Other Disclosures

(37) Derivative financial instruments

The following derivatives were held by the Group as of the balance sheet date:

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Nominal volume Fair value
€ million Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2016
Cash flow hedge 3,258 2,741 3 – 91
Interest
Currency 3,258 2,741 3 – 91
Fair value hedge
Interest
Currency
No hedge accounting 5,477 8,012 – 45 – 55
Interest 1,100 1,100 – 73 – 87
Currency 4,376 6,912 – 18 32
Equity 46
  8.735 10,753 – 42 – 146

Cash flow hedges included currency hedges in a nominal volume of € 1,898 million (December 31, 2016: € 1,795 million) with a remaining term of up to one year and hedges in a nominal volume of € 1,360 million (December 31, 2016: € 946 million) with a remaining term of more than one year.

The maturities of the derivatives (nominal volume) were as follows as of the balance sheet date:

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€ million Remaining maturity less than 1 year Remaining maturity more than 1 year Total Dec. 31, 2017 Remaining maturity less than 1 year Remaining maturity more than 1 year Total Dec. 31, 2016
Forward exchange contracts 6,035 1,311 7,347 8,555 784 9,339
Currency options 239 49 288 153 162 314
Interest rate swaps 1,100 1,100 1,100 1,100
6.274 2,460 8,735 8,707 2,046 10,753

Currency hedging served to economically protect the company from the foreign exchange risks of the following types of transaction:

  • Forecast transactions in non-functional currency, the expected probability of which is very high for the next 36 months,
  • Off-balance sheet firm purchase commitments of the next 36 months in non-functional currency,
  • Intragroup financing in non-functional currency as well as
  • Receivables and liabilities in non-functional currency

Exchange rate fluctuations of mainly the following currencies against the euro were hedged:

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Nominal volume € million Dec. 31, 2017 Dec. 31, 2016
USD 4,046 5,031
CHF 903 1,211
CNY 701 717
TWD 444 406
JPY 411 800
KRW 266 158
GBP 214 576

Forecast transactions and firm purchase commitments in nonfunctional currency are hedged using forward exchange contracts and currency options which are due within the next 36 months. Overall, forecast transactions and firm purchase commitments in non-functional currency were hedged in the amount of € 3,258 million (December 31, 2016: € 2,741 million).

Intragroup financing as well as receivables and payables in non-functional currency were hedged exclusively using forward exchange contracts. Overall, balance sheet items amounting to € 4,376 million (December 31, 2016: € 6,912 million) were hedged. In this context, the hedging transactions in 2017 were exclusively purely economic hedges for which hedge accounting is not applied.

Forward starting payer interest rate swaps for which the hedging relationship was terminated voluntarily were entered into in 2015 with a nominal volume of € 550 million. In line with the hedged item running until 2022, in 2017 an amount of € 13 million (2016: € 13 million) was reclassified from Other Comprehensive Income under the line item ‟Reclassification to profit or loss” within ‟Derivative financial instruments” to the financial result. The original transactions as well as the offsetting transactions are now classified as ‟held for trading”. The changes in fair value are reflected in the consolidated income statement.

(38) Management of financial risks

Market fluctuations with respect to foreign exchange and interest rates represent significant profit and cash flow risks for the Group. The Group aggregates these Group-wide risks and steers them centrally, also by using derivatives. The Group uses scenario analyses to estimate existing risks of foreign exchange and interest rate fluctuations. The Group is not subject to any material risk concentration from financial transactions.

The Group uses derivative financial instruments (hereinafter ‟deriva­tives”) to hedge risks from currency and interest rate positions. The group uses marketable forward exchange contracts, options and interest rate swaps as hedging instruments. Depending on the nature of the hedged item, changes in the fair values of derivatives are recorded in the consolidated income statement either in the operating result or in the financial result. The strategy to hedge interest rate and foreign exchange rate fluctuations arising from forecast transactions and transactions already recognized in the balance sheet is set by a risk committee, which meets on a regular basis. Extensive guidelines regulate the use of derivatives. There is a ban on speculation. Derivative transactions are subject to continuous risk management procedures. Trading, settlement and control functions are strictly separated. Derivatives are only entered into with banks that have a good credit rating. Related default risks are continuously monitored.

The Report on Risks and Opportunities included in the combined management report provides further information on the management of financial risks.

