Accounting and Measurement Policies

(51) Measurement policies

The main assets and liabilities disclosed in the consolidated balance

sheet are measured as follows:

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Balance sheet item Measurement principle
ASSETS
Goodwill Acquisition cost (subsequent measurement: impairment-only approach)
Other intangible assets
With finite useful life Amortized cost
With indefinite useful life or not yet available for use Amortized cost (subsequent measurement: impairment-only approach)
Property, plant and equipment Amortized cost
Financial assets (current/non-current)
Held-to-maturity investments Amortized cost
Available-for-sale financial assets Fair value
Loans and receivables Amortized cost
Derivative assets (financial transactions) Fair value
Other assets
Derivative assets (operational) Fair value
Receivables from non-income related taxes Amortized cost
Other receivables Amortized cost
Deferred tax assets Undiscounted measurement based on tax rates that are expected to apply to the period when the asset is realized or the liability is settled
Inventories Lower of cost and net realizable value
Trade accounts receivable Amortized cost
Income tax receivables Expected tax refunds based on tax rates that have been enacted or substantively enacted by the end of the reporting period
Cash and cash equivalents Nominal value
Assets held for sale Lower of carrying amount and fair value less costs to sell
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Balance sheet item Measurement principle
Equity and liabilities
Provisions for pensions and other post-employment benefits Projected unit credit method
Other provisions (current/non-current) Present value of the expenditures expected to be required to settle the obligation
Financial liabilities (current/non-current)
Bonds and commercial paper Amortized cost
Bank loans Amortized cost
Liabilities to related parties Amortized cost
Loans from third parties and other financial liabilities Amortized cost
Liabilities from derivatives (financial transactions) Fair value
Finance lease liabilities Amortized cost
Other liabilities (current/non-current)
Liabilities from derivatives (operational) Fair value
Liabilities from non-income-related taxes Settlement amount
Other liabilities Settlement amount
Deferred tax liabilities Undiscounted measurement based on tax rates that are expected to apply to the period when the asset is realized or the liability is settled
Trade accounts payable Amortized cost
Income tax liabilities Expected tax payments based on tax rates that have been enacted or substantively enacted by the end of the reporting period
Liabilities directly related to assets held for sale Fair value

(52) Consolidation methods

The consolidated financial statements are based on the single-entity financial statements of the consolidated companies as of the balance sheet date, which were prepared applying consistent accounting policies in accordance with IFRS.

Acquisitions are accounted for using the purchase method in accordance with IFRS 3. Subsidiaries acquired and consolidated for the first time were measured at the carrying values at the time of acquisition. Differences resulting in this context are recognized as assets and liabilities to the extent that their fair values differ from the values carried in the financial statements. Any remaining positive difference is recognized as goodwill within intangible assets.

In cases where a company was not acquired in full, non-controlling interests are measured using the fair value of the proportionate share of net assets. The option to measure non-controlling interests at fair value on the date of their acquisition (full goodwill method) was not utilized.

When additional shares in non-controlling interests are acquired, the purchase price amount that exceeds the carrying amount of this interest is recognized immediately in equity.

IFRS 11 is applied for joint arrangements. A joint arrangement exists when, on the basis of a contractual arrangement, the Group and third parties jointly control business activities. Joint control means that decisions about the relevant activities require unanimous consent. Joint arrangements are either joint operations or joint ventures. Revenues and expenses as well as assets and liabilities from joint operations are included in the consolidated financial statements on a pro rata basis in accordance with the Group’s rights and obligations. By contrast, interests in joint ventures as well as in material associates over which the Group has significant influence are included in accordance with IAS 28 using the equity method of accounting.

Intragroup sales, expenses and income, as well as all receivables and payables between the consolidated companies, are eliminated. The effects of intragroup deliveries reported under non-current assets and inventories are adjusted by eliminating any intragroup profits. In accordance with IAS 12, deferred taxes are applied to these consolidation measures.

