CHT

Business Context and Reporting Period

Company: Chunghwa Telecom Co., Ltd. (NYSE: CHT, TAIEX: 2412)
Filing Date: April 24, 2008
Reporting Period: Fiscal years ended December 31, 2007 and 2006
Context: This Form 6-K announces a material change in accounting policy. Beginning in 2008, the Company will report financial results under Republic of China Generally Accepted Accounting Principles (ROC GAAP) instead of U.S. GAAP. The filing provides reconciliations between the two standards for net income and stockholders' equity for the years 2006 and 2007 to assist investors in understanding the transition.

Key Financial Metrics (2007 vs. 2006)

Note: All figures are in millions of New Taiwan Dollars (NT$) unless otherwise noted. Data presented below reflects U.S. GAAP figures as the primary reporting standard prior to the 2008 change.

Material Changes and GAAP Differences

The filing highlights significant variances between U.S. GAAP and ROC GAAP, resulting in different reported asset values and earnings. Key drivers of these differences include:

• Property, Plant, and Equipment (PPE): ROC GAAP permits revaluation of PPE and land, leading to significantly higher asset values ($469.6B vs. $406.2B in 2007) and different depreciation expenses compared to U.S. GAAP, which prohibits revaluation.
• Revenue Recognition: Differences exist in the timing of revenue recognition for prepaid phone cards and one-time connection fees. ROC GAAP defers these revenues differently than U.S. GAAP, impacting reported income.
• Employee Bonuses: Under ROC GAAP, bonuses are treated as appropriations of retained earnings and recorded after shareholder approval. Under U.S. GAAP, they are accrued as compensation expenses based on management estimates.
• Share-Based Compensation: U.S. GAAP recognizes compensation expense for discounted share offers and stock options using fair value methods (SFAS 123R), whereas ROC GAAP historically treated certain transactions as equity transactions or used intrinsic value methods.
• Pension Accounting: U.S. GAAP requires recognition of overfunded/underfunded pension status on the balance sheet and in comprehensive income, whereas ROC GAAP does not require this recognition.

Outlook, Risks, and Management Commentary

Management Commentary: The Company states that the change to ROC GAAP aligns with its local statutory reporting requirements post-privatization. The Company will continue to provide reconciliations to U.S. GAAP for holders of American Depositary Shares (ADSs) to ensure transparency.

Risks and Contingencies:

• Comparability Risk: Investors must exercise caution when comparing financial results across periods or with other U.S. companies due to the fundamental differences in accounting principles (e.g., asset revaluation, revenue timing).
• Regulatory Compliance: The filing notes that the Company is subject to ROC regulations regarding the 10% tax on unappropriated earnings and specific rules for employee remuneration, which create timing differences in expense recognition.

Unusual Items: The filing details specific adjustments related to the privatization process, including the settlement of pension obligations by the Ministry of Transportation and Communication (MOTC), which impacted equity and retained earnings differently under the two standards.

Key Facts for Investor Verification

• Accounting Standard Shift: Verify that future filings will present ROC GAAP as the primary standard with U.S. GAAP reconciliations, reversing the previous practice.
• Asset Valuation Discrepancy: Note that Total Assets under ROC GAAP are approximately 15% higher than under U.S. GAAP due to land and PPE revaluations.
• Earnings Per Share Variance: Basic EPS under U.S. GAAP ($5.13) was higher than ROC GAAP ($4.56) in 2007, primarily due to differences in share count adjustments and expense recognition timing.
• Cash Flow Classification: Be aware that cash flows from investing and financing activities (e.g., changes in customer deposits, employee bonuses) are reclassified to operating activities under U.S. GAAP, affecting liquidity analysis.
• Reconciliation Availability: Confirm that the Company continues to provide the detailed reconciliation tables for net income and equity in future reports to maintain comparability for U.S. investors.