gain - changes in financial
assumptions
Actuarial loss - experience adjustments
Recognized in other comprehensive income
Contributions from the employer
Benefits paid
Payment to employees direct from theemployer$(118,494)-

Balance at December 31, 2017

$ 11,956,223$ (5,797,479)$

6,158,744(Concluded)

Through the defined benefit plans under the Labor Standards Law, the Company is exposed to thefollowing risks:
1) Investment risk: The plan assets are invested in domestic and foreign equity and debt securities,bank deposits, etc. The investment is conducted at the discretion of the Bureau or under the
mandated management. Based on relevant regulations, the return generated by plan assets should
not be below the interest rate for a two-year time deposit with local banks.
2) Interest risk: A decrease in the government bond interest rate will increase the present value of thedefined benefit obligation; however, this will be partially offset by an increase in the return on theplan’s debt investments.
3) Salary risk: The present value of the defined benefit obligation is calculated by reference to the
future salaries of plan participants. Thus, an increase in the salaries of the plan participants will
increase the present value of the defined benefit obligations.
The actuarial valuations of the present value of the defined benefit obligation were carried out by
qualified actuaries. The significant assumptions used for the purposes of the actuarial valuations wereas follows:
December 31

Discount rate
Expected rate of salary increase- 50 -

2017

2016

1.01%
1.00%

1.29%
1.00%

If possible reasonable change in each of the significant actuarial assumptions will occur and all otherassumptions will remain constant, the present value of the defined benefit obligation would increase(decrease) as follows:
December 31

Discount rate
0.5% increase
0.5% decrease
Expected rate of salary increase
0.5% increase
0.5% decrease

2017

2016

$ (534,890)$ 580,412$ (496,081)$ 538,301$ 557,651$ (523,509)$ 517,191$ (485,527)

The sensitivity analysis presented above may not be representative of the actual change in the present
value of the defined benefit obligation as it is unlikely that the change in assumptions would occur inisolation of one another as some of the assumptions may be correlated.
December 31
2017

2016

The expected contributions to the plan for the next year

$ 688,096$ 691,530

The average duration of the defined benefit obligation

10 years

10 years

25. EQUITY
a. Share capital
Common shares
December 31

Numbers of shares authorized (in thousands)
Amount of shares authorized
Amount of shares issued

2017

2016

6,000,000$ 60,000,000$ 54,709,846

6,000,000$ 60,000,000$ 54,708,901

For the years ended December 31, 2017, the Company issued the 5th domestic unsecured convertible
bonds, and holders of such bonds amounting to $1,100 thousand applied for conversion, for which 95
thousand of the Company’s common shares were exchanged. In accordance with the law, theCompany may apply for a change of registration after issuing new shares.

- 51 -

b. Capital surplus
December 31

Issue of shares in excess of par value and conversion premium
Distribution of cash dividends to treasury shares held bysubsidiaries
Expired employee share options
Long-term investments
Bonds payable equity component
Others2017

2016$ 552,696$ 552,470

2,673
11,747955
146,589
85,3392,673
11,747
1,019
146,684
85,339$ 799,999$ 799,932

The capital surplus from shares issued in excess of par (additional paid-in capital from issuance ofcommon shares) may be used to offset a deficit; in addition, when the Company has no deficit, suchcapital surplus may be distributed as cash dividends or transferred to capital (limited to a certain
percentage of the Company’s paid-in capital).
The capital surplus from long-term investments and employee shares options expired and dividends
distributed to subsidiaries may not be used for any purpose, expect for offsetting a deficit. As forcapital surplus from conversion of convertible bonds payable may not be used for any purpose.
c. Appropriation of earnings and dividend policy
According to amended Company Act, where the Company made profit in a fiscal year, the profit shallbe first utilized for paying taxes, offsetting losses of previous years, setting aside as legal reserve 10%of the remaining profit, setting aside or reversing a special reserve in accordance with the laws andregulations, and then any remaining profit together with any undistributed retained earnings shall be
used by the Company’s board of directors as the basis for proposing a distribution plan with due
consideration of any future aircraft acquisition plans and fund demand, which should be resolved in theshareholders’ meeting for the distribution of dividends and bonuses to shareholders by cash or shares(cash dividends cannot be less than 30% of total dividends distributed). However, if the Company’s
profit before tax in a fiscal year after deductions for the abovementioned items is not sufficient forearnings distribution, retained earnings can be used as a supplement for the deficiency. If theCompany has no deficit in a fiscal year, the Company can distribute all or part of the capital surplus bycash or shares with due consideration of finance, marketing and management requirements inaccordance with the laws and regulations.
The distribution of profit surplus shall be approved in the annual shareholders’ meeting held in thefollowing year and shall be accounted for in that year.
1) Appropriation of earnings and dividends per share in 2015
The appropriation and dividends per share resolved in the shareholders’ meeting on June 24, 2016
were as follows:
Appropriationof Earnings
Legal reserve
Special reserve
Cash dividends$- 52 -

287,224
76,4862,508,525

Dividends Per
Share (NT$)$0.458522382

2) Appropriation of earnings in 2016
The legal reserve of $81,132 thousand and special reserve of $76,486 thousand used to offset
deficits was resolved by the shareholders in their meeting on June 22, 2017.
3) Appropriation of earnings and dividends per share in 2017
The appropriation of earnings for 2017 should be resolved in the board of directors meeting to beheld on March 22, 2018. The appropriation and dividends per share were as follows:
Appropriationof Earnings
Legal reserve
Special reserve
Cash dividends$

145,831
118,810
1,193,670

Dividends Per
Share (NT$)$0.2181820086

The appropriation of earnings should be resolved in the shareholders’ meeting to be held on June 27,
2018.
When the Company distributes undistributed earnings for the years after 1998, except for non-ROC
residents shareholders, all shareholders can receive an imputation tax credit calculated according to theTax Deduction Ratio on the distribution date.
d. Other equity items
The movement of other equity items is as follows:
Exchange
Unrealized
Differences on Gain (Loss) on
Translating
Available-forForeign
sale Financial
Operations
AssetsCash Flow
Hedges

Total

1,755

$ (225,997)$ (66,283)(80,104)--(80,104)--(282,556)(282,556)--

582,665582,665(12,909)
13,618

(41)
-

8,893
(51,019)(4,057)(37,401)

31,986$ 112,264(Continued)

Balance at January 1, 2016
Exchange differences ontranslating the foreign
operations
Cumulative loss arising onchanges in fair value ofhedging instruments
Cumulative gain arising onchanges in fair value ofhedging instruments
reclassified to profit or loss
Share of associates accounted
for using the equity method
Effect of income tax$ 157,959

Balance at December 31, 2016$

78,564- 53 -

$

$

1,714

$

Exchange
Unrealized
Differences on Gain (Loss) on
Translating
Available-forForeign
sale Financial
Operations
AssetsBalance at January 1, 2017
Exchange differences arising ontranslating the foreign
operations
Cumulative loss arising onchanges in fair value ofhedging instruments
Cumulative gain arising onchanges in fair value ofhedging instruments
reclassified to profit or loss
Share of associates accounted
for using the equity method
Effect of income tax$

78,564

Balance at December 31, 2017

$ (34,986)

$

1,714

Cash Flow
Hedges$Total

31,986$ 112,264(134,857)--(134,857)--(283,449)(283,449)--

166,869

166,869(1,619)22,92660-(9,653)
19,818(11,212)42,744

1,774$ (74,429)$$ (107,641)(Concluded)e. Treasury shares
Treasury shares are the Company’s shares held by its subsidiaries, as of December 31, 2017 and 2016
were as follows:(Shares in Thousands)
Number of
Shares,Beginningof Year

Purpose of Treasury Shares

Reduction
Duringthe Year

Number of
Shares,Endof YearFor the year ended December 31, 2017
Company’s shares held by its subsidiaries reclassified frominvestment in shares to treasury shares

2,889

-

2,889

2,889

-

2,889

For the year ended December 31, 2016
Company’s shares held by its subsidiaries reclassified frominvestment in shares to treasury shares- 54 -

Subsidiary

Shares(In Thousands)

Carrying
AmountMarket Value$ 24,169
9,485$ 24,169
9,485$ 33,654$ 33,654$ 19,294
7,572$ 19,294
7,572$ 26,866$ 26,866

December 31, 2017
2,075
814

Mandarin Airlines
Hwa Hsia

December 31, 2016
Mandarin Airlines
Hwa Hsia

2,075
814

The above acquisitions by subsidiaries of the Company’s shares in previous years was due toinvestment planning. The shares of the Company held by its subsidiaries were treated as treasury
shares. The subsidiaries can exercise shareholders’ rights on these treasury shares, except for therights to subscribe for the Company’s new shares and voting rights.

