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Capital Structure, Investments and Financing Activities

(32) Financial result/net gains or losses from financial instruments

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€ million 2018 20171
Interest income and similar income 55 23
Income from fair value changes
from debt instruments with subsequent measurement at fair value through profit or loss 5
Income from the change of the fair value of share-based compensation programs 1
Currency differences from financing activities 16 27
Finance income 77 51
 
Interest expenses and similar expenses – 268 – 294
Capitalized borrowing costs of qualifying assets
in property, plant and equipment 7 5
in other intangible assets 8 7
Interest expenses from interest rate derivatives – 14 – 13
Capital loss from disposal of debt instruments with subsequent measurement at amortized cost – 1
Expenses from fair value changes
from debt instruments with subsequent measurement at fair value through profit or loss – 2
Expenses from fair value changes of share-based compensation programs – 15
Interest component of the additions to pension provisions and other non-current provisions – 56 – 51
Other interest expenses – 1
Finance costs – 343 – 345
 
Financial result – 266 – 294
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.

The currency differences from financing activities mainly comprised gains or losses from hedging intragroup transactions in foreign currency.

The following table shows the development of net gains or losses, interest income or expenses as well as dividend income from financial instruments (excluding items recognized in other comprehensive income) in the period under review by measurement category:

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Interest result Net gains and losses
2018€ million Currency translation Dividends Interest income Interest expenses Impairment losses Reversals of impairment losses Fair value adjustments Disposal gains/losses
Financial assets
Subsequent measurement at amortized cost – 47 12 – 77 105
Subsequent measurement at fair value through other comprehensive income
Equity instruments
Debt instruments 1
Subsequent measurement at fair value through profit or loss 22 – 669
Financial liabilities
Subsequent measurement at amortized cost – 54 – 259
Subsequent measurement at fair value through profit or loss 735
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Net gains and losses
2017€ million Interest Impairment losses Reversals of impairment losses Fair value adjustments Disposal gains/losses
Held for trading – 203
Held to maturity
Loans and receivables 21 – 39 97
Available for sale 5 – 14 – 1
Other liabilities – 294

In the table above, interest income or expenses related to derivatives without a hedging relationship are recognized within fair value adjustments. The currency translation result from equity instruments with subsequent measurement at fair value through other comprehensive income was recognized in other comprehensive income.

(33) Cash and cash equivalents

Cash and cash equivalents comprised the following items:

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€ million Dec. 31, 2018 Dec. 31, 2017
Cash, bank balances and checks 780 481
Short-term cash investments (up to 3 months) 1,391 108
Cash and cash equivalents 2,170 589

Changes in cash and cash equivalents as defined by IAS 7 are presented in the consolidated cash flow statement.

Cash and cash equivalents included restricted cash amounting to € 295 million (December 31, 2017: € 238 million). This relates mainly to cash and cash equivalents with subsidiaries which the Group only had restricted access to owing to foreign exchange controls.

The maximum default risk is equivalent to the carrying value of the cash and cash equivalents.

(34) Financial assets

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Dec. 31, 2018 Dec. 31, 2017
€ million Current Non-current Total Current Non-current Total
Available-for-sale financial assets 35 420 454
Loans and receivables 47 12 59
Derivative assets (financial transactions) 9 13 22
 
Subsequent measurement at amortized cost 1 9 10
Loans against third parties 1 9 9
Subsequent measurement at fair value through other comprehensive income 8 278 285
Equity instruments 274 274
Debt instruments 8 4 12
Subsequent measurement at fair value through profit and loss 16 324 340
Equity instruments
Contingent considerations 259 259
Other debt instruments 50 50
Derivatives without a hedging relationship (financial transactions) 16 14 30
Financial assets 24 610 635 90 444 535

As in the previous year, contingent considerations were mainly attributable to the divestments of the Biosimilars business (see Note (5) ‟Acquisitions and divestments”) and Kuvan®. In the previous year, these items were disclosed as available-for-sale financial assets. The shares held in Intrexon Corporation, United States, acquired in fiscal 2018, were disclosed in equity instruments with subsequent measurement at fair value through other comprehensive income. Please refer to Note (70) ‟List of shareholdings” for a detailed list of all investments made in equity instruments with subsequent measurement at fair value through other comprehensive income. Given the Group’s intention to hold these items for the long term, they were classified as equity instruments and subsequently measured at fair value through other comprehensive income. For further information on impairment losses and credit risks associated with these items, please refer to Note (38) ‟Management of financial risks”. Please refer to Note (49) ‟Effects from new accounting standards and other presentation and measurement changes” for further details on the first-time application effects of IFRS 9 regarding the classification and measurement of financial assets.