Foreign exchange risks

Owing to its international business focus, the Group is exposed to foreign-­exchange-related transaction risks within the scope of both its business activities and financing activities. Different strategies are used to limit or eliminate these risks. Foreign exchange risks from transactions already recognized on the balance sheet are eliminated as far as possible through the use of forward exchange contracts. Foreign exchange risks arising from forecast transactions are analyzed regularly and reduced if necessary through forward exchange contracts or currency options by applying the hedge accounting rules. The Group is exposed to currency translation risks since the majority of the Group’s subsidiaries are located outside the eurozone and have functional currencies other than the reporting currency. The financial statements of these companies are translated into euros. Exchange differences resulting from currency translation of the assets and liabilities of these companies are recognized in equity. These effects are not taken into consideration in the following tables.

The following table presents the net exposure of the Group in relation to exchange rate fluctuations of the major currencies against the euro:

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€ million CHF CNY JPY KRW TWD USD
Net exposure Dec. 31, 2017 – 184 449 75 115 135 1,215
 
Net exposure Dec. 31, 2016 – 267 412 154 217 165 1,009

The net exposure of each of the aforementioned currencies consists of the following components:

  • Planned cash flows in the next 12 months in the respective currency as well as
  • Derivatives to hedge these planned cash flows. Usually, the hedging ratio is 30% – 70%.

Balance sheet items in the aforementioned currencies were economically hedged in full in both 2017 and 2016 by derivatives if they did not correspond to the functional currency of the respective company. Accordingly, they do not affect the net exposure presented above.

The following table shows the effects of exchange rate movements of the key currencies against the euro in relation to the net income and equity of the Group on the balance sheet date. The effects of planned cash flows of the next 12 months are not taken into consideration here. By contrast, the effects of cash flow hedges are taken into consideration in the equity of the Group and are included in the following table.

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€ million
Dec. 31, 2017
CHF CNY JPY KRW TWD USD
Exchange rate – 10% (EUR depreciation) Consolidated income statement
Equity 39 – 44 – 19 – 18 – 38 – 172
Exchange rate + 10% (EUR appreciation) Consolidated income statement
Equity – 31 36 17 15 31 147
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€ million
Dec. 31, 2016
CHF CNY JPY KRW TWD USD
Exchange rate – 10% (EUR depreciation) Consolidated income statement
Equity 17 – 31 – 26 – 26 – 148
Exchange rate + 10% (EUR appreciation) Consolidated income statement
Equity – 20 38 25 32 159

Interest rate risks

The Group’s exposure to interest rate changes comprises the following:

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€ million Dec. 31, 2017 Dec. 31, 2016
Short-term or variable interest rate monetary deposits 684 1,085
Short-term or variable interest rate monetary borrowings – 3,641 – 4,587
Net interest rate exposure – 2,957 – 3,502

The effects of a parallel shift in the yield curve by + 100 or – 100 basis points on the consolidated income statement as well as on equity relative to all short-term or variable monetary deposits and monetary borrowings, all debt instruments classified as ‟available for sale”, except contingent consideration, as well as all derivatives are presented in the following table.

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€ million 2017 2016
Change in market interest rate + 100 basis points – 100 basis points + 100 basis points – 100 basis points
Effects on consolidated income statement – 26 16 – 36 22
Effects on equity

The scenario calculations here assumed that for material variable interest-bearing loan agreements, the risk-free interest rate component (EURIBOR) cannot fall below 0%.

Share price risks

The shares in publicly listed companies amounting to € 16 million (December 31, 2016: € 8 million) are generally exposed to a risk of fluctuations in fair value. A 10% change in the value of the stock market would impact equity by € 2 million (December 31, 2016: € 1 million). This change in value would initially be recognized in equity and then in profit or loss at the time of disposal.

Liquidity risks

The liquidity risk, meaning the risk that the Group cannot meet its payment obligations resulting from financial liabilities, is limited by establishing the required financial flexibility and by effective cash management. Information on bonds issued by the Group and other sources of financing can be found in Note (28) ‟Financial liabilities/Capital management”.

Liquidity risks are monitored and reported to management on a regular basis.

The following tables present the contractual cash flows such as repayments and interest on financial liabilities and derivative financial instruments with a negative fair value as well as the settlement amount of trade accounts payable:

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Cash flows < 1 year Cash flows1 – 5 years Cash flows> 5 years
€ million Dec. 31, 2017 Carrying amount Interest Repayment Interest Repayment Interest Repayment
Bonds and commercial paper 8,213 210 1,171 590 5,234 143 1,839
Bank loans 1,653 18 803 4 850
Trade accounts payable 2,195 2,195
Liabilities to related parties 1,352 1,352
Other financial liabilities 474 453 21
Loans from third parties and other financial liabilities 73 1 19 4 54
Liabilities from derivatives 155 15 52 59 18
Financing lease liabilities 4 1 2
14,120 243 6,046 657 6,179 143 1,839
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Cash flows < 1 year Cash flows1 – 5 years Cash flows> 5 years
€ million Dec. 31, 2016 Carrying amount Interest Repayment Interest Repayment Interest Repayment
Bonds and commercial paper 9,650 224 1,855 759 4,314 245 3,523
Bank loans 1,978 11 1,128 5 600 1 250
Trade accounts payable 2,048 2,048
Liabilities to related parties 1,215 1,215
Other financial liabilities1 481 467 14
Loans from third parties and other financial liabilities 80 6 22 10 55 2
Liabilities from derivatives 233 18 95 70 34 17
Financing lease liabilities 4 1 2
15,689 259 6,832 845 5,019 263 3,775
1
Previous year’s figures have been adjusted, see Note (4) ‟Acquisitions and divestments”.