(53) Currency translation

The functional currency concept applies to the translation of financial statements of consolidated companies prepared in foreign currencies. The subsidiaries of the Group generally conduct their operations independently. The functional currency of these companies is normally the respective local currency. Assets and liabilities are measured at the closing rate, and income and expenses are measured at weighted average annual rates in euros, the reporting currency. Any currency translation differences arising during consolidation of Group companies are recognized in equity. If Group companies are deconsolidated, existing currency differences are reversed and reclassified to profit or loss.

When the financial statements of consolidated companies are prepared, business transactions that are conducted in currencies other than the functional currency are recorded using the current exchange rate on the date of the transaction. Foreign currency monetary items (cash and cash equivalents, receivables and payables) in the year-end financial statements of the consolidated companies prepared in the functional currency are translated at the respective closing rates. Exchange differences from the translation of monetary items are recognized in the income statement with the exception of net investments in a foreign operation. Hedged items are likewise carried at the closing rate. The resulting gains or losses are eliminated in the consolidated income statement against offsetting amounts from the fair value measurement of derivatives.

Currency translation was based on the following key exchange rates:

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Average annual rate Closing rate
1 € = 2017 2016 Dec. 31, 2017 Dec. 31, 2016
British pound (GBP) 0.874 0.816 0.887 0.857
Chinese renminbi (CNY) 7.621 7.343 7.791 7.343
Japanese yen (JPY) 126.921 121.127 134.669 123.070
Swiss franc (CHF) 1.112 1.090 1.168 1.075
South Korean won (KRW) 1,275.143 1,279.345 1,275.923 1,265.450
Taiwan dollar (TWD) 34.398 35.571 35.538 34.004
U.S. dollar (USD) 1.130 1.102 1.195 1.051

(54) Recognition of net sales and other income

Net sales and other income are recognized when the amount of revenue can be measured reliably, it is probable that the economic benefits will flow to the entity and when the following preconditions have been met.

Net sales are deemed realized once the goods are delivered or the services have been rendered and the significant risks and rewards of ownership have been transferred to the purchaser. In the case of sales of equipment in the Life Science business sector, these pre­conditions are only met after installation has been successfully completed to the extent that the installation requires specialized knowledge, does not represent a clear ancillary service and the rele­vant equipment can only be used by the customer once successfully set up.

Net sales are recognized net of sales-related taxes and sales deductions. When sales are recognized, estimated amounts are taken into account for expected sales deductions, for example rebates, discounts and returns. The vast majority of Group sales are generated by the sale of goods.

In the Healthcare business sector, products are often sold to pharma­ceutical wholesalers and to a lesser extent directly to pharmacies or hospitals. In the Life Science and Performance Materials business sectors, products are largely sold to business customers, and to a lesser extent to distributors.

In addition to revenue from the sale of goods, net sales also include commission income, profit-sharing and in the Life Science business sector revenue from services, but the volume involved is insignificant. In the case of long-term service agreements, the Group records revenues on a pro rata basis over the term of the agreement or in accordance with the services rendered.

Revenues from multiple-element arrangements (e.g. sales of goods in combination with services) are recognized when the respective contract element is delivered or rendered.

Royalty and license income is recognized when the contractual obligation has been met.

Dividend income is recognized when the shareholders’ right to receive the dividend is established. This is normally the date of the dividend resolution.

Interest income is recognized in the period in which it is earned.

(55) Research and development costs

Research and development costs comprise the costs of research departments and process development, the expenses incurred as a result of research and development collaborations as well as the costs of clinical trials (both before and after approval is granted).

The costs of research cannot be capitalized and are expensed in full in the period in which they are incurred. As internally generated intangible assets, it is necessary to capitalize development expenses if the cost of the internally generated intangible asset can be reliably determined and the asset can be expected to lead to future economic benefits. The condition for this is that the necessary resources are available for the development of the asset, technical feasibility of the asset is given, its completion and use are intended, and marketability is given. Owing to the high risks up to the time that pharmaceutical products are approved, these criteria are not met in the Healthcare business sector. Costs incurred after regulatory approval are usually insignificant and are therefore not recognized as intangible assets. In the Life Science and Performance Materials business sectors, development expenses are capitalized as soon as the aforementioned criteria have been met.