(35) Financial liabilities/capital ­management

The composition of financial liabilities as well as a reconciliation to net financial debt are presented in the following table:

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Nominal value
Dec. 31, 2018€ million Dec. 31, 2017€ million Maturity Interest rate % million Currency
USD bond 2015/2018 335 March 2018 1.700% 400 USD
Eurobond 2015/2019 799 Sept. 2019 0.750% 800
Eurobond 2009/2019 70 Dec. 2019 4.250% 70
Bonds (current) 869 335
Commercial paper 113 838
Bank loans 370 803
Liabilities to related parties 824 767
Loans from third parties and other financial liabilities 20 19
Liabilities from derivatives (financial transactions) 16 27
Finance lease liabilities 2 1
Current financial liabilities 2,215 2,790
 
Eurobond 2015/2019 799 Sept. 2019 0.750% 800
Eurobond 2009/2019 70 Dec. 2019 4.250% 70
USD bond 2015/2020 655 626 March 2020 2.400% 750 USD
Eurobond 2010/2020 1,348 1,347 March 2020 4.500% 1,350
USD bond 2015/2022 872 833 March 2022 2.950% 1,000 USD
Eurobond 2015/2022 548 548 Sept. 2022 1.375% 550
USD bond 2015/2025 1,389 1,328 March 2025 3.250% 1,600 USD
Hybrid bond 2014/2074 994 992 Dec. 20741 2.625% 1,000
Hybrid bond 2014/2074 498 497 Dec. 20742 3.375% 500
Bonds (non-current) 6,304 7,040
Bank loans 250 850
Liabilities to related parties
Loans from third parties and other financial liabilities 51 54
Liabilities from derivatives (financial transactions) 73 86
Finance lease liabilities 2 2
Non-current financial liabilities 6,681 8,033
 
Financial liabilities 8,896 10,823
less:
Cash and cash equivalents 2,170 589
Current financial assets 24 90
Net financial debt3 6,701 10,144
1
Merck KGaA, Darmstadt, Germany, has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in June 2021.
2
Merck KGaA, Darmstadt, Germany, has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in December 2024.
3
Not defined by International Financial Reporting Standard (IFRS).

€ million

1 The nominal volumes of bonds denominated in U.S. dollars were converted into euros at the closing rate on December 31, 2018.
2 For the hybrid bonds repayment is assumed at the earliest possible date.

The Group repaid a USD bond with a volume of € 323 million in March 2018.

For the hybrid bond 2014/2074 issued by Merck KGaA, Darmstadt, Germany, in two tranches, the rating agencies Standard & Poor’s, Moody’s and Scope have given equity credit treatment to half of the issuance, thus making the issuance more favorable to the Group’s credit rating than a classic bond issue. The bond is recognized in full as financial liabilities in the balance sheet.

The financial liabilities of the Group were not secured by liens or similar forms of collateral. The loan agreements do not contain any financial covenants. The Group’s average borrowing cost as of the balance sheet date was 2.7% (December 31, 2017: 2.2%).

Information on liabilities to related parties can be found in Note (42) ‟Related-party disclosures”.

Capital Management

The objective of capital management is to secure financial flexibility in order to maintain long-term business operations and to realize strategic options. Maintaining a stable investment grade rating, ensuring liquidity, limiting financial risks as well as optimizing the cost of capital are the objectives of our financial policy and set important framework conditions for capital management. The responsible committees decide on the target capital structure of the balance sheet, the appropriation of net retained profit and the dividend level. In this context, net financial debt is one of the leading capital management indicators.

Traditionally, the capital market represents a major source of financing for the Group, for instance via bond issues. As of December 31, 2018, there were liabilities of € 2.77 billion (December 31, 2017: € 2.77 billion) from a debt issuance program most recently renewed in 2015. In addition, the Group had access to a commercial paper program to meet short-term capital requirements with a volume of € 2 billion, of which € 113 million had been utilized as of December 31, 2018 (December 31, 2017: € 838 million).