Credit risks

The Group limits credit risk by only entering into financial contracts with banks and industrial companies with good credit ratings. Moreover, the broad-based business structure with a large number of different customers results in a diversification of credit risks within the Group. The credit risk from financial contracts is monitored daily on the basis of rating information as well as market information on credit default swap rates.

The credit risk of customers is monitored using established credit management processes that take the individual customer risks into account. This is done in particular by continuously analyzing the age structure of trade accounts receivable. The Group continuously reviews and monitors open positions of all trading partners in the affected countries and takes risk-mitigating measures if necessary. If there is objective evidence that particular accounts receivable are fully or partially impaired, respective impairment losses are recognized to provide for credit defaults. On the balance sheet date, the theoretically maximum default risk corresponded to the net carrying amounts less any compensation from credit insurance.

There were no indications of impairment for financial assets neither past due nor impaired on the balance sheet date.

(39) Other disclosures on financial instruments

The following table presents the reconciliation of the balance sheet items to categories of financial instruments pursuant to the disclosures required by IFRS 7 and provides information on the measurement of fair value:

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Subsequent measurement according to IAS 39 Subsequent measurement according to IAS 39
€ million Carrying amount Dec. 31, 2017 Amortized cost At cost Fair value Carrying amount according to IAS 17 Non-financial items Fair value, Dec. 31, 20172 Carrying amount Dec. 31, 2016 Amortized cost At cost Fair value Carrying amount according to IAS 17 Non-financial items Fair value Dec. 31, 20162
Assets
Cash and cash equivalents 589 589 939 939
Current financial assets 90 47 44 145 44 101
Held for trading (non-derivatives)
Derivatives without a hedging relationship 9 9 9 59 59 59
Held to maturity
Loans and receivables 47 47 44 44
Available for sale 35 35 35 43 43 43
Derivatives with a hedging relationship
Trade accounts receivable 2,923 2,923 2,889 2,889
Loans and receivables 2,923 2,923 2,889 2,889
Remaining current and non-current assets1 936 276 92 568 803 277 12 514
Derivatives without a hedging relationship 46 46 46 1 1 1
Loans and receivables 276 276 277 277
Derivatives with a hedging relationship 45 45 45 11 11 11
Non-financial items1 568 568 514 514
Non-current financial assets 444 12 4 429 218 10 59 149
Derivatives without a hedging relationship 13 13 13 17 17 17
Held to maturity
Loans and receivables 12 12 10 10
Available for sale 420 4 416 416 191 59 132 132
Derivatives with a hedging relationship
Liabilities
Current and non-current financial liabilities 10,823 10,707 113 4 12,597 12,465 128 4
Derivatives without a hedging relationship 113 113 113 128 128 128
Other financial liabilities 10,707 10,707 11,074 12,465 12,465 12,802
Derivatives with a hedging relationship
Finance lease liabilities 4 4 4 4
Trade accounts payable 2,195 2,195 2,048 2,048
Other financial liabilities 2,195 2,195 2,048 2,048
Remaining current and non-current liabilities1 2,529 1,059 43 1,427 2,389 939 105 1,345
Derivatives without a hedging relationship 3 3 3
Other financial liabilities1 1,059 1,059 939 939
Derivatives with a hedging relationship 43 43 43 102 102 102
Non-financial items 1,427 1,427 1,345 1,345
1
Previous year’s figures have been adjusted, see Note (4) ‟Acquisitions and divestments”.
2
The exemption provisions under IFRS 7.29a were applied for information on specific fair values.

Net gains and losses on financial instruments included measurement results from fair value adjustments recognized in profit or loss, impairments and reversals of impairments, disposal gains/losses as well as the recognition of premiums and discounts. In the following table, the financial instruments of the held-for-trading category include interest as a component of fair value adjustments. At the Group, this category only included derivatives that were not in a hedging relationship. Dividends were not allocated to net gains and losses on financial instruments.