Reimbursements for R&D are offset against research and development costs.

(56) Goodwill

Goodwill is allocated to cash-generating units or groups of cash-generating units and tested for impairment either annually or if there are indications of impairment. The carrying amounts of the cash-generating units or groups of cash-generating units are compared with their recoverable amounts and impairment losses are recognized where the recoverable amount is lower than the carrying amount. The recoverable amount of a cash-generating unit is determined as the higher of fair value less costs of disposal and value in use estimated using the discounted cash flow method.

(57) Other intangible assets

Acquired intangible assets are recognized at cost and are classified as assets with finite and indefinite useful lives. Self-developed intangible assets are only capitalized if the requirements specified by IAS 38 have been met. Intangible assets acquired in the course of business combinations are recognized at fair value on the acquisition date. If the development of intangible assets takes a substantial period of time, the directly attributable borrowing costs incurred up until completion are capitalized as part of the costs.

Intangible assets with indefinite useful lives and intangible assets not yet available for use

Intangible assets with indefinite useful lives and intangible assets not yet available for use are not amortized; however they are tested for impairment when a triggering event arises or at least once a year. Here, the respective carrying amounts are compared with the recoverable amount and impairments are recognized as required. Impairment losses other than goodwill recognized on indefinite-life intangible assets and intangible assets not yet available for use are reversed if the original reasons for impairment no longer apply.

The marketing authorizations, patents, licenses and similar rights, and other not yet available for use primarily relates to rights that the Group acquired for active ingredients, products or technologies that are still in development stages. Owing to the uncertainty as to the extent to which these projects will ultimately lead to the marketing of marketable products, the period for which the resulting capitalized assets would generate an economic benefit for the company cannot yet be determined.

Intangible assets with finite useful lives

Intangible assets with a finite useful life are amortized using the straight-line method. The useful lives of customer relationships, brand names and trademarks as well as marketing authorizations, acquired patents, licenses and similar rights, and software are between three and 24 years. Amortization of intangible assets and software is allocated to the functional costs in the consolidated income statement. An impairment test is performed if there are indications of impairment. Impairment losses are determined using the same methodology as for indefinite-life intangible assets. Impairment losses are reversed if the original reasons for impairment no longer apply.

(58) Property, plant and equipment

Property, plant and equipment is measured at cost less depreciation and impairments plus reversals of impairments. The component approach is applied here in accordance with IAS 16. Subsequent costs are only capitalized if it is probable that future economic benefits will arise for the Group and the cost of the asset can be measured reliably. The cost of self-constructed property, plant and equipment is calculated on the basis of the directly attributable unit costs and an appropriate share of overheads. If the construction of property, plant and equipment takes a substantial period of time, the attributable borrowing costs incurred up until completion are capitalized as part of the costs. In accordance with IAS 20, costs are reduced by the amount of government grants in those cases where government grants or subsidies have been paid for the acquisition or manufacture of assets (grants related to assets). Grants related to expenses which no longer offset future expenses are recognized in profit or loss. Property, plant and equipment is depreciated by the straight-line method over the useful life of the asset concerned. Depreciation of property, plant and equipment is based on the following useful lives:

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Useful life of property, plant and equipment

Useful life
Production buildings maximum of 33 years
Administration buildings maximum of 40 years
Plant and machinery 6 to 25 years
Operating and office equipment; other facilities 3 to 10 years

The useful lives of the assets are reviewed regularly and adjusted if necessary. If indications of a decline in value exist, an impairment test is performed. If the reasons for an impairment loss no longer exist, a reversal of the impairment loss recognized in prior periods is recorded.