Loan agreements represent a further source of financing for the Group. At the balance sheet date, the bank financing commitments vis-à-vis the Group were as follows:

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Dec. 31, 2018 Dec. 31, 2017
€ million Financing commitments from banks Utilization Financing commitments from banks Utilization Interest Maturity of financing commitments
Syndicated loan 2,000 2,000 variable 2020
Bilateral credit agreement with banks 700 700 variable
Bilateral credit agreement with banks 400 400 variable
Bilateral credit agreement with banks 250 250 250 250 variable 2022
Various bank credit lines 549 370 581 303 variable < 1 year
2,799 620 3,931 1,653

There are no indications that the availability of credit lines already extended was restricted.

(36) Equity

Equity capital

The total capital of the company consists of the share capital composed of shares and the equity interest held by the general partner E. Merck KG, Darmstadt, Germany. As of the balance sheet date, the company’s share capital amounting to € 168 million was divided into 129,242,251 no-par value bearer shares plus one registered share and is disclosed as subscribed capital. Each share therefore corresponds to € 1.30 of the share capital. The amount resulting from the issue of shares by Merck KGaA, Darmstadt, Germany, exceeding the nominal amount was recognized in the capital reserves. The equity interest held by the general partner amounted to € 397 million. As in the prior year, the share capital did not change in fiscal 2018.

share of net profit of E. Merck KG, Darmstadt, Germany

E. Merck KG, Darmstadt, Germany, and Merck KGaA, Darmstadt, Germany, engage in reciprocal net profit transfers. This makes it possible for E. Merck KG, Darmstadt, Germany, the general partner of Merck KGaA, Darmstadt, Germany, and the shareholders to participate in the net profit/loss of Merck KGaA, Darmstadt, Germany, in accordance with the ratio of the general partner’s equity interest and the share capital (70.274% or 29.726% of the total capital).

The allocation of net profit/loss is based on the net income of both E. Merck KG, Darmstadt, Germany, and Merck KGaA, Darmstadt, Germany, determined in accordance with the provisions of the German Commercial Code. These results are adjusted for trade tax and/or corporation tax and create the basis for the allocation of net profit/loss. The adjustment for corporation tax is made to compensate for the difference in the tax treatment between the general partner and the limited liability shareholders. Corporation tax is only calculated on the income received by the limited liability shareholders. Its equivalent is the income tax applicable to the partners of E. Merck KG, Darmstadt, Germany, which has to be paid by them directly. The adjustment thus ensures that the share in net profit corresponds to the respective interests held by the two shareholder groups. The reciprocal net profit/loss transfer between E. Merck KG, Darmstadt, Germany, and Merck KGaA, Darmstadt, Germany, as stipulated by the Articles of Association was as follows:

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€ million 2018 2017
E. Merck KG, Darmstadt, Germany Merck KGaA, Darmstadt, Germany E. Merck KG, Darmstadt, Germany Merck KGaA, Darmstadt, Germany
Result of E. Merck KG, Darmstadt, Germany, before reciprocal profit transfer, adjusted for trade tax – 24 – 16
Net income of Merck KGaA, Darmstadt, Germany, before reciprocal profit transfer 616 723
Corporation tax 20 56
Basis for appropriation of profits (100%) – 24 637 – 16 780
Profit transfer to E. Merck KG, Darmstadt, Germany
Ratio general partner’s capital to total capital
(70.274%) 447 – 447 548 – 548
Profit transfer from E. Merck KG, Darmstadt, Germany
Ratio of share capital to total capital
(29.726%) 7 – 7 5 – 5
Corporation tax – 20 – 56
Net income 430 162 537 171

The result of E. Merck KG, Darmstadt, Germany, on which the appropriation of profits adjusted for trade tax is based amounted to € – 24 million (2017: € – 16 million). This resulted in a profit/loss transfer to Merck KGaA, Darmstadt, Germany, of € – 7 million (2017: € – 5 million). The net income of Merck KGaA, Darmstadt, Germany, adjusted for corporation tax, on which the appropriation of its profit is based, amounted to € 637 million (2017: € 780 million). Merck KGaA, Darmstadt, Germany, transferred a gain in the amount of € 447 million of its profit to E. Merck KG, Darmstadt, Germany (2017: € 548 million). In addition, an expense from corporation tax charges amounting to € 20 million resulted (2017: expense of € 56 million).

