PART I We use long-term historical actual return information and estimate future long-term investment returns  by reference to external sources to develop the expected long-term return on plan assets. The discount rate  is assumed based on the rates available on high-quality fixed-income debt instruments with the same period  to maturity as the estimated period to maturity of the pension benefit. We assume the rate of increase in  compensation levels and average remaining years of service based on historical data. Any changes in one or more  of these assumptions could impact our pension benefits.  Deferred income taxes represent the effect of temporary differences between the amounts of assets and  liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. We  measure deferred tax assets and liabilities using statutory tax rates that, if changed, would result in either an  increase or a decrease in the provision for income taxes in the period of change.  We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that  is more likely than not to be realized. While we have considered future taxable income and ongoing prudent  and feasible tax planning strategies in assessing the need for the valuation allowance, we cannot assure you  that we would not need to increase the valuation allowance to cover additional deferred tax assets that may not  be realizable. Any increase in the valuation allowance could have a material adverse effect on our income tax  provision and net income in the period in which such determination is made.  We had a valuation allowance of NT$268 million (US$9.2 million) on our deferred tax asset balance as  of December 31, 2010. We do not have a full valuation allowance on the deferred tax asset, as we believe these  benefits will be fully realizable based on our projection of future operating income. If we experience a significant  decrease in our future operating income, our ability to realize the deferred tax assets could be negatively  impacted, and thus an increase in the valuation allowance might be required.  Any tax credits arising from purchases of machinery, equipment and technology, research and development  expenditures, personnel training, and investments in important technology based enterprises are recognized  using the flow through method. Adjustments of prior years’ tax liabilities are added to or deducted from the  current year’s tax provision. Under R.O.C. GAAP, income taxes of 10% on undistributed earnings are recorded  in the year of stockholders approval which is the year subsequent to the year the earnings are generated. Under  US GAAP, the 10% tax on unappropriated earnings is accrued during the period the earnings arise and adjusted  to the extent that distributions are approved by the stockholders in the following year.  Effective from January 1, 2007, we adopted a guidance prescribing the recognition threshold and  measurement attribute for the financial statement recognition and measurement of a tax position taken or  expected to be taken in a tax return under U.S. GAAP. This guidance also provides guidance on derecognition,  classification, interest and penalties, disclosure and transition. The evaluation of a tax position in accordance  with this guidance is a two step process. The first step is recognition, where we evaluate whether an individual  tax position has a likelihood of greater than 50% of being sustained upon examination based on the technical  merits of the position, including resolution of any related appeals or litigation processes. For tax positions that  are currently estimated to have a less than 50% likelihood of being sustained, zero tax benefit is recorded. For tax  positions that have met the recognition threshold in the first step, we perform the second step of measuring the  benefit to be recorded. The actual benefits ultimately realized may differ from the estimates. The adoption of this  guidance did not have a material impact on our report. We did not identify significant unrecognized tax benefits  for the year ended December 31, 2008, 2009 and 2010. It is highly unlikely that we will incur any interests or  penalties related to potential underpaid income tax expenses.  Accounting for Income Taxes  72