(59) Leasing

Where non-current assets are leased and economic ownership lies with the Group (finance lease), the asset is recognized at the present value of the minimum lease payments or the lower fair value in accordance with IAS 17 and depreciated over its useful life. The corresponding payment obligations from future lease payments are recorded as liabilities. If an operating lease is concerned, the associated expenses are recognized in the period in which they are incurred.

(60) Financial instruments: Principles

A financial instrument is a contractual agreement that gives rise to a financial asset of one entity and a financial liability or an equity instrument of another entity. A distinction is made between nonderivative and derivative financial instruments.

The Group accounts for regular way purchases or sales of nonderi­vative financial instruments at the settlement date and of derivatives at the trade date. Financial assets and liabilities are recorded when a Group company becomes contract party to the financial instrument.

Upon initial recognition, financial assets and financial liabilities are measured at fair value, taking into account any transaction costs, if necessary.

Financial assets are derecognized in part or in full if the contractual rights to the cash flows from the financial asset have expired or have been fulfilled or if control and substantially all the risks and rewards of ownership of the financial asset have been transferred to a third party. Financial liabilities are derecognized if the contractual obligations have been discharged, cancelled, or expired. Cash and cash equivalents are carried at nominal value.

(61) Financial instruments: Categories and classes of financial instruments

Financial assets and liabilities are classified into the following IAS 39 measurement categories and IFRS 7 classes. The classes required to be disclosed in accordance with IFRS 7 consist of the measurement categories set out here. Additionally, cash and cash equivalents with an original maturity of up to 90 days, finance lease liabilities, and derivatives designated as hedging instruments are also classes in accordance with IFRS 7.

Financial assets and financial liabilities at fair value through profit or loss

‟Financial assets and financial liabilities at fair value through profit or loss” can be both non-derivative and derivative financial instruments. Financial instruments in this category are subsequently measured at fair value. Gains and losses on financial instruments in this measurement category are recognized directly in the consolidated income statement. This measurement category includes an option to designate non-derivative financial instruments as ‟at fair value through profit or loss” on initial recognition (fair value option) or as ‟financial instruments held for trading”. The fair value option was applied neither during the fiscal year nor the previous year. The Group only assigns derivatives to the ‟held for trading” measurement category. Special accounting rules apply to derivatives that are designated as hedging instruments in a hedging relationship.

Held-to-maturity investments

‟Held-to-maturity investments” are non-derivative financial assets with fixed or determinable payments and a fixed maturity that are quoted in an active market. To be able to assign a financial asset to this measurement category, the entity must have the positive intention and ability to hold it to maturity. These investments are subsequently measured at amortized cost using the effective rate method. If there is objective evidence that such an asset is impaired, an impairment loss is recognized in profit or loss. Subsequent reversals of impairment losses are also recognized in profit or loss up to the amount of the amortized cost. At the Group, this measurement cate­gory is used for current financial assets.

Loans and receivables

‟Loans and receivables” are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are subsequently measured at amortized cost using the effective rate method. If there is objective evidence that such assets are impaired, an impairment loss is recognized in profit or loss. Subsequent reversals of impairment losses are also recognized in profit or loss up to the amount of amortized cost. Long-term non-interest-­bearing and low-interest receivables are measured at their present value. The Group primarily assigns trade receivables, loans, and miscellaneous other current and non-current receivables to this measurement category. The Group always uses a separate allowance account for impairment losses on trade and other receivables. Amounts from the allowance account are recognized in the carrying amount of the corresponding receivable as soon as this is derecognized due to irrecoverability.