The net gains and losses on financial instruments by category (excluding amounts recognized in other comprehensive income) were as follows:

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Net gains or losses
€ million 2017 Interest result Impairments Reversals of impairment Fair value adjustments Disposal gains/losses
Financial instruments of the category
Held for trading – 203
Held to maturity
Loans and receivables 21 – 39 97
Available for sale 5 – 14 – 1
Other liabilities – 294
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Net gains or losses
€ million
2016
Interest result Impairments Reversals of impairment Fair value adjustments Disposal gains/losses
Financial instruments of the category
Held for trading 69
Held to maturity
Loans and receivables 18 – 52 59
Available for sale 2 – 5 34
Other liabilities – 287

In 2017, foreign exchange losses of € – 3 million resulting from receivables and payables in operating business, their economic hedging, as well as hedging of forecast transactions in operating business were recorded (2016: foreign exchange losses of € – 57 million). Foreign exchange gains of € 22 million resulting from financial balance sheet items and their economic hedging were recorded (2016: foreign exchange losses of € – 4 million).

The fair value of financial assets and liabilities was based on the official market prices and market values quoted on the balance sheet date (Level 1 assets and liabilities) as well as mathematical calculation models with inputs observable in the market on the balance sheet date (Level 2 assets and liabilities) as well as measurement models and refinancing tranches (Level 3 assets and liabilities). Level 1 assets comprised stocks and bonds and were classified as available for sale, Level 1 liabilities comprised issued bonds and were classified as other liabilities. Level 2 assets and liabilities were primarily liabilities to banks classified as other liabilities, unlisted equity instruments classified as available for sale as well as derivatives with and without hedging relationships.

The fair value of the liabilities classified as other liabilities was determined by discounting future cash flows using market interest rates. The calculation of the fair value of forward exchange contracts and currency options used spot and forward rates observable in the market as well as foreign exchange volatilities applying recognized mathematical principles. The fair value of interest rate swaps is determined with standard market valuation models using interest rate curves available in the market.

Level 3 assets were classified as ‟available for sale” and as a derivative without hedge accounting relationship, respectively. They included unlisted equity instruments, an interest in a partnership, contingent consideration from the sale of business activities and a corporation, equity investments in unlisted funds as well as an option on equity instruments. The fair values of unlisted equity instruments were derived from observable prices taken from equity refinancing transactions that occurred sufficiently close to the reporting date.

The fair value of the interest in one partnership was determined through an internally performed valuation using the discounted cash flow method. Expected future cash flows based on the company’s latest medium-term planning were taken into account. The planning relates to a period of five years. Cash flows for periods beyond this were included in the terminal value calculation by applying a long-term growth rate of 0.5% (December 31, 2016: 0.5%). The after-tax discount rate used was 7.0% (December 31, 2016: 7.0%). To calculate the fair values of the contingent consideration components, the expected future milestone events and revenues were weighted using the probability of occurrence and discounted using after-tax discount rates of between 6.5% and 7.6% (December 31, 2016: 7.1%). The determination of the fair values of the fund investments was based on the fair values of companies in which the funds were invested. The fair value of the option on equity instruments was determined on the basis of the last available transaction price.

A sensitivity analysis of the measurement of the contingent consideration components from the disposal of the Biosimilars business is set out in Note (6) ‟Management judgments and sources of estimation uncertainty”. An increase or decrease in the discount rates used to calculate the fair values of the other contingent consideration components would not have had a material impact on profit before tax or on other comprehensive income since the corresponding calculations assume a limited planning horizon and the determination of the fair values does not include a calculation of a terminal value. If the discount rate used for the determination of the fair value of the interest in the partnership had been one percentage point higher, other comprehensive income would have decreased by € 2 million. By contrast, a decline in the discount rate by one percentage point would have increased other comprehensive income by € 2 million.

Level 3 liabilities consisted of contingent consideration from acquisitions of corporations. These were reported as other liabilities and amounted to € 3 million as of the balance sheet date.

Counterparty credit risk was taken into consideration for all valuations. In the case of non-derivative financial instruments, such as other liabilities or interest-bearing securities, this was reflected using risk-adequate premiums on the discount rate, while discounts on market value (so-called credit valuation adjustments and debit valuation adjustments) were used for derivatives.

The fair values of investments in equity instruments classified as available for sale with a carrying amount of € 4 million (December 31, 2016: € 59 million) could not be reliably determined since there was no quoted price for an identical instrument in an active market and it was not possible to make a reliable estimate of fair value. They were measured at cost. Financial investments primarily included investments in equity instruments in various non-operating subsidiaries. There is currently no intention to sell these financial instruments.