26. NET INCOME
a. Revenue
For the Year Ended December 31
2017
2016
Passenger
Cargo
Others$ 90,560,375
42,970,102
6,284,734$ 86,298,238
35,353,349
5,873,277$ 139,815,211$ 127,524,864

b. Other income
For the Year Ended December 31
2017
2016
Interest income
Subsidy income
Dividend income
Others- 55 -$ 176,329
32,332
9,564
142,755$ 188,006
168,377
59,099177,969$ 360,980$ 593,451

c. Other gains and losses
For the Year Ended December 31
2017
2016
Gain on disposal property, plant and equipment and noncurrent
assets held for sale
Net loss on financial assets as held for trading
Gain (loss) on disposal of investment
Gain (loss) on foreign exchange, net
Impairment loss recognized on noncurrent assets held for saleImpairment loss recognized on flight equipment
Impairment loss on financial assets carried at cost
Others$258,306(33,385)
101,105
4,920(3,571,301)(690,579)(56,023)(993,913)$ (4,980,870)$

54,188(29,909)(164)(495,350)(347,868)(717,758)(874,060)$ (2,410,921)

The Company has been named as a defendant, together with other airline members of the Association ofAsia Pacific Airlines, in a civil class action lawsuit filed at the U.S. Northern District Court ofCalifornia by a group of passengers who alleged that there was an antitrust violation in December 2007.
After consulting with the lawyers and considering the cost of litigation, the Company settled with theplaintiff in the amount of US$19,500 thousand, and the settlement was recognized in 2017 financial
statement. The settlement funds will be divided into four-phase payments in three years.
d. Finance costs
For the Year Ended December 31
2017
2016
Interest expense
Bonds payable
Bank loans
Interest on obligations under finance leases
Loss on derivatives designated as hedging instruments in cash
flow hedge accounting relationships reclassified from equity
to profit or loss$

321,457
907,915
45,621$

297,032
845,987
68,1792,814

10,390$ 1,277,807$ 1,221,588$ 212,557
1.31%-1.41%$ 419,593
1.45%-1.73%

Information about capitalized interest was as follows:

Capitalization interest
Capitalization rate
e. Depreciation and amortization expenses

For the Year Ended December 31
2017
2016
Property, plant and equipment
Intangible assets- 56 -$ 17,375,194
247,725$ 16,588,758
138,554$ 17,622,919$ 16,727,312(Continued)

For the Year Ended December 31
2017
2016
An analysis of deprecation by function
Operating costs
Operating expenses

An analysis of amortization by function
Operating expenses$ 17,097,228
277,966$ 16,290,250
298,508$ 17,375,194$ 16,588,758$$

247,725

138,554(Concluded)

f. Employee benefits expense
For the Year Ended December 31
2017
2016
Post-employment benefits
Defined contribution plans
Defined benefit plans

Other employee benefits
Salary expenses
Labor and health insurance
Personnel service expenses

An analysis of employee benefits expense by function
Operating costs
Operating expenses$

344,228
897,383$

312,512736,666$

1,241,611$

1,049,178$ 15,179,456
1,167,348
3,636,354$ 14,176,230
1,175,417
3,318,811$ 19,983,158$ 18,670,458$ 17,376,793
3,847,976$ 15,901,818
3,817,818$ 21,224,769$ 19,719,636

The Company distributes employees’ compensation at rates of no less than 3% of net profit before
income tax and employees’ compensation. For the years ended December 31, 2017 and 2016,
employees’ compensation was $799,768 thousand and $382,318 thousand, respectively, of the base net
profit.
Material differences between such estimated amounts and the amounts proposed by the board of
directors on or before the date the annual financial statements are authorized for issue are adjusted in
the year that the bonus and remuneration were recognized. If there is a change in the proposed
amounts after the annual financial statements were authorized for issue, the differences are recorded asa change in the accounting estimate.
Information on the employees’ compensation and remuneration of directors and supervisors resolved by
the Company’s board of directors in 2017 and 2016 are available on the Market Observation Post
System website of the Taiwan Stock Exchange.

- 57 -

27. INCOME TAX
a. Income tax recognized in profit or loss
The major components of tax expense were as follows:
For the Year Ended December 31
2017
2016
Current tax
Current year
Prior year adjustment
Deferred tax
Current year$

Income tax expense recognized in profit or loss

27,142
1,617$

19,624(116)

851,378

946,203$ 880,137$ 965,711

A reconciliation of accounting profit and income tax expense is as follows:
For the Year Ended December 31
2017
2016
Profit before tax$ 3,088,203$ 1,537,251

Income tax expense calculated at the statutory rate (17%)
Add (deduct) tax effects of:Nondeductible expenses in determining taxable income
Temporary differences
Tax-exempt income
Loss carryforwards - current used
Overseas income tax expense
Additional income tax under the Alternative Minimum Tax Act
Deferred tax
Temporary differences
Unrecognized loss carryforwards and investment tax credits
Adjustments for prior years’ tax$$

Income tax expense recognized in profit or loss$

524,995

261,333

5,122
691,804(283,157)(938,764)
17,236
9,906

142,079(393,931)(9,481)
19,624-

239,378
612,000
1,617

470,203
476,000(116)

880,137$

965,711b. Income tax recognized in other comprehensive income
For the Year Ended December 31
2017
2016
Deferred tax
Recognized in other comprehensive income
Translation of foreign operations
Fair value revaluation of hedging instruments for cash flow
hedgesActuarial gain or loss on defined benefit plan
Total income tax recognized in other comprehensive income- 58 -$

22,926$

19,818109,687$ 152,431

13,618(51,019)
100,195$

62,794

c. Deferred tax assets and liabilities
For the year ended December 31, 2017

Beginning
Balance

Recognized in
Profit or Loss

Recognized in
Other
Comprehensive Income$ 1,061,207
421,695
1,151,061$$

EndingBalance

Deferred tax assets
Temporary differences
Defined benefit plans
Frequent flyer programs
Maintenance reserves
Allowance for reduction of
inventory
OthersLoss carryforwards

199,092
593,708
2,322,951(114,922)
4,411
244,744
38,274
465,069(1,543,182)

109,687-$ 1,055,972
426,106
1,395,805

21,146-237,366
1,079,923
779,769$ 5,749,714$(905,606)$

130,833$ 4,974,941$

85,94928,823$(54,939)
915
(204)

$

(21,598)$

31,010
915
7,021

$

114,772$(54,228)$(21,598)$

38,946

Deferred tax liabilities
Temporary differences
Depreciation difference fromfixed assets
Unrealized exchange gains
OthersFor the year ended December 31, 2016

