6.1. Risks Associated with Interest Rate Fluctuation, Foreign Exchange Volatility, and Inflation

Risks associated with foreign currency:

The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the Company’s operating activities (when revenue or expense are denominated in a different currency from the Company’s functional currency) and the Company’s net investments in foreign subsidiaries. The Company reviews its assets and liabilities denominated in foreign currency and enter into forward exchange contracts to hedge the exposure from exchange rate fluctuations. The level of hedging depends on the foreign currency requirements from each operating unit. As the purpose of holding forward exchange contracts is to hedge exchange rate fluctuation risk, the gain or loss made on the contracts from the fluctuation in exchange rates are expected to mostly offset gains or losses made on the hedged item. The foreign currency sensitivity analysis of the possible change in foreign exchange rates on the Company’s profit is performed on significant monetary items denominated in foreign currencies as of the end of the reporting period. The Company’s foreign currency risk is mainly related to the volatility in the exchange rates for USD and CNY. The information of the sensitivity analysis is as follows: When NTD appreciates or depreciates against USD by 0.1%, the profit for the years ended December 31, 2016 and 2015 decreases or increases by NT$4,860 thousand and NT$6,581 thousand, while equity decrease/increase by NT$32,213 thousand and NT$6,313 thousand, respectively. When NTD appreciates or depreciates against CNY by 0.1%, the profit for the years ended December 31, 2016 and 2015 decreases or increases by NT$4 thousand and NT$88 thousand, while equity decrease/increase by NT$7,194 thousand and NT$3,641 thousand, respectively.

Risks associated with interest rate:

The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s loans, receivables at variable interest rates and borrowings at variable and fixed interest rates. Moreover, the market value of the Company’s investment in credit-linked deposits and interest rate-linked deposits are affected by interest rate. The market value would decrease (even lower than the principal) when the interest rate increases, and vice versa. The market values of exchange rate-linked deposits are affected by interest rates and changes in the value and volatility of the underlying. The following sensitivity analysis focuses on interest rate risk and does not take into account the interdependencies between risk variables. The interest rate sensitivity analysis is performed on items exposed to interest rate risk as of the end of the reporting period, including investments and borrowings with variable interest rates. At the reporting date, an increase/decrease of 10 basis points of interest rate in a reporting period could cause the profit for the years ended December 31, 2016 and 2015 to increase/decrease by NT$11,188 thousand and NT$6,464 thousand, respectively.

Risks associated with inflation:

There was no major impact from inflation on the Company’s 2016 operations.

The Finance Division is responsible for related risk management.

6.2. Risks Associated with High-Risk/High-Leveraged Investment; Lending, Endorsements, and Guarantees for Other Parties; and Financial Derivative Transactions

As part of the Company’s conservative financial management, it does not engage in investments that are either high-risk or highly leveraged. The Company has in place a complete and thorough policy and internal control scheme governing lending, endorsements, guarantees for other parties, and financial derivative transactions. For the last fiscal year and year to date, the Company’s lending, endorsements and guarantees for other parties are in accordance with relevant provisions. The Company engages in derivative transactions for hedging purposes. Any gains or losses from such transactions should roughly cancel out gains or losses in the underlying assets. For the last fiscal year and year to date, all the transactions are in accordance with relevant provisions.

The Finance Division is responsible for related risk management.

6.3. Future R&D Plans and Expected R&D Spending

The Company’s R&D projects all follow industry trends and are implemented in a highly integrated and economical way. R&D expenses in 2016 and 2015 were NT$55,685,244 thousand and NT$49,528,765 thousand, accounting for 20% and 23% of revenue respectively. The Company will continue to invest in R&D to develop products for next generation communication standard. The budget for R&D projects above mentioned accounts for approximately 80% of 2017 total R&D budget which is estimated to be 24% of 2017 revenue.