The amounts of the financial instruments recognized at fair value in the balance sheet and the disclosed fair values for financial instruments were determined as follows:

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€ million
Dec. 31, 2017
Assets Liabilities
Fair value determined by official prices and quoted market values (Level 1) 53 7,719
thereof: available for sale 53
thereof: other liabilities 7,719
Fair value determined using inputs observable in the market (Level 2) 67 3,511
thereof: available for sale
thereof: derivatives with a hedging relationship 45 43
thereof: derivatives without a hedging relationship 22 113
thereof: other liabilities 3,355
Fair value determined using inputs unobservable in the market (Level 3) 443 3
thereof: available for sale 397
thereof: derivatives without a hedging relationship 46
thereof: other liabilities 3
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€ million
Dec. 31, 2016
Assets Liabilities
Fair value determined by official prices and quoted market values (Level 1) 54 9,058
thereof: available for sale 54
thereof: other liabilities 9,058
Fair value determined using inputs observable in the market (Level 2) 134 3,978
thereof: available for sale 46
thereof: derivatives with a hedging relationship 11 102
thereof: derivatives without a hedging relationship 77 131
thereof: other liabilities 3,744
Fair value determined using inputs unobservable in the market (Level 3) 75 1
thereof: available for sale 75
thereof: other liabilities 1

The changes in financial assets and liabilities assigned to Level 3 and measured at fair value were as follows:

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€ million 2017 2016
Net book values as of January 1 74 11
Additions due to acquisitions/disposals 302 46
Transfers to Level 3 from previous measurement at cost/Level 1/Level 2 68 16
Fair value changes
Gains (+)/losses (–) recognized in consolidated income statement – 6 4
Gains (+)/losses (–) recognized in consolidated statement of comprehensive income 5 – 3
Currency translation – 2
Disposals – 1
Transfers from Level 3 to Level 1/Level 2
Net book values as of December 31 440 74

Additions to Level 3 particularly comprised contingent consideration from the disposal of the Biosimilars business (see Note (4) ‟Acquisitions and divestments”). The transfer to Level 3 mainly referred to investments in unlisted equity instruments where equity refinancing transactions at customary terms occurred sufficiently close to the reporting date. The gains and losses from Level 3 assets recognized in other comprehensive income were reported in the consolidated statement of comprehensive income under the item ‟fair value adjustments” related to ‟available-for-sale financial assets”.

Balance sheet netting of financial instruments is not possible. From an economic perspective, netting is only possible for derivatives. This possibility results from the framework agreements on derivatives trading which the Group enters into with commercial banks. The Group does not offset financial assets and financial liabilities in its balance sheet.

The following table presents the potential netting volume of the reported derivative financial assets and liabilities:

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Potential netting volume
€ million
Dec. 31, 2017
Gross presentation Netting Net presentation due to master netting agreements due to financial collateral Potential net amount
Derivative financial assets 113 113 60 54
Derivative financial liabilities – 155 – 155 – 60 – 96
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Potential netting volume
€ million
Dec. 31, 2016
Gross presentation Netting Net presentation due to master netting agreements due to financial collateral Potential net amount
Derivative financial assets 88 88 64 24
Derivative financial liabilities – 233 – 233 – 64 – 170

(40) Contingent liabilities

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€ million Dec. 31, 2017 Dec. 31, 2016
Contingent liabilities from legal disputes and tax matters 66 73
Other contingent liabilities 1 2

Contingent liabilities from legal disputes included potential obligations, for which the probability of an outflow of resources did not suffice to recognize a provision as of the balance sheet date. These mainly related to obligations under civil law and antitrust law. The potential civil law obligations primarily related to potential liabilities to pay damages due to a legal dispute under antitrust law. It was possible that the Group would be subject to claims for compensation for damages asserted by health insurance companies due to excessively high drug prices in case of a valid judgment under antitrust law.

In addition, Bristol-Myers Squibb Co., USA, E.R. Squibb & Sons L.L.C., USA, Ono Pharmaceutical Co., Ltd., Japan, and a private individual filed suit in the United States District Court of Delaware against the Group and Pfizer Inc., USA, (Pfizer) based on the allegation that Bavencio® infringes a U.S. patent relating to methods of treating tumors with anti-PD-L1 antibodies. Both the Group and Pfizer Inc. have initiated legal steps to defend themselves. The criteria for the recognition of a provision were not satisfied since utilization is currently not considered probable.

In addition, there were contingent liabilities from various legal disputes with Merck & Co. Inc., Kenilworth, NJ, USA of the United States (outside the United States and Canada: Merck Sharp & Dohme (MSD)), among other things due to breach of the co-existence agreement between the two companies and/or trademark/name right infringement regarding the use of the designation ‟Merck.” An outflow of resources – except costs for legal defense – was not deemed sufficiently probable as of the balance sheet date to justify the recognition of a provision. Since the contingent liability from these legal disputes could not be reliably quantified as of the balance sheet date, this matter was not taken into account in the table presented above.