Available-for-sale financial assets

‟Available-for-sale financial assets” are those non-derivative financial assets that are not assigned to the measurement categories ‟financial assets and financial liabilities at fair value through profit or loss”, ‟held-to-maturity investments” or ‟loans and receivables”. Financial assets in this category are subsequently measured at fair value. Generally, changes in fair value are recognized immediately in equity and are only transferred to the consolidated income statement when the financial asset is derecognized. Changes in the fair values of contingent consideration resulting from adjustments to cash flow estimated are recognized in profit or loss. Further explanations on the accounting treatment of contingent consideration can be found in Note (63) ‟Contingent consideration”. If there is substantial evidence of an asset impairment, the accumulated loss recognized immediately in equity is to be reclassified to the consolidated income statement, even if the financial asset has not been derecognized. Reversals of impairment losses on previously impaired equity instruments are recognized immediately in equity.

Reversals of impairment losses on previously impaired debt instruments are recognized in profit or loss up to the amount of the impairment loss. Any amount in excess of this is recognized directly in equity. Financial assets in this category for which no fair value is available or fair value cannot be reliably determined are measured at cost less any accumulated impairment losses. Impairment losses on financial assets carried at cost may not be reversed. At the Group, this measurement category is used in particular for interest-bearing securities, financial assets, contingent consideration, and financial investments in equity instruments as well as interests in subsidiaries that are not consolidated due to secondary importance (affiliates). Both interests in non-consolidated subsidiaries as well as to some extent financial investments in equity instruments are measured at cost.

Other liabilities

Other liabilities are non-derivative financial liabilities that are sub­sequently measured at amortized cost except for cases of contingent consideration. Differences between the amount received and the amount to be repaid are amortized to profit or loss over the maturity of the instrument. The Group primarily assigns financial liabilities such as issued bonds and bank loans, trade payables, and miscellaneous other non-derivative current and non-current liabilities to this category.

(62) Financial instruments: Derivatives and hedge accounting

The Group uses derivatives solely to economically hedge recognized assets or liabilities and forecast transactions. The hedge accounting rules in accordance with IFRS are applied to some of these hedges. A distinction is made between fair value hedge accounting and cash flow hedge accounting. Designation of a hedging relationship requires a hedged item and a hedging instrument. The Group currently only uses derivatives as hedging instruments.

The hedging relationship must be effective at all times, i.e. the change in fair value of the hedging instrument almost fully offsets changes in the fair value of the hedged item. The Group uses the dollar offset method as well as regression analyses to measure hedge effectiveness. Derivatives that do not or no longer meet the documentation or effectiveness requirements for hedge accounting, whose hedged item no longer exists, or for which hedge accounting rules are not applied are classified as ‟financial assets and liabilities at fair value through profit or loss”. Changes in fair value are then recognized in profit or loss.

At the Group, cash flow hedges normally relate to highly probable forecast transactions in foreign currency and to future interest payments. In cash flow hedges, the effective portion of the gains and losses on the hedging instrument taking deferred taxes into consideration is recognized in equity until the hedged expected cash flows affect profit or loss. This is also the case if the hedging relationship expires or is terminated before the hedged transaction occurs and the occurrence of the hedged item remains likely. The ineffective portion of a cash flow hedge is recognized directly in profit or loss.

(63) Contingent consideration

For contingent consideration that was contractually agreed with the acquirer or seller within the context of the disposal or the acquisition of businesses within the meaning of IFRS 3, the fair value of the claims or obligations at the transaction date is recognized in the balance sheet as financial assets available for sale or financial liabilities.

Contingent consideration in connection with the purchase of individual assets outside of business combinations is recorded as a financial liability only when the consideration is contingent upon future events that are beyond the Group’s control.

n cases where the payment of contingent consideration is within the Group’s control, the liability is recognized only as from the date when a non-contingent obligation arises.

Contingent consideration upon the purchase of individual assets primarily relates to future milestone payments in connection with in-licensed intellectual property in the Healthcare business sector.

Changes in the fair value of financial assets from contingent consideration are recorded as other operating income or other operating expenses, except for changes due to interest rate fluctuations and the effect from the unwinding of the discount.

The effect from the unwinding of the discount is reported as part of the interest result; changes due to interest rate fluctuations are reported in the consolidated statement of comprehensive income as ‟fair value adjustments”.