6.4. Risk Associated with Changes in the Political and Regulatory Environment

The Taiwan Financial Supervisory Commission (FSC) required listed companies, starting from January 1, 2015, to prepare their consolidated financial statements in accordance with the 2013 version of following FSC endorsed standards and interpretations: “International Financial Reporting Standards,” “International Accounting Standards,” and “IFRS Interpretations” or Interpretations’ announcement (collectively, “2013 Taiwan-IFRSs version”). From January 1, 2017, FSC requires listed companies to prepare their consolidated financial statements in accordance with the 2015 Taiwan-IFRSs version. The Company had already prepared its 2016 annual and interim consolidated financial statements in accordance with 2013 Taiwan-IFRSs version and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers. Also, the Company has already prepared its 2017 interim consolidated financial statements in accordance with 2015 Taiwan-IFRSs version and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers.

The Company’s Finance Division is responsible for risks associated with changes in the political and regulatory environment

6.5. Impact of New Technology and Industry Changes

Technologies used in the electronics and semiconductor industries are constantly changing. New standards and applications continuously emerge in wireless communication and digital home segments. The Company will continue to invest in research and development, to improve operating efficiency, and to monitor the latest trend of the market, in order to secure and expand our market share.

The Company’s Business Units are responsible for risks associated with new technology and industry changes.

6.6. Changes in Corporate Image and Impact on Company’s Crisis Management

MediaTek has always maintained a humanistic philosophy toward management and provides a working environment that is both challenging and nurturing for its employees, who are able to grow and realize their full potential. MediaTek upholds the partnership with our suppliers and customers and implements corporate social responsibility. At the same time, MediaTek’s has maintained its core values, such as integrity, conviction inspire by deep thinking, customer focus, constant renewal, innovation and teamwork. As of the Annual Report’s publication date, there has been no event that adversely impact in MediaTek’s corporate image and impact on company’s crisis management.

The Company’s Business Units are responsible for risks associated with the corporate image and impact on company’s crisis management.

6.7. Risks Associated with Mergers and Acquisitions

In order to enhance operating performance and competitive edge, the Company’s subsidiary, Hsu-Si Investment (Hsu-Si), conducted tender offer to acquire Airoha Technology (Airoha) in February and March, 2017. Both Hsu-Si and Airoha’s Board meetings on March 28th, 2017 have approved share swap. After the relevant legal process is complete, Airoha will become Hsu-Si’s fully-owned subsidiary. Please refer to “6. Financial Statements of Independent Auditors’ Report – MediaTek & Subsidiaries” under “IX. Financial Information” for more details.

The Company’s Business Units and the finance department are responsible for this risk item and execution.

6.8. Risks Associated with Facility Expansion

To meet company’s future growth and increasing demand in talents, the Company expanded office buildings in Hsinchu Science Park, Neihu Technology Park, Mainland China, and relevant oversea areas. Expansion plans are under prudent assessments to ensure they fully meet operation needs such as space for working, labs and the rest. Results of the benefit assessment are within the Company’s expectation.

The Human Resources Division is responsible for managing the risks associated with plant expansion.

6.9. Risks Associated with Purchase Concentration and Sales Concentration

MediaTek’s production allocation is flexible and diversified, and is able to deal with any emergencies from any of its production lines. Therefore there is no risk associated with purchase concentration. Sales concentration does not pose any risks since MediaTek’s products are sold to many clients throughout Japan, Korea, Europe, Southeast Asia, and Greater China.

Each business units are responsible for managing the risks associated with purchase concentration and sales concentration.

6.10. Risks Associated with Sales of Significant Numbers of Shares by MediaTek’s Directors and Major Shareholders Who Own 10% or More of MediaTek’s Total Outstanding Shares

In the latest fiscal year and as of the date of this Annual Report, there were no such risks for MediaTek.

6.11. Risks Associated with Change in Management

In the latest fiscal year and as of the date of this Annual Report, there were no such risks for MediaTek.