Beginning
Balance

Recognized in
Profit or Loss

Recognized in
Other
Comprehensive Income$ 1,525,482
452,949855,653$$

EndingBalance

Deferred tax assets
Temporary differences
Defined benefit plans
Frequent flyer programs
Maintenance reserve
Allowance for reduction of
inventory
OthersLoss carryforwards

172,901
849,476
2,834,341$ 6,690,802- 59 -(564,470)(31,254)
295,408
26,191(210,207)(511,390)$(995,722)$

100,195-$ 1,061,207
421,695
1,151,061(45,561)-

199,092
593,708
2,322,951

54,634$ 5,749,714(Continued)

Beginning
Balance

Recognized in
Profit or Loss

Recognized in
Other
Comprehensive Income$

125,008
47,443$(39,059)(10,460)$(8,160)$85,94928,823$

172,451$(49,519)$(8,160)$114,772(Concluded)

EndingBalance

Deferred tax liabilities
Temporary differences
Depreciation difference fromfixed assets
OthersIn February 2018, the President of the Republic of China announced the amendment of the Income Tax
Law, which adjusted the income tax rate from 17% to 20%, and it will be implemented in 2018. In
addition, the tax rate applicable to undistributed earnings in 2018 will be reduced from 10% to 5%.
Deferred tax assets and liabilities that were recognized on December 31, 2017 are expected to increaseby $877,931 thousand and $6,873 thousand, respectively, due to changes in tax rates.
Deductible temporary differences, unused loss carryforwards and unused investment credits for which
no deferred tax assets have been recognized in the balance sheets are as follows:
December 31
2017
Loss carryforwards
Expiry in 20192016

$ 10,900,000$

7,300,000

d. Unused tax loss carryforwards as of December 31, 2017 were as follows:
UnusedAmountExpiry Year

$ 11,764,885
2,899,496
619,799
202,699

2019
2021
2022
2026

$ 15,486,879
e. Integrated income tax
December 31

Imputation credit accounts

2017

2016

$ 195,252$ 102,527

The Company accumulated deficit as of December 31, 2016; thus, there were no expected creditable tax
ratios.
Due to the amendment of Income Tax Law promulgated in February 2018, which repeals integrated
income tax, the Company expect that there were no creditable tax ratios when distributing earnings in2018.
- 60 -

f. Income tax returns
The income tax returns of the Company through 2015 have been examined by the tax authorities.

28. EARNINGS PER SHARE
For the Year Ended December 31
2017
2016
Basic earnings per share
Diluted earnings per share

$
$

0.40
0.39

$
$

0.10
0.10

For the Year Ended December 31
2017
2016
Earnings used in the computation of basic earnings per share
Effect of potentially dilutive common shares:
Interest on convertible bonds (after tax)

$ 2,208,066

Earnings used in the computation of diluted earnings per share$ 2,232,867

Weighted average number of common shares in computation of basic
earnings per share
Effect of potentially dilutive common shares:
Convertible bonds
Employees’ compensation or bonuses issued to employees
Weighted average number of common shares used in thecomputation of diluted earnings per share$

571,540

24,801$

571,540

5,468,030

5,468,002

145,763
70,25947,337

5,684,052

5,515,339

If the Company offers to settle compensation or bonuses paid to employees in cash or shares, the Company
assumes the entire amount of the compensation or bonuses would be settled in shares, and the resulting
potential shares were included in the weighted average number of shares outstanding used in thecomputation of diluted earnings per share, if the effect is dilutive. Such dilutive effect of the potential
shares was included in the computation of diluted earnings per share until the number of shares to be
distributed to employees is resolved in the following year.

29. CAPITAL MANAGEMENTThe Company manages its capital to ensure that entities in the Company will be able to continue as going
concerns while maximizing the return to stakeholders through the optimization of the debt and equity
balance. The capital structure of the Company consists of net debt (borrowings offset by cash and cash
equivalents) and equity of the Company comprising issued capital, reserves, retained earnings, other equity
and non-controlling interests.
To support its operating activities and purchase of aircraft, the Company needs to maintain sufficient
capital. Therefore, the goal of capital management is to ensure financial resources and operating plan isable to support the future working capital, capital expenditures, debt repayment and dividend expenses andother needs.

- 61 -

30. FINANCIAL INSTRUMENTS
a. Fair values of financial instruments
1) Fair value of financial instruments not carried at fair value
December 31
2017
Carrying
Amount$ 25,717,100
80,722,611

2016
Fair Value

Carrying
AmountFair Value$ 25,818,511
82,735,255$ 22,538,044
84,649,618$ 22,580,069
86,734,531

Financial liabilities
Bonds payable
Bank loans

Some long-term debts and capital lease obligations are floating-rate financial liabilities, so theircarrying amounts are their fair values. The fair values of long-term debts and private bonds with
fixed interest rates are estimated at the present value of expected cash flows discounted at rates of
0.75% in 2017 and 1.191% in 2016 prevailing in the market for long-term debts (Level 2). The
fair values of bonds payable are based on those which are traded in the stock exchange and based onquoted market prices (Level 1).
2) Fair value measurements recognized in the balance sheets
The following table provides an analysis of financial instruments that are measured subsequent toinitial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fairvalue is observable:a) Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active
markets for identical assets or liabilities;b) Level 2 fair value measurements are those derived from inputs other than quoted prices included
within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) orindirectly (i.e. derived from prices); andc) Level 3 fair value measurements are those derived from valuation techniques that include inputs
for the asset or liability that are not based on observable market data (unobservable inputs).
December 31, 2017
Level 1
Financial assets at FVTPL
Derivative instruments
Derivative financial assets
for hedging
Derivative financial
liabilities for hedging

Level 2

Level 3

Total

$

-

$

9,581

$

-

$

9,581

$

-

$

293

$

-

$

293

$

-

$

84,633$-$

84,633- 62 -

December 31, 2016
Level 1
Financial assets at FVTPL
Derivative instruments
Derivative financial assets
for hedging
Derivative financial
liabilities for hedging

Level 2

Level 3

Total

$

-

$

1,200

$

-

$

1,200

$

-

$

54,671$-$

54,671$-$

23,629$-$23,629There were no transfers between Level 2 and 3 in the current and prior periods.
d) Valuation techniques and inputs applied for Level 2 fair value measurement
Financial Instruments
Derivatives - foreignexchange forward
contracts and interest
rate swaps

Valuation Techniques and Inputs
The fair values of derivatives (except options) have been
determined based on discounted cash flow analyses using
interest yield curves applicable for the duration of thederivatives. The estimates and assumptions that theCompany used to determine the fair values are identical tothose used in the pricing of financial instruments for market
participants.

e) Valuation techniques and inputs applied for Level 3 fair value measurement
The fair values of currency options and fuel options are determined using option pricing models
where the significant unobservable inputs are implied fluctuation. An increase in the implied
fluctuation used in isolation would result in a decrease in the fair value of currency options andfuel options.
Because the individual fair values of some financial instruments and non-financial instruments
need not be disclosed, the total fair value disclosed is not the total value of the Company’s
financial and non-financial instruments.
b. Categories of financial instruments
December 31
2017

2016

Financial assets$

Financial assets at FVTPL
Available-for-sale financial assets (Note 3)
Derivative financial assets for hedging
Loans and receivables (Note 1)

64,177
293
26,095,060

$

1,200
120,200
54,671
29,522,622

Financial liabilities
Financial liabilities at FVTPL
Derivative financial liabilities for hedging
Financial liabilities at amortized cost (Note 2)- 63 -

