Letter To Shareholders - Mitac

18) Convertible bonds
For convertible bonds issued prior to and including December 31, 2005, in
accordance with the EITF 95-78 issued by the Accounting Research and
Development Foundation of the R.O.C., the Company elected not to bifurcate the
embedded derivatives and accounted for those convertible bonds as follows:
A. When bonds are converted, the par value of the bonds is credited to common
stock and any excess is credited to capital reserve. No gain or loss is recognized
on bond conversion.
B. Expenditures incurred on issuance of convertible bonds are classified as deferred
assets and amortized over the life of the bonds. In cases where the bonds are
converted or redeemed before the maturity date, the issuance expenditures are
expensed in proportion to the amount of bonds converted or redeemed.
19) Pension plan
Under the defined benefit pension plan, net periodic pension costs are recognized in
accordance with the actuarial calculations. Net periodic pension costs include
service cost, interest cost, expected return on plan assets, and amortization of
unrecognized net transition obligation and gains or losses on plan assets.
Unrecognized net transition obligation is amortized on a straight-line basis over 15
years. Under the defined contribution pension plan, net periodic pension costs are
recognized as incurred.
20) Warranty
Warranty is estimated based on historical experience. Service warranty expense is
included in the current year's operating expense.
21) Income tax
A. Income taxes are allocated on the inter- and intra-period basis. Over or under
provision of prior years’ income tax liabilities is included in current year’s
income tax.
B. Investment tax credits arising from expenditures incurred on acquisitions of
equipment or technology, research and development, employees’ training, and
equity investments are recognized in the year the related expenditures are
incurred.
C. An additional 10% tax is levied on the unappropriated retained earnings and is
recorded as income tax expense in the year the stockholders resolve to retain the
earnings.
D.When a change in the tax laws is enacted, the deferred tax liability or asset should
be recomputed accordingly in the period of change. The difference between the
new amount and the original amount, that is, the effect of changes in the deferred
tax liability or asset, should be recognized as an adjustment to income tax
expense (benefit) for income from continuing operations in the current period.
~105~