(64) Other non-financial assets and liabilities

Other non-financial assets are carried at amortized cost. Allowances are recognized for any credit risks. Long-term non-interest bearing and low-interest receivables and liabilities are carried at their present value. Other non-financial liabilities are carried at the amount to be repaid.

(65) Deferred taxes

Deferred tax assets and liabilities result from temporary differences between the carrying amount of an asset or liability in the IFRS and tax balance sheets of consolidated companies as well as from consolidation activities, insofar as the reversal of these differences will occur in the future. In addition, deferred tax assets are recorded insofar as their utilization is probable in the foreseeable future.
Deferred taxes are not recorded for temporary differences from the initial recognition of assets or liabilities to the extent that the transaction affects neither the profit (before income tax) under IFRS nor the taxable profit and the transaction is not a business combination.

In addition, deferred tax liabilities are not recognized for temporary differences that arise in connection with the initial recognition of goodwill.

Deferred tax liabilities are recognized for temporary differences arising from interests in subsidiaries or associates, unless the Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are calculated based on the expected tax rates and tax laws applicable during the period in which the asset is realized or a liability settled. The carrying amount of deferred tax assets is reviewed each year on the balance sheet date and its value is lowered if it is no longer probable that sufficient taxable income is available in order to realize the asset either in full or in part. Deferred tax assets and liabilities are only offset on the balance sheet date if they meet the requirements of IAS 12.

(66) Inventories

Inventories are carried at the lower of cost or net realizable value. When determining cost, the ‟first-in, first-out” (FIFO) and weighted average cost formulas are used. In addition to directly attributable unit costs, manufacturing costs also include overheads attributable to the production process, which are determined on the basis of normal capacity utilization of the production facilities.

Inventories are written down if the net realizable value is lower than the acquisition or manufacturing cost carried in the balance sheet. Since the inventories are for the most part not manufactured within the scope of long-term production processes, the manufacturing costs do not include any borrowing costs.

Inventory prepayments are recorded under other current assets.

(67) Provisions for pensions and other post-employment benefits

Provisions for pensions and other post-employment benefits are recorded in the balance sheet in accordance with IAS 19. The obligations under defined benefit plans are measured using the projected unit credit method. Under the projected unit credit method, dynamic parameters are taken into account in calculating the expected benefit payments after an insured event occurs; these payments are spread over the entire period of service of the participating employees. Annual actuarial opinions are prepared for this purpose. Actuarial gains and losses resulting from changes in actuarial assumptions and/or experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) are recognized immediately in equity as soon as they are incurred, taking deferred taxes into account. Consequently, the consolidated balance sheet discloses – after deduction of the plan assets – the full scope of the obligations while avoiding the fluctuations in expenses that can result especially when the calculation parameters change. The actuarial gains and losses recorded in the respective reporting period are presented separately in the Statement of Comprehensive Income.

(68) Other provisions and contingent liabilities

Provisions are recognized in the balance sheet if it is more likely than not that a cash outflow will be required to settle the obligation and the amount of the obligation can be measured reliably. The carrying amount of other provisions takes into account the amounts required to cover future payment obligations, recognizable risks and uncertain obligations of the Group to third parties.

Measurement of other provisions is based on the settlement amount with the highest probability or, if a large number of similar cases exist with respect to the provision being measured, it is based on the expected value of the settlement amounts. Long-term provisions are discounted and carried at their present value as of the balance sheet date if the discount rate effect is material. To the extent that reimbursement claims exist as defined in IAS 37, they are recognized separately as an asset if their realization is virtually certain and the asset recognition criteria have been met.

Contingent liabilities comprise not only possible obligations arising from past events and whose existence is subject to the occurrence of uncertain future events, but also present obligations arising from past events where an outflow of resources embodying economic benefits is not probable or where the amount of the obligation cannot be measured with reliability. Contingent liabilities that were not assumed within the context of a business combination are not recognized in the consolidated balance sheet. Unless the possibility of an outflow of resources embodying economic benefits is remote, information on the relevant contingent liabilities is disclosed in the notes.