9,581
84,633
121,598,470

23,629122,866,720

Note 1: The balances of loans and receivables measured at amortized cost comprised cash and cash
equivalents, notes and accounts receivable, accounts receivable - related parties, otherreceivables, refundable deposits, other financial assets and other restricted financial assets.
Note 2: The balances of financial liabilities measured at amortized cost comprised short-term loans,short-term notes payable, notes and accounts payable, accounts payable - related parties, otherpayables, bonds payable and long-term loans, capital lease obligations, provisions, part ofother current liabilities, part of other noncurrent liabilities and guarantee deposits.
Note 3: The balances include financial assets measured at cost.
c. Financial risk management objectives and policies
The Company has risk management and hedging strategies to respond to changes in the economic,
financial environment and in the fuel market. To reduce the financial risks from changes in interest
rates, in exchange rates and in fuel prices, the Company has its operating costs stay within a specified
range by using appropriate financial hedging instruments and hedging percentages in accordance withthe “Processing Program of Derivative Financial Instrument Transactions” approved by Company
shareholders to reduce the impact of market price on earnings. These risks include market risk(including foreign currency risk, interest rate risk and other price risk), credit risk and liquidity risk.
In addition, the Company has a risk management committee, which meets periodically to evaluate theperformance of derivative instruments and determine the appropriate hedging portion. This committee
informs the Company of global economic and financial conditions, controls the Company’s entire
financial risk resulting from changes in the financial environment and fuel prices, and develops thestrategy and response to avoid financial risk with the assistance of financial risk experts to effect risk
management.
1) Market risk
The Company is primarily exposed to the financial risks of changes in foreign currency exchange
rates and interest rates. The Company entered into derivative financial instruments to manage its
exposure to foreign currency risk and interest rate risk.
The Company enters into forward contracts, foreign currency option contracts, and interest swap
contracts with fair values that are highly negatively correlated to the fair values of hedged items andevaluates the hedging effectiveness of these instruments periodically.
a) Foreign currency risk
The Company enters into currency option to hedge against the risks of changes in related
exchange rates, and enters into foreign exchange forward contracts to hedge against the risks ofchanges in the related exchange rates of foreign-currency assets, liabilities and commitments.
Sensitivity analysis
The Company is mainly exposed to the U.S. dollar.
The following details the Company’s sensitivity to a one dollar increase and decrease in the
New Taiwan dollar (i.e. the functional currency) against the U.S. dollar. The sensitivity
amount used when reporting foreign currency risk internally to key management personnel andwhich represents management’s assessment of the reasonably possible change in foreignexchange rates is one dollar. The sensitivity analysis included only outstanding foreign
currency denominated monetary items and foreign exchange forward contracts designated as
cash flow hedges and adjusts their translation at the end of the reporting period for the New
Taiwan dollar strengthening or weakening one dollar against the U.S. dollar.
- 64 -

When the New Taiwan dollar increases one dollar against the U.S. dollar and all other variables
are held constant, there will be an increase in pre-tax profit in 2017 of $109,319 thousand andan increase in pre-tax profit in 2016 of $9,026 thousand.
b) Interest rate risk
The Company enters into interest swap contracts to hedge against the risks on change in net
liabilities interest rates.
The risk is managed by the Company through maintaining an appropriate mix of fixed andfloating rate borrowings, and using interest rate swap contracts and forward interest rate
contracts.
The carrying amount of the Company’s financial liabilities with exposure to interest rates at theend of the reporting period were as follows.
December 31

Fair value interest rate risk
Cash flow interest rate risk

2017

2016

$ 27,717,100
80,898,611$ 26,258,421
86,645,240

Sensitivity analysis
The sensitivity analyses below were determined based on the Company’s exposure to interest
rates for both derivatives and non-derivative instruments at the end of the reporting period.
For floating rate liabilities, the analysis was prepared assuming the amount of the liability
outstanding at the end of the reporting period was outstanding for the whole year. One yard
(25 basis) increase or decrease was used when reporting interest rate risk internally to key
management personnel and represents management’s assessment of the reasonably possible
change in interest rates.
Had interest rates increased one yard (25 basis) and had all other variables been held constant,
the Company’s pre-tax profit for the year ended December 31, 2017 would have decreased by$202,247 thousand.
Had interest rates increased one yard (25 basis) and had all other variables been held constant,
the Company’s pre-tax profit for the year ended December 31, 2016 would have decreased by$216,613 thousand.
c) Other price risk
The Company is exposed to fuel price risk on its purchase of aviation fuel.
After considering the fuel market conditions and the cost of hedging, the Company will set fueloptions contracts with financial institution to avoid the risk of fuel price fluctuations. The
Company has not signed contracts still not settling as of December 31, 2017.
2) Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting
in financial loss to the Company. The Company’s credit risk, primarily comes from accounts
receivable generated from operating activities and bank deposits generated from investing activities,
fixed investment income and other financial instruments, operation related credit risk and financial
credit risk are managed separately.
- 65 -

Operation - related credit risk
The Company has established procedures to management operations related credit risk to maintainthe quality of accounts receivable.
To assess individual customers, the Company consider into the financial condition of the customers,
the credit rating agency rating, the Company’s internal credit rating, transaction history and current
economic conditions and many other factors that may affect the repayment. Sometimes, theCompany uses certain credit enhancement tools to reduce the credit risk of specific customers.
Since the customers of the industry is dispersed and non-related, the credit risk concentration is notcritical aviation.
Financial credit risk
Credit risk on bank deposits, investments income and other financial instruments are measured andmonitor by the Company’s finance department. The Company’s trading partners and other parties
were well-performing banks and financial institutions, corporations, and government agencies, andso the risk of counterparties failing to discharge an obligation is low; therefore, there is no
significant credit risk.
Endorsements given by the Company on behalf of its subsidiaries can be found in Note 31,g.
3) Liquidity risk
The objective of the Company’s management of liquidity is to maintain cash and cash equivalents
sufficient for operating purposes, marketable securities with high liquidity and loan commitmentsthat are sufficient to ensure that the Group has adequate financial flexibility.
Liquidity and interest risk rate table
The following table shows the remaining contractual maturity analysis of the Company’s financial
liabilities with agreed-upon repayment periods, which were based on the date the Company may berequired to pay the first repayment and financial liabilities is evaluated based on undiscounted cash
flows, including cash flows of interest and principal.
Bank loans with a repayment on demand clause were included in the second column of the tablebelow regardless of whether or not the banks would choose to exercise early their rights to
repayment. The maturity dates for other non-derivative financial liabilities were based on theagreed-upon repayment dates. The Company’s liquidity analysis for its derivative financial
instruments is also shown in the following table. The table was based on the undiscounted
contractual net cash inflows and outflows on derivative instruments that settle on a net basis, andthe undiscounted gross cash inflows and outflows on those derivatives that require gross settlement.
When the amount payable or receivable is not fixed, the amount disclosed has been determined byreference to the projected interest rates as illustrated by yield curves at the end of the reporting
period.