Contingent liabilities pertaining to tax matters included various non-German income and non-income-related tax matters that mainly related to intragroup business transfers as well as legal disputes attributable to the determination of earnings under tax law, customs regulations, excise tax matters, and transfer pricing adjustments.

(41) Other financial obligations

Other financial obligations comprised the following:

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€ million Dec. 31, 2017 Dec. 31, 2016
Obligations to acquire intangible assets and payment obligations from collaboration agreements 3,328 2,826
Obligations to acquire property, plant and equipment 151 187
Future operating lease payments 530 362
Long-term purchase commitments 236 309
Remaining other financial obligations 63 208
Other financial obligations 4,308 3,891

Obligations to acquire intangible assets existed in particular owing to contingent consideration and within the scope of research and development collaborations. Here the Group has obligations to make milestone payments when certain objectives are reached. In the unlikely event that all contract partners achieve all milestones, the Group would be obligated to pay up to € 1,968 million (December 31, 2016: € 1,456 million) for the acquisition of intangible assets.

Moreover, within the scope of collaboration agreements, individual research and development or commercialization budgets were contractually set, upon the basis of which collaboration partners can commit the Group to make payments in the amount of up to € 1,360 million (2016: € 1,370 million).

The expected maturities of these obligations were as follows:

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€ million Dec. 31, 2017 Dec. 31, 2016
Obligations to acquire intangible assets and payment obligations from collaboration agreements
within one year 247 263
in 1 – 5 years 1,572 1,176
more than 5 years 1,509 1,387
3,328 2,826

Other financial obligations were recognized at nominal value.

The maturities of liabilities from lease agreements were as follows:

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€ million
Dec. 31, 2017
within 1 year 1 – 5 years more than 5 years Total
Present value of future payments from finance leases 1 2 4
Interest component of finance leases
Future finance lease payments 1 3 4
 
Future operating lease payments 137 287 106 530
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€ million
Dec. 31, 2016
within 1 year 1 – 5 years more than 5 years Total
Present value of future payments from finance lease 1 2 4
Interest component of finance leases
Future finance lease payments 2 2 4
 
Future operating lease payments 112 221 29 362

Operating leasing agreements related mainly to leasing arrangements to lease real estate, company fleet vehicles as well as operating and office equipment. The payments resulting from operating leasing agreements amounted to € 146 million (2016: € 132 million) and were recorded as an expense in the reporting period.

(42) Personnel expenses/Headcount

Personnel expenses comprised the following:

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€ million 2017 2016
Wages and salaries 3,953 3,575
Compulsory social security contributions and special financial assistance 586 555
Pension expenses 304 226
Personnel expenses 4,843 4,356

As of December 31, 2017, the Group had 52,880 employees (December 31, 2016: 50,348). The average number of employees during the year was 51,990 (2016: 50,242).

The breakdown of personnel by function was as follows:

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2017 2016
Production 15,570 14,790
Administration 9,272 8,878
Research and Development 6,786 6,240
Supply Chain 3,726 3,873
Marketing and Sales 15,073 15,109
Other 1,563 1,352
Average number of employees 51,990 50,242

(43) Material costs

Material costs in 2017 amounted to € 2,463 million (2016: € 2,358 million) and were largely reported under cost of sales.

(44) Auditor’s fees

The costs of the auditors (KPMG) of the financial statements of the Group consisted of the following:

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2017 2016
€ million Group thereof:
KPMG Germany
Group thereof:
KPMG Germany
Audits of financial statements 8.5 2.4 8.2 2.2
Other audit-related services 0.3 0.2 0.3 0.2
Tax consultancy services 0.6 0.4 0.7 0.5
Other services 1.0 0.9 1.4 1.3
10.4 3.9 10.6 4.2

Other audit-related services pertain to various statutory or contractually agreed audits. Tax consultancy services encompass services in connection with the preparation of tax returns, also for employees delegated abroad. Other services comprises particularly advisory services for employees delegated abroad.

(45) Corporate governance

The Statement of Compliance in accordance with section 161 of the German Stock Corporation Act (Aktiengesetz) was published in the corporate governance section of the website www.emdgroup.com/investors ➞ corporate governance in March 2017 and thus made permanently available.