In this context, the present value of the future settlement amount is used as the basis for measurement. The settlement amount is determined in accordance with the rules set out in IAS 37 and is based on the best estimate.

(69) Share-based compensation programs

Provisions have been set up for obligations from long-term variable compensation programs (Long-Term Incentive Plan of Merck KGaA, Darmstadt, Germany). These share-based compensation programs with cash settlement are aligned not only with target achievement based on key performance indicators, but above all also with the long-term performance of shares of Merck KGaA, Darmstadt, Germany. Certain executives and employees could be eligible to receive a certain number of virtual shares – Share Units of Merck KGaA, Darmstadt, Germany (MSUs) – at the end of a three-year performance cycle. The number of MSUs that could be received depends on the individual grant defined for the respective person and the average closing price of shares of Merck KGaA, Darmstadt, Germany, in Xetra® trading during the last 60 trading days prior to January 1 of the respective performance cycle (reference price). In order for members of top management to receive payment for the 2015 and 2016 tranches, they must personally own an investment in shares of Merck KGaA, Darmstadt, Germany, dependent on their respective fixed annual compensation. For the 2017 tranche, an obligatory personal investment is not a precondition for a payout. The personal investment for top management was defined in 2017 in a separate Share Ownership Guideline.

When the three-year performance cycle ends, the number of MSUs to then be granted is determined based on the development of defined key performance indicators (KPIs).

For the 2015 and 2016 tranches, these are on the one hand the performance of the share price of Merck KGaA, Darmstadt, Germany, compared to the performance of the DAX® with a weighting of 70%, and on the other hand the development of the EBITDA pre margin during the performance cycle as a proportion of a defined target value with a weighting of 30%.

As of fiscal 2017, the program conditions were modified. For the 2017 tranche, the performance of the the share price of Merck KGaA, Darmstadt, Germany, is compared with the performance of the DAX® with a weighting of 50%, and the development of the EBITDA pre margin during the performance cycle as a proportion of a defined target value with a weighting of 25%. The development of organic sales growth as a proportion of a defined target value with a weighting of 25% is a new key performance indicator now taken into account.

Depending on the development of the KPIs, at the end of the respective performance cycle the eligible participants are granted between 0% and 150% of the MSUs they could be eligible to receive. Based on the MSUs granted, the eligible participants receive a cash payment at a specified point in time in the year after the three-year performance cycle has ended. The value of a granted MSU, which is relevant for payment, corresponds to the average closing price of shares of Merck KGaA, Darmstadt, Germany, shares in Xetra® trading during the last 60 trading days prior to January 1 after the performance cycle. Whereas the payout for the 2015 tranche is limited to three times the reference price and the payout for the 2016 tranche is limited to twice the reference price, the payout for the 2017 tranche is limited to two and a half times the individual grant.

The fair value of the obligations is recalculated on each balance sheet date by an external expert using a Monte Carlo simulation based on the previously described KPIs. The expected volatilities are based on the implicit volatility of shares of Merck KGaA, Darmstadt, Germany, and the DAX® in accordance with the remaining term of the respective tranche. The dividend payments incorporated into the valuation model orient towards medium-term dividend expectations.

The Executive Board members have their own Long-Term Incentive Plan, the conditions of which largely correspond to the Long-Term Incentive Plan described here. A description of the plan for the Executive Board can be found in the compensation report, which is part of the Statement on Corporate Governance.

On the occasion of the 350th anniversary of the company in 2018, a promise was made to grant shares of Merck KGaA, Darmstadt, Germany, worth € 350 to every eligible employee of the Group. For the share grant of Merck KGaA, Darmstadt, Germany, in 2018, the required shares will be purchased on the stock market by a third party on behalf of the Group and then transferred to the eligible employees. In accordance with IFRS 2, the promise led to personnel expenses as well as to a corresponding increase in retained earnings in equity.