- 66 -

December 31, 2017
The Weighted
Average
Effective
Interest Rate(%)
Capital leaseobligations
Floating interest rate
liabilities
Fixed interest rate
liabilities
Derivative
instruments
Bonds payable

1.0789

1-3 Months

3 Months to
1 Year$$225,869

1,375,827

1-2 Years$

2-5 Years

154,430$

5+ Years

452,833$-

1.1084

7,069,453

12,558,373

17,915,408

27,019,287

16,291,168

1.18005,900

17,7002,023,600--

1.4142

26,9222,790,923

50,7171,911,231

6,994
301,932

20,651,932

1,014,142$ 10,119,067$ 15,913,848$ 20,402,364$ 48,124,052$ 17,305,310

1-3 Months

3 Months to
1 Year

1-2 Years

2-5 Years

5+ Years$$

December 31, 2016
The Weighted
Average
Effective
Interest Rate(%)
Capital leaseobligations
Floating interest rate
liabilities
Fixed interest rate
liabilities
Derivative
instruments
Bonds payable

1.0508326,152

975,984$

3,003,429$

602,263$-

1.2477

4,521,325

27,424,092

15,213,937

31,768,363

5,033,023

0.016

401,382

419,3992,000,320--

1.33842,654
75,412

18,2002,926,237

2,775
4,603,556

15,707,452-

5,326,925$ 31,763,912$ 24,824,017$ 48,078,078$$

5,033,023

Loan commitments
December 31

Unused bank loan limit (unsecured)

2017

2016

$ 25,181,000$ 14,424,006

31. RELATED-PARTY TRANSACTIONS
Except for the disclosures stated in other notes, transactions between the Company and its related partiesare disclosed below:
a. Related parties’ names and relationships
Name

Relationship with the Company

Taiwan Aircargo Terminal Company
Taoyuan International Airport Service Co., Ltd.
Sabre Travel Network (Taiwan), Ltd.
Taiwan Airport Service Co., Ltd.
Taiwan Airport Service (Samoa)
Hwa Hsia

Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary(Continued)- 67 -

Name

Relationship with the Company

Yestrip
Global Sky Express
Mandarin Airlines
Cal Park
Cal Hotel Co., Ltd.
Cal-Asia Investment
Dynasty Holidays, Inc.
Cal-Dynasty International Inc.
Tigerair Taiwan Co., Ltd.
Taiwan Aircraft Maintenance and Engineering Co., Ltd.
Kaohsiung Catering Services
Science Park Logistics
Asian Compressor Technology Services
China Aircraft Service
Airport Air Cargo Terminal (Xiamen) Co., Ltd.
Airport Air Cargo Service (Xiamen) Co., Ltd.
Eastern United International Logistics (Hong Kong)
China Pacific Catering Services
China Pacific Laundry Services
Nordam Asia Ltd.
China Aviation Development Foundation

Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Associate
Associate (disposal in August 2017)
Associate
Associate
Associate
Associate
Associate
Joint venture investment
Joint venture investment
Joint venture investment
Director of the Company and major
shareholder
Director, key management personnel,
chairman, general manager of theCompany, spouse and second-degree
relative(Concluded)

Othersb. Operating income

Account Items
Other income

Related Party Type
Subsidiary
Major shareholder of theCompany
Associate
Joint venture investment

For the Year Ended December 31
2017
2016
$ 2,937,333$
31,971$ 3,051,374$
28,328

$
$

$
$

1,938
46,461

2,552
14,325c. Purchases
For the Year Ended December 31
2017
2016

Related Party Type
Subsidiary
Major shareholder of the Company
Associate
Joint venture investment$ 3,081,697$
71,852$ 745,686$ 1,857,684- 68 -$ 2,881,974$
63,084$ 656,653$ 1,613,899

d. Accounts receivable - related parties (generated by operations)
December 31
Related Party Type2017

Subsidiary
Associate
Joint venture investment
Major shareholder of the Company

2016

$

502,229
6,431
1,928

$

435,946
501
1,550
1,512

$

510,588$439,509

The receivables are not guaranteed, and there is no allowance for doubtful accounts related to accounts
receivable - related parties. The payment periods of such accounts were within 30 to 90 days, andthere are no overdue payments.
e. Accounts payable - related parties (generated by operations)
December 31
Related Party Type2017$

Subsidiary
Associate
Joint venture investment
Major shareholder of the Company

903,200
116,525
469,827
4,454$ 1,494,006

2016$

791,178
120,824
431,5023,503$ 1,347,007

The remaining balance of notes and accounts payable - related parties will be paid in cash if they are notsecured.
f. Leases of properties (operating leases)
The Company rented out planes to Mandarin Airlines under an operating lease contract. The monthly
rent received is based on flight hours. In 2017 and 2016, the rentals received amounted to $1,105,171
thousand and $1,022,817 thousand, respectively.
For fleet scheduling, the Company rented planes from Mandarin Airlines under an operating leaseagreements beginning from July 2003. The Company paid the rental by flight hours. The contract
was terminated in May 2016. The payments of flight rentals were $17,519 thousand in 2016.
Under an operating lease agreement, the Company rented flight training machines and flight simulatorsfrom China Aviation Development Foundation to train pilots. The Company paid the rental based on
usage hours. In 2017 and 2016, the Company paid rentals of about $71,852 thousand and $63,084
thousand, respectively.
In March 2010, the Company signed with CAL Park a yearly renewable operating lease agreement to
use the Operating and Aviation Headquarters building of the Taiwan Taoyuan International Airport.
In 2017 and 2016, the Company paid rentals of about $228,942 thousand and $217,210 thousand,respectively.

- 69 -

g. Endorsements and guarantees
December 31
2017

2016

Authorized
AmountActualAmount Used

Authorized
AmountActualAmount Used

$ 3,850,000
1,080,000
1,055,604$ 2,850,000
318,611405,998$ 3,850,000
1,080,000
180,000
919,742$ 2,783,000
436,418
438,740

The Company
Cal Park
Taiwan Air Cargo Terminal
Cal Hotel
Tigerair Taiwan
h. Bonds payable - related parties
Related parties that invested in the first issue of unsecured bonds in 2016 (Note 19) are summarized asfollows:
December 31, 2016
Aggregate
Units
Par/Dollars

Related Party
The first issue of unsecured bonds in 2016
Mandarin Airlines
Sabre Travel Network (Taiwan)

$

250
50

250,000
50,000In 2017, interest expenses was $3,570 thousand. This bonds payable will be paid off in May 2021.
As of December 31, 2017 the interest payable was $2,142 thousand.
i.

Compensation of key management personnel
For the Year Ended December 31
2017
2016
Short-term employee benefits
Post-employment benefits$

46,805
4,007$

47,74812,269$50,812$60,017

The remuneration of directors and key executives was determined by the remuneration committee
having regard to the performance of individuals and market trends.

32. PLEDGED ASSETS
The following assets were pledged or mortgaged as collateral for long-term bank loans, lease obligations
and business transactions:
December 31

Property, plant and equipment- 70 -

2017

2016$ 39,041,679$ 52,801,26433. COMMITMENTS AND CONTINGENT LIABILITIESAs of December 31, 2017, the Company had commitments and contingent liabilities which were as follows:
In January 2008, the Company entered into a contract to buy fourteen A350-900 aircrafts from Airbus, withthe option to buy six more A350-900 aircrafts, with aggregate listing purchase prices of US$3,933,235
thousand and US$1,802,645 thousand, respectively. The expected period of delivery of the aircrafts wasfrom 2016 to 2018. As of December 31, 2017, ten of the aircrafts had been delivered to the Company, andthe aggregated listing purchase price of the remaining ten aircrafts was $1,150,984 thousand, which has
been paid in the amount of US$287,746 thousand (recognized as prepayments for aircrafts).