6.12. Risks Associated with Litigations

1. Optical Devices, LLC (“Optical Devices”) filed a complaint with the U.S. International Trade Commission (the “Commission”) against MTK and subsidiary MediaTek USA Inc. on September 3, 2013 alleging infringement of United States Patent No. 8,416,651. Optical Devices alleged that MTK’s optical disc drive chips infringe its patent and sought to prevent the accused products from being imported into the United States. The Commission issued an Initial Determination on July 17, 2014 finding that Optical Devices failed to meet the domestic industry requirement and terminating the investigation. On September 3, 2014, the Commission vacated the Initial Determination and remanded the case for further proceedings. On October 21, 2014, the Commission issued an Initial Determination to terminate the investigation on the ground that Optical Devices’ lack of standing. On December 4, 2014, the Commission partially vacated the Initial Determination and remanded a part of the case including the investigation against MTK for further proceedings. On April 27, 2015, the Commission issued an Initial Determination terminate the investigation on the ground of Optical Devices’ lack of standing. The Commission issued notice to affirm the Initial Determination with modified reasoning and terminated the investigation on June 9, 2015.
2. Luciano F. Paone filed a complaint in the United States District Court for the South District of New York against subsidiary MediaTek USA Inc. on February 6, 2015, alleging infringement of United States Patent No. 6,259,789. The court dismissed the claims with prejudice against MediaTek USA pursuant to the parties’ joint motion on March 2, 2016.
3. Innovatio IP Ventures, LLC (“Innovatio”) filed a complaint in the United States District Court for the Northern District of Illinois against subsidiary MediaTek USA Inc. on March 16, 2015, alleging infringement of United States Patent Nos. 6,697,415, 5,844,893, 5,740,366, 7,916,747, 6,665,536, 7,013,138, 7,107,052, 5,546,397, 7,710,907, 7,710,935, 6,714,559, 7,457,646 and 6,374,311. The court dismissed the claims with prejudice against MediaTek USA Inc. pursuant to the parties’ joint stipulation on August 22, 2016.
4. Mariner IC Inc. (“Mariner”) filed a complaint in the United States District Court for the Eastern District of Texas against MTK and subsidiary MediaTek USA Inc. on April 25, 2016, alleging infringement of United States Patent Nos. 5,560,666 and 5,846,874. The operations of MTK and subsidiary MediaTek USA Inc. would not be materially affected by this case.
5. Semcon IP Inc. (“Semcon”) filed a complaint in the United States District Court for the Eastern District of Texas against MTK and subsidiary MediaTek USA Inc. on April 25, 2016, alleging infringement of United States Patent Nos. 7,100,061, 7,596,708, 8,566,627 and 8,806,247. The operations of MTK and subsidiary MediaTek USA Inc. would not be materially affected by this case.
6. ZiiLabs Inc. Ltd. (“ZiiLabs”) filed a complaint with the Commission against MTK and subsidiary MediaTek USA Inc. on December 16, 2016 alleging infringement of United States Patent No. 6,677,952, 6,950,350, 7,518,616, 8,643,659. The operations of MTK and subsidiary MediaTek USA Inc. would not be materially affected by this case. Also on December 16, 2016, ZiiLabs filed a complaint in the United States District Court for the Eastern District of Texas against MTK and subsidiary MediaTek USA Inc., alleging infringement of the above referenced patents. The operations of MTK and subsidiary MediaTek USA Inc. would not be materially affected by this case.
7. Advanced Micro Devices, Inc. and ATI Technologies ULC (collectively “AMD”) filed a complaint with the Commission against MTK and subsidiary MediaTek USA Inc. on January 24, 2017 alleging infringement of United States Patent No. 7,633,506, 7,796,133, 8,760,454, and 9,582,846. The operations of MTK and subsidiary MediaTek USA Inc. would not be materially affected by this case.
8. Broadcom Corporation (“Broadcom”) filed a complaint with the Commission against MTK and subsidiaries MediaTek USA Inc. and MStar Semiconductor Inc. on March 7, 2017 alleging infringement of United States Patent No. 8,284,844, 7,590,059, 8,068,171, 7,310,104, and 7,342,967. The operations of MTK and subsidiaries MediaTek USA Inc. and MStar Semiconductor Inc. would not be materially affected by this case.

The Company will handle these cases carefully.

6.13. Other Material Risk:

None.