(46) Companies opting for exemption under section 264 (3) HGB or section 264b HGB

The following companies, which have been consolidated in these financial statements, opted for exemption:

  • Allergopharma GmbH & Co. KG, Reinbek
  • Allergopharma Verwaltungs GmbH, Darmstadt
  • Biochrom GmbH, Berlin
  • Chemitra GmbH, Darmstadt
  • Litec-LLL GmbH, Greifswald
  • Merck Accounting Solutions & Services Europe GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany
  • Merck Chemicals GmbH, Darmstadt, Germany, an indirect subsidiary of Merck KGaA, Darmstadt, Germany
  • Merck Consumer Health Holding GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany
  • Merck Export GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany
  • Merck Life Science GmbH, Eppelheim, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany
  • Merck Patent GmbH, Darmstadt, Germany, an indirect subsidiary of Merck KGaA, Darmstadt, Germany
  • Merck Selbstmedikation GmbH, Darmstadt, Germany, an indirect subsidiary of Merck KGaA, Darmstadt, Germany
  • Merck Serono GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany
  • Merck Versicherungsvermittlung GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany

(47) Related-party disclosures

Related parties in respect of the Group are E. Merck KG, Darmstadt, Germany, Emanuel-Merck-Vermögens-KG, Darmstadt, Germany, and E. Merck Beteiligungen KG, Darmstadt, Germany a related party of Merck KGaA, Darmstadt, Germany. In principle, direct or indirect subsidiaries of Merck KGaA, Darmstadt, Germany, associates of the Group, jointly controlled companies where the Group is involved, as well as pension funds that are classified as defined benefit plans in accordance with IAS 19 are also related parties within the meaning of IAS 24. This also includes the com­panies Merck Capital Asset Management Ltd., Malta, and Merck Pensions­treuhandverein e.V., Darmstadt, Germany, Members of the Executive Board and the Supervisory Board of Merck KGaA, Darmstadt, Germany, the Executive Board and the Board of Partners of E. Merck KG, Darmstadt, Germany, as well as close members of their families are also related parties.

As of December 31, 2017, there were liabilities by Merck Financial Services GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, Merck KGaA, Darmstadt, Germany, and Merck & Cie, Altdorf, Switzerland, a subsidiary of Merck KGaA, Darmstadt, Germany, to E. Merck KG, Darmstadt, Germany, in the amount of € 1,349.2 million (December 31, 2016: € 1,186.3 million). The balances result mainly from mutual profit transfers between Merck KGaA, Darmstadt, Germany, and E. Merck KG, Darmstadt, Germany, as well as the profit transfer by Merck & Cie, Altdorf, Switzerland,, a subsidiary of Merck KGaA, Darmstadt, Germany, to E. Merck KG, Darmstadt, Germany. They included financial liabilities of € 764.8 million (December 31, 2016: € 729.2 million) which were subject to standard market interest rates. In addition, as of December 31, 2017, Merck KGaA, Darmstadt, Germany, had receivables from E. Merck Beteiligungen KG, Darmstadt, Germany a related party of Merck KGaA, Darmstadt, Germany, in the amount of € 140.9 million (December 31, 2016: € 123.7 million). Merck Financial Services GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, had receivables from Merck Pensionstreuhandverein e.V., Darmstadt, Germany, in the amount of € 0.1 million (December 31, 2016: € 0.1 million) and from Merck Capital Asset Management Ltd., Malta, in the amount of € 0.0 million (December 31, 2016: € 2.5 million). These included financial receivables of € 0.1 million (December 31, 2016: € 2.5 million), which were subject to standard market interest rates. Neither collateral nor guarantees existed for any of the balances either in favor or to the disadvantage of the Group.

From January to December 2017, Merck KGaA, Darmstadt, Germany, performed services for E. Merck KG, Darmstadt, Germany, with a value of € 0.9 million (2016: € 1.0 million), for Emanuel-Merck-Vermögens-KG, Darmstadt, Germany, with a value of € 0.2 million (2016: € 0.2 million) and for E. Merck Beteiligungen KG, Darmstadt, Germany a related party of Merck KGaA, Darmstadt, Germany, with a value of € 0.1 million (2016: € 0.1 million). During the same period, E. Merck KG, Darmstadt, Germany, performed services for Merck KGaA, Darmstadt, Germany, with a value of € 0.5 million (2016: € 0.5 million).

As of December 31, 2017, there were receivables from the Venezue­lan entities deconsolidated as of February 29, 2016 with a carrying amount of € 22.7 million (December 31, 2016: € 25.7 million) after impairment losses and liabilities with a carrying amount of € 21.5 million (December 31, 2016: € 24.2 million). The Group no longer makes any deliveries to Venezuelan entities. From March to December 2016, essential drugs to treat cancer and multiple sclero­sis were provided to patients to a certain extent. Revenues are recognized when payment is received and were consequently not included in the stated receivables. From January to December 2017, the Group did not generate any revenues from these deliveries (March to December 2016: € 0.4 million). During the prior-year period, the cost of sales of these deliveries totaled € 13.7 million.