34. SIGNIFICANT ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIESThe following information was aggregated by the foreign currencies other than functional currencies of theCompany entities and the exchange rates between foreign currencies and respective functional currencies
were disclosed. The significant assets and liabilities denominated in foreign currencies were as follows:
December 31, 2017
Foreign
Currencies(In Thousands)

Exchange Rate

Carrying
Amount290,336
21,347
293,677
5,164,642
365,62429.850735.71433.81830.26484.5830$ 8,666,739
762,410
1,212,346
1,367,597
1,675,654

406,155
5,957
77,9294,848,134
120,472

29.850735.71433.81830.26484.583012,124,021
212,759
297,556
1,283,786
552,123

Financial assets
Monetary items
USD
EUR
HKD
JPY
RMB

$

Financial liabilities
Monetary items
USD
EUR
HKD
JPY
RMB

- 71 -

December 31, 2016
Foreign
Currencies(In Thousands)

Exchange Rate

Carrying
Amount240,758
15,642
273,058
4,799,620
428,19632.258134.0136
4.15800.27704.6425$ 7,764,768
532,068
1,135,374
1,329,495
1,987,898

250,734
6,511
84,4504,408,042
106,305

32.258134.0136
4.15800.27704.6425

8,088,204
221,448
351,141
1,221,028
493,520

Financial assets
Monetary items
USD
EUR
HKD
JPY
RMB

$

Financial liabilities
Monetary items
USD
EUR
HKD
JPY
RMB

For the years ended December 31, 2017 and 2016, the Company’s net foreign exchange gains (losses) were
$4,920 thousand and $(495,350) thousand, respectively. It is impractical to disclose net foreign exchange
gains (losses) by each significant foreign currency due to the variety of the foreign currency transactions.

35. ADDITIONAL DISCLOSURESa. Following are the additional disclosures required by the Securities and Futures Bureau for the Company
and its investees:
1) Financing provided:

None.

2) Endorsements/guarantees provided: Table 1 (attached).
3) Marketable securities held: Table 2 (attached).
4) Marketable securities acquired and disposed of at costs or prices of at least NT$300 million or 20%of the paid-in capital: Table 3 (attached).
5) Acquisitions of individual real estates at costs or price of at least NT$100 million or 20% of thepaid-in capital: None.
6) Disposals of individual real estates at costs or prices of at least NT$100 million or 20% of thepaid-in capital: None.
7) Total purchases from or sales to related parties amounting to at least NT$100 million or 20% of thepaid-in capital: Table 4 (attached).
8) Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in
capital: Table 5 (attached).

- 72 -

9) Names, locations, and related information of investees over which the Company exercises
significant influence: Table 6 (attached).
10) Derivative financial transactions: Notes 7 and 8.
b. Investment in mainland China: Table 7 (attached).

36. SEGMENT INFORMATIONThe Company mainly engages in air transportation services for passengers, cargo and others. The major
revenue-generating asset is the fleet, which is jointly used for passenger and cargo services. Thus, theCompany’s sole reportable segment is the flight segment. For operating segment reporting in the financial
statements, the Company’s reportable segment comprises the flight and the non-flight businessdepartments.

- 73 -TABLE 1

CHINA AIRLINES, LTD. AND INVESTEESENDORSEMENT/GUARANTEE PROVIDEDFOR THE YEAR ENDED DECEMBER 31, 2017
(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Counterparty
Endorsement/
Guarantee
Provider

No.

0

Name

China Airlines
Cal Park(the “Company”) Taiwan Air Cargo Terminal
Cal Hotel
Tigerair Taiwan Ltd.

Nature of Relationship100% subsidiary
54% subsidiary
100% subsidiary
100% subsidiary by direct
and indirect holdings

Limit on EachCounterparty’s
Maximum
Endorsement/
Balance for the Ending Balance
Guarantee
PeriodAmount(Note 1)

ActualBorrowingAmount$ 11,404,647
11,404,647
11,404,647
11,404,647$ 2,850,000
318,611405,998$ 3,850,000
1,080,000
180,000
1,079,101$ 3,850,000
1,080,000
1,055,604

Ratio ofAccumulated
Value ofAmount ofCollaterals
Collateral toProperty, Plant Net Equity ofor Equipment
the Latest
Financial
Statement (%)

Note 1:

Based on the Company’s guidelines, the maximum amount of guarantee to an individual counterparty is up to 20% of the Company’s shareholders’ equity.

Note 2:

Based on the Company’s guidelines, the allowable aggregate amount of collateral guarantee is up to 50% of the Company’s shareholders’ equity.

- 74 -

-

6.75
1.89
1.85

Maximum
Collateral/
Guarantee
Amounts
Allowable(Note 2)

$ 28,511,619
28,511,619
28,511,619
28,511,619

Endorsement/ Endorsement/ Endorsement/
Guarantee
Guarantee
Guarantee
Given by Parent
Given byGiven on Behalf
on Behalf of
Subsidiaries on of Companies in
Subsidiaries Behalf of Parent Mainland China

Y
Y
Y
Y

N
N
N
N

N
N
N
N

TABLE 2

CHINA AIRLINES, LTD. AND INVESTEESMARKETABLE SECURITIES HELDDECEMBER 31, 2017
(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Holding Company Name

Marketable Security Type and Issuer/Name

China Airlines (“Parent company”) Shares
Everest Investment Holdings Ltd. - common shares
Everest Investment Holdings Ltd. - preference
sharesChung Hua Express Co.
Jardine Air Terminal Services
Mandarin Airlines

SharesChina Airlines
Beneficiary certificates
Barclays America Bonds Fund

Cal-Asia Investment

Sabre Travel Network (Taiwan)

Taiwan Airport Services

Financial Statement AccountNumber of
Shares/Units-

Financial assets carried at cost - noncurrent
Financial assets carried at cost - noncurrent

1,359,368
135,937-

Financial assets carried at cost - noncurrent
Financial assets carried at cost - noncurrent

Parent company Available-for-sale financial assets - current

December 31, 2017
Percentage
CarryingofAmountOwnership(%)$

52,704
473

13.59
-

1,100,000
12,000,000

11,000-2,074,628

Market Valueor Net Asset
Value

$

Note

60,524-Note 1
Note 1

11.00
15.00

27,9609,167-

24,169-24,169-1,000,000

30,030-30,030--19,8982.59
5.45

31,15225,434Note 2
Note 2-

68,926
86,14866,869----Financial assets at fair value through profit or loss - current-

Financial assets carried at cost - noncurrent
Financial assets carried at cost - noncurrent

Beneficiary certificatesFranklin Templeton SinoAm Money Market FundFSITC Taiwan Money Market Fund
Allianz Global Investors Money Market Fund-

Financial assets at fair value through profit or loss - current
Financial assets at fair value through profit or loss - current
Financial assets at fair value through profit or loss - current

6,709,255
5,664,992
5,368,495

68,926
86,14866,869

SharesTransAsia Airways-

Available-for-sale financial assets - noncurrent

2,277,786--

Financial assets at fair value through profit or loss - current

4,568,824

50,166-50,166-814,152

9,485

-

9,485

-

349,523

4,700

-

4,700

-

SharesTaikoo (Xiamen) Landing Gear Services
Taikoo Spirit Aerospace Systems (Jinjiang)
Composite

Beneficial certificatesFuh Hwa Emerging Market Short-term Income
Fund
Hwa Hsia

Relationshipwith the Holding
Company

SharesChina Airlines
Beneficiary certificates
Taishin 1699 Money Market Fund

Parent company Available-for-sale financial assets - current-

Financial assets at fair value through profit or loss - current

Note 1: The subsidiary’s net asset value was $60,524 thousand, which included common shares and preference shares as of and for the year ended December 31, 2017.
Note 2: The Company does not issue shares because it is a limited company.

- 75 -

0.40

TABLE 3

CHINA AIRLINES, LTD. AND SUBSIDIARIES
MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$300 MILLION OR 20% OF THE PAID-IN CAPITALFOR THE YEAR ENDED DECEMBER 31, 2017
(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Company Name

China Airlines, Ltd.

Type and Name ofMarketable
Securities (Note 1)

Financial Statement
Account

Counterparty(Note 2)

SharesScience Park Logistics Investments accounted HCT Logistics Co.,for using the equity
Ltd.
methodTaiwan Aircraft
Investments accounted Taiwan Aircraft
Maintenance andfor using the equity
Maintenance andEngineering Co.,
methodEngineering Co.,
Ltd.
Ltd.

Relationship(Note 2)Beginning Balance
Number ofAmountShares

Non-related party-

Subsidiary-$

Acquisition (Note 3)
Number ofAmountShares

-

-

-

-

$

Disposal (Note 3)
Carrying
AmountAmountNumber of
Shares

-

-

-

-

$

-

-

$

Gain (Loss) on
Disposal--$Ending Balance
Number ofAmountShares

-

-

-

-

$

-

-

Note 1:

The marketable securities in this table refer to shares, bonds, beneficial certificates and the securities derived from the above items.

Note 2:Marketable securities which are recognized as investments accounts for using the equity method are required to be filled in the second column.

Note 3:The cumulative amount of acquired and disposed of marketable securities are required to be calculated separately to determine whether they are at least NT$300 million or 20% of the paid-in capital.

Note 4:Paid-in capital refers to paid-in capital of the indicated parent company. If the shares issued by an issuer have no par value or a par value other than NT$10 per share, the threshold of 20% of paid-in capital, as set out in the preceding item, shall be replaced by 10% of equity attributable toowners of the indicated parent company, as stated in the respective balance sheet.

- 76 -TABLE 4

CHINA AIRLINES, LTD. AND INVESTEESTOTAL PURCHASES FROM OR SALES TO RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITALFOR THE YEAR ENDED DECEMBER 31, 2017
(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)Transaction Details
Company Name

Related Party

Nature of Relationship

Purchase/
Sale$

Amount% of
Total

Payment Terms

Unit Price

507,489
334,375(2,495,101)
147,9141,737,819
228,942
375,579
1,193,551
376,678
197,713
136,681(288,954)
119,865
138,905

0.42
0.27(1.78)
0.12
1.43
0.19
0.31
0.98
0.31
0.16
0.11
(0.21)
0.10
0.11

30 days
2 months
2 months
2 months
90 days
2 months
40 days
40 days
60 days
30 days
1 month
1 month
2 months
2 months$

China Airlines, Ltd.
(“China Airlines”)

Taiwan Air Cargo Terminal
Hua Hsia
Mandarin Airlines
Mandarin Airlines
China Pacific Catering Services
Cal Park
Taiwan Airport Services
Taoyuan International Airport Service
Kaohsiung Catering Services
China Aircraft Services
Cal Hotel
Tigerair Taiwan
China Pacific Laundry Services
Eastern United International Logistics

Subsidiary
Subsidiary
Subsidiary
Subsidiary
Equity-method investee
Subsidiary
Subsidiary
Subsidiary
Equity-method investee
Equity-method investee
Subsidiary
Subsidiary
Equity-method investee
Equity-method investee

Purchase
Purchase
Sale
Purchase
Purchase
Purchase
Purchase
Purchase
Purchase
Purchase
Purchase
Sale
Purchase
Purchase

Tigerair Taiwan

Taoyuan International Airport Service

Same parent company

Purchase

152,384

2.59

Mandarin Airlines

Taiwan Airport Services

Same parent company

Purchase

121,505

1.78- 77 -

Note/Account Payable or
Receivable% ofPayment Terms Ending Balance
Total

Abnormal Transaction--

30 days-

1 month

-

$

Note

(48,735)(49,140)
452,488(339,274)(440,739)(67,871)(355,885)(70,948)(30,260)(10,140)
38,796(29,088)(14,769)(3.34)(3.37)
4.99(23.28)(30.24)(4.66)(24.42)(4.87)(2.08)(0.70)
0.43(2.00)(1.01)--(30,344)(4.79)--(17,825)(1.42)-TABLE 5

CHINA AIRLINES, LTD. AND INVESTEESRECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITALDECEMBER 31, 2017
(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Company Name

Related Party

Nature of Relationship

OverdueEnding Balance(Note)

Turnover Rate

$ 452,488

Note

China Airlines, Ltd. (“China Airlines”)

Mandarin Airlines

Subsidiary

Mandarin Airlines

China Airlines

Parent company

339,274

China Pacific Catering Services

China Airlines

Parent company

Taoyuan International Airport Service

China Airlines

Parent company

Amount$Action Taken

Amounts Received
in Subsequent
PeriodAllowance for
Bad Debts--$ 271,899

Note

-

-

307,390-

440,739

4.08

-

-

440,698-

355,885

3.51

-

-

355,764-

Note: Accounts receivable and revenue were not directly correlated because of the particular industry characteristics, and therefore the turnover rate was not applicable.

- 78 -$-TABLE 6

CHINA AIRLINES, LTD. AND INVESTEESNAMES, LOCATIONS, AND OTHER INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCEFOR THE YEAR ENDED DECEMBER 31, 2017
(New Taiwan Dollars and Foreign Currencies in Thousands, Unless Stated Otherwise)

Investment Amount
Investor Company

Investee Company

Location

Cal Park
Mandarin Airlines
Taiwan Air Cargo Terminal
Cal-Dynasty International
China Pacific Catering Services
Taoyuan International Airport Services
Cal-Asia Investment
Sabre Travel Network (Taiwan)
China Aircraft Service
Asian Compressor Technology Services
Taiwan Airport Services
Kaohsiung Catering Services
Cal Hotel Co., Ltd
Science Park Logistics
China Pacific Laundry Services

Taoyuan, Taiwan
Taipei, Taiwan
Taoyuan, Taiwan
Los Angeles, U.S.A.
Taoyuan, Taiwan
Taoyuan, Taiwan
Territory of the British Virgin Islands
Taipei, Taiwan
Hong Kong International Airport
Taoyuan, Taiwan
Taipei, Taiwan
Kaohsiung, Taiwan
Taoyuan, Taiwan
Tainan, Taiwan
Taoyuan, Taiwan

Hwa Hsia

Taoyuan, Taiwan

Yestrip
Dynasty Holidays
Global Sky Express
Freighter Princess Ltd.
Freighter Prince Ltd.
Tigerair Taiwan Co., Ltd.
Taiwan Aircraft Maintenance andEngineering Co., Ltd.
Nordam Asia Ltd.

Taipei, Taiwan
Tokyo, Japan
Taipei, Taiwan
Cayman Islands
Cayman Islands
Taipei, Taiwan
Taoyuan, Taiwan

Real estate lease and international trade
Air transportation and maintenance of aircraft
Air cargo and storage
A holding company, real estate and hotel services
In-flight catering
Airport services
General investment
Sale and maintenance of hardware and software
Airport services
Research, manufacture and maintenance of engines
Airport services
In-flight catering
Hotel business
Storage and customs of services
Cleaning and leasing of the towel of airlines, hotels,
restaurants and health clubs
Cleaning of aircraft and maintenance of machine andequipment
Travel businessTravel business
Forwarding and storage of air cargo
Aircraft lease
Aircraft lease
Air transportation and maintenance of aircraft
Aircraft maintenanceTaoyuan, Taiwan

Aircraft maintenance

Mandarin Airlines

Tigerair Taiwan Co., Ltd.
Taiwan Airport Services

Taipei, Taiwan
Taipei, Taiwan

Air transportation and maintenance of aircraft
Airport services

Cal-Asia Investment

Eastern United International Logistics

Hong Kong

Forwarding and storage of air cargo

HK$

3,329

Taiwan Airport Services

Taiwan Airport Service (Samoa)

Samoa

Airport services and investment

US$

5,877

China Airlines, Ltd.