As of December 31, 2017, there were receivables of € 8.3 million (December 31, 2016: € 18.8 million) and liabilities of € 9.1 million (December 31, 2016: € 12.1 million) vis-à-vis non-consolidated subsidiaries. From January to December 2017, the Group generated revenues of € 0.1 million (December 31, 2016: € 0.9 million) with these companies. During the same period, expenses amounting to € 0.8 million (December 31, 2016: € 6.1 million) were incurred as a result of transactions with these companies.

Information on pension funds that are classified as defined benefit plans in accordance with IAS 19 can be found in Note (26) ‟Provisions for pensions and other post-employment benefits”.

Information on Executive Board and Supervisory Board compensation can be found in Note (48) ‟Executive Board and Supervisory Board compensation”. Activities above and beyond those set forth in Note (48) such as, for example, the provision of services or the granting of loans, between companies of the Group and members of the Executive Board or the Supervisory Board of Merck KGaA, Darmstadt, Germany, the Executive Board or the Board of Partners of E. Merck KG, Darmstadt, Germany, or members of their immediate families took place neither in 2017 nor 2016.

(48) Executive Board and Supervisory Board compensation

The compensation of the Executive Board of Merck KGaA, Darmstadt, Germany, is paid by the general partner, E. Merck KG, Darmstadt, Germany. Furthermore, companies included in these consolidated financial statements recorded expenses for the period from January to December 2017 in the amount of € 3.5 million (2016: € 3.0 million) for services provided by members of the Execu­tive Board of Merck KGaA, Darmstadt, Germany, at those companies.

For the period from January to December 2017, fixed salaries of € 6.0 million (2016: € 6.6 million), variable compensation of € 16.3 million (2016: € 16.8 million), and additional benefits of € 0.3 million (2016: € 0.2 million) were recorded for members of the Executive Board of Merck KGaA, Darmstadt, Germany, by E. Merck KG, Darmstadt, Germany, and by companies included in these consolidated financial statements. Furthermore, releases of provisions for the Long-Term Incentive Plan for members of the Executive Board of Merck KGaA, Darmstadt, Germany, resulted in income of € 1.8 million (2016: expense of € 12.5 million from additions to provisions), and additions to the pension provisions for members of the Executive Board of Merck KGaA, Darmstadt, Germany, included current service costs of € 3.2 million (2016: € 2.8 million) and past service costs of € 0.9 million (2016: € 3.5 million).

The compensation of the Supervisory Board amounting to € 868.3 thousand (2016: € 869.0 thousand) consisted of a fixed portion of € 822.5 thousand (2016: € 822.5 thousand) and meeting attendance compensation of € 45.8 thousand (2016: € 46.5 thousand).

Further individualized information and details can be found in the Compensation Report.

(49) Information on preparation and approval

The Executive Board of Merck KGaA, Darmstadt, Germany, prepared the consolidated financial statements on February 14, 2018 and approved them for forwarding to the Supervisory Board. The Supervisory Board has the responsibility to examine the consolidated financial statements and to declare whether it approves them.

(50) Subsequent events

In connection with the antitrust review proceedings for the Sigma-Aldrich acquisition, on July 6, 2017, the Group received notice from the European Commission (EU Commission), in which the EU Commission informed the Group of its preliminary conclusion that the Group and Sigma-Aldrich allegedly transmitted incorrect and/or misleading information within the scope of the acquisition of Sigma-Aldrich. The EU Commission received registration of the merger on April 21, 2015 and granted clearance on June 15, 2015 subject to the condition that the Group and Sigma-Aldrich divest parts of the European solvents and inorganic chemicals businesses of Sigma-Aldrich in order to resolve antitrust concerns. According to the preliminary viewpoint of the EU Commission communicated in the letter dated July 6, 2017, the Group and Sigma-­Aldrich withheld in this connection important information about an innovation project allegedly relevant for certain laboratory chemicals of significance to the analysis by the EU Commission. According to the EU Commission, the innovation project should have been included in the remedies package. A meeting of the cooperation procedure between the EU Commission and the Group took place on February 5, 2018.

Based on management’s updated assessment, the existing provision was increased to a mid double-digit million amount. The expense was recorded under other operating expenses and allocated to the Life Science business sector.

The ongoing investigations are limited to the examination of violations of EU merger control procedures and do not affect the validity of the EU Commission’s decision to approve the merger.

Subsequent to the balance sheet date, no further events of special importance occurred that could have a material impact on the net assets, financial position and results of operations.