Main Business and ProductDecember 31,
2017

December 31,
2016

$

$

1,500,000
2,042,368
1,350,000
US$ 26,145
439,110147,000
US$
7,172
52,200
HK$ 58,000
3,704
12,289140,240
465,000
137,500

1,500,000
2,042,368
1,350,000
US$ 26,145
439,110147,000
US$
7,172
52,200
HK$ 58,000
77,322
12,289140,240
465,000
214,745
137,500

150,000,000
188,154,025
135,000,000
2,614,500
43,911,000
34,300,000
7,172,346
13,021,042
28,400,000
370,440
20,626,644
14,329,759
46,500,000
13,750,000

100.0093.99
54.00
100.0051.00
49.00
100.00
93.93
20.00
47.35
35.78
100.0055.00

77,27077,270100.0083,01426,265
20,400
2,500
US$
1
US$
1
1,600,000
160,000

1,600,000
408
250,000
180,000,000
135,000,000

100.00
51.00
25.00
90.00
100.002,450-

245,000

200,000
11,658200,000
11,658HK$US$

77,27026,265
20,4002,500
US$1,648,387
1,350,000
JPY

Adopted the treasury shares method in recognizing investment income or loss.

Note 2:

Represents the consolidated financial information of the foreign holding company disclosed in accordance with local regulations.

Note 3:

The Company does not issue shares because it is a limited company.

Note 4:

Taiwan Aircraft Maintenance and Engineering Co., Ltd. invested capital in the amount of $490,000 thousand and $700,000 thousand in April 2017 and November 2017, respectively.

Note 5:The Company signed a contract to sell all of its holding in Asian Compressor Technology Services, and reclassified it as noncurrent assets held for sale at book value.

$

1,522,696
1,211,739
1,339,450
1,185,323
756,965
654,104
478,933
450,600
493,077
259,459
300,400
435,965
171,229

Net Income(Loss) of theInvestee

Investment
Income (Loss)$$

10,017
125,570
190,444
34,695472,248248,207
31,191
182,046
122,349
363,033
108,331242,473
48,59083,91942,461Note

10,017118,023
102,840
34,695
235,871
121,622
31,191
171,004
24,47088,94351,29586,757
48,59021,81923,354Note 1
Note 2
Note 5-

11,28011,280Note 1

25,90425,992
7,437
915,135
1,231,548

440(4,725)
6,876
572,953(68,580)440(2,410)1,719
514,897(68,580)

Note 4

49.00

2,399

(104)

(51)

-

20,000,000
469,755

10.00
1.08

101,682
5,902

572,953
108,330

57,295
1,167

-

3,329

1,050,000

35.00

43,171

13,726

4,804

-

5,877

-

100.00370,322

25,14325,143Note 3JPY

Note 1:- 79 -

Balance as of December 31, 2017
Percentage
Number ofof
Carrying
Shares/Units Ownership
Amount(%)

TABLE 7

CHINA AIRLINES, LTD. AND INVESTEESINVESTMENTS IN MAINLAND CHINAFOR THE YEAR ENDED DECEMBER 31, 2017
(New Taiwan Dollars/Renminibi/U.S. Dollars In Thousands, Unless Stated Otherwise)
China Airlines

Investee Company Name

Main Business andProduct

Accumulated
Outflow of
Total Amount
Investment Investmentof Paid-in
Typefrom Taiwan as
Capitalof January 1,
2017

Investment Flow

Outflow

Inflow

Airport Air Cargo Terminal(Xiamen) Co., Ltd.

Forwarding and storage $ 1,028,781
of air cargo(RMB 224,480)

Indirect(Note 1)$
124,955 $(US$4,186)

Airport Air Cargo Service(Xiamen) Co., Ltd.

Forwarding and storage64,161of air cargo(RMB 14,000)

Indirect(Note 1)

58,133
1,947)-(US$

Taikoo (Xiamen) Landing
Gear Services

Landing gear
1,101,194
maintenance services (US$ 36,890)

Indirect(Note 1)64,2152,151)-(US$

Taikoo Spirit Aerospace
Systems (Jinjang)Composite material

Indirect(Note 1)

18,985
636)

-

(US$

(US$

348,149
11,663)

Accumulated Investment in
Mainland China as ofDecember 31, 2017

Investment Amount
Authorized by Investment
Commission, MOEA

Limit on Investment$266,287 (US$8,920)$647,805 (Note 3)$34,213,942 (Note 4)

Accumulated
Outflow ofInvestment
from Taiwan asof December 31,
2017

-

$

-

% Ownershipof Direct orIndirect
Investment

Net Income(Loss) of
the Investee

Carrying
Amountas ofDecember 31,
2017

Investment
Gain (Loss)$
124,955 $
79,880(US$
4,186) (RMB 17,741)

14.00

58,133
99,528
1,947) (RMB 22,105)

14.00

(US$

64,2152,151)

-

2.59

-

(US$

18,985
636)

-

5.45

-

(US$

-

-

-

Accumulated
InwardRemittance ofEarnings as ofDecember 31,
2017$
12,098 $242,549 $(RMB 2,484) (RMB 52,924) (US$83,6342,802)(Note 2)

13,952
128,035 $3,095) (RMB 27,937) (US$26,129875)(Note 2)

(RMB

(RMB

-

-

19,8984,342)-(Continued)- 80 -

Taiwan Airport Services

Investee Company

Main Business andProduct

Accumulated
Outward
Remittance for
Method ofPaid-in Capital
Investment
Investment
from Taiwan asof January 1,
2017

Airport Air Cargo Terminal(Xiamen) Co., Ltd.

Forwarding and storage $ 1,028,781
of air cargo(RMB 224,480)

Indirect(Note 5)$
119,951 $(US$
4,018)

Airport Air Cargo Service(Xiamen) Co., Ltd.

Forwarding and storage64,161of air cargo(RMB 14,000)

Indirect(Note 5)

(US$

57,515
1,927)

Remittance of Funds

OutwardAccumulated
Outward
Remittance forInvestment
from Taiwan asof December 31,
2017

Inward

-

$

-

-

$
119,951 $
79,880(US$
4,018) (RMB 17,741)

14.00

57,51599,5281,927) (RMB 22,105)

14.00

(US$

Accumulated Outward
Remittance for Investment in
Mainland China as of December 31, 2017

Investment Amounts Authorized by
Investment Commission, MOEA

Upper Limit on the Amount of
Investment Stipulated by
Investment Commission, MOEA

$177,466 (US$5,945)$177,466 (US$5,945)$328,776 (Note 4)

Net Income(Loss) of theInvestee% Ownershipof Direct orIndirect
Investment

Investment
Income (Loss)

Carrying
Amount as ofDecember 31,
2017

Accumulated
Repatriation of
Investment
Income as ofDecember 31,
2017$
11,183 $
241,265 $
113,622(RMB 2,484) (RMB 52,644) (US$3,806)(RMB

13,934
128,256
3,095) (RMB 27,985) (US$41,9881,407)

Note 1: China Airlines, Ltd. the “Company” invested in Cal-Asia Investment, which, in turn, invested in a company located in mainland China.
Note 2: The inward remittance of earnings in 2017 amounted to US$2,801,749 and US$875,330.
Note 3: The amount comprised US$19,828,324, RMB4,200,000 and NT$36,666,667.
Note 4: The limit stated in the Investment Commission’s regulation, “Investment or Technical Cooperation in Mainland China Adjustment Rule,” is the larger of the Company’s net asset value or 60% of the consolidated net asset value.
Note 5: Taiwan Airport Services invested in Taiwan Airport Services (Samoa), which in return, invested in a company located in mainland China.
Note 6: The RMB and U.S. dollar amounts of assets are translated at year-end rates and those of gains (losses), at the average of the year-end rates of refer for the reporting period.
(Concluded)- 81 -