Appropriation of profits

The profit distribution to be resolved upon by shareholders also defines the amount of that portion of net profit/loss freely available to E. Merck KG, Darmstadt, Germany. If the shareholders resolve to carry forward or to allocate to retained earnings a portion of net retained profit of Merck KGaA, Darmstadt, Germany, to which they are entitled, then E. Merck KG, Darmstadt, Germany, is obligated to allocate to the profit brought forward/retained earnings of Merck KGaA, Darmstadt, Germany, a comparable sum determined in accordance with the ratio of share capital to general partner’s capital. This ensures that the retained earnings and the profit carried forward of Merck KGaA, Darmstadt, Germany, correspond to the ownership ratios of the shareholders on the one hand and E. Merck KG, Darmstadt, Germany, on the other hand. Consequently, for distributions to E. Merck KG, Darmstadt, Germany, only the amount is available that results after netting the profit transfer of Merck KGaA, Darmstadt, Germany, with the amount either allocated or withdrawn by E. Merck KG, Darmstadt, Germany, from retained earnings/profit carried forward. This amount corresponds to the amount that is paid as a dividend to the shareholders and reflects their pro rata shareholding in the company.

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€ million 2018 2017
E. Merck KG, Darmstadt, Germany Merck KGaA, Darmstadt, Germany E. Merck KG, Darmstadt, Germany Merck KGaA, Darmstadt, Germany
Net income 430 162 537 171
 
Profit carried forward previous year 60 25 39 16
Withdrawal from revenue reserves
Transfer to revenue reserves
Retained earnings Merck KGaA, Darmstadt, Germany 187 187
 
Withdrawal by E. Merck KG, Darmstadt, Germany – 430 – 515
Dividend proposal – 162 – 162
Profit carried forward 61 26 60 25

For 2017, a dividend of € 1.25 per share was distributed. The dividend proposal for fiscal 2018 will again be € 1.25 per share, corresponding to a total dividend payment of € 162 million (2017: € 162 million) to shareholders. The amount withdrawn by E. Merck KG, Darmstadt, Germany, would amount to € 430 million (2017: € 515 million).

Appropriation of profits and changes in reserves

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€ million 2018 2017
Merck & Cie, Altdorf, Switzerland, a subsidiary of Merck KGaA, Darmstadt, Germany Merck KGaA, Darmstadt, Germany Total Merck & Cie, Altdorf, Switzerland, a subsidiary of Merck KGaA, Darmstadt, Germany Merck KGaA, Darmstadt, Germany Total
Profit transfer to E. Merck KG, Darmstadt, Germany – 62 – 447 – 509 – 63 – 548 – 611
Profit transfer from E. Merck KG, Darmstadt, Germany – 7 – 7 – 5 – 5
Changes in reserves 1 1 22 22
Profit transfer to E. Merck KG, Darmstadt, Germany, including changes in reserves – 62 – 454 – 515 – 63 – 531 – 593
Result of E. Merck KG, Darmstadt, Germany, before reciprocal profit transfer adjusted for trade tax – 24 – 16
Profit transfer to E. Merck KG, Darmstadt, Germany/withdrawal by E.Merck KG, Darmstadt, Germany – 62 – 430 – 63 – 515

Based on the assumed appropriation of profits, the profit transfer to E. Merck KG, Darmstadt, Germany, for 2018, including changes in reserves, amounted to € –515 million. This consisted of the profit transfer to E. Merck KG, Darmstadt, Germany (€ –447 million), the result transfer from E. Merck KG, Darmstadt, Germany, to Merck KGaA, Darmstadt, Germany (€ –7 million), the change in profit carried forward of E. Merck KG, Darmstadt, Germany, (€ 1 million) as well as the profit transfer from Merck & Cie, Altdorf, Switzerland, a subsidiary of Merck KGaA, Darmstadt, Germany, to E. Merck KG, Darmstadt, Germany (€ –62 million). For 2017 the profit transfer to E. Merck KG, Darmstadt, Germany, including changes in reserves amounted to € –593 million. This consisted of the profit transfer to E. Merck KG, Darmstadt, Germany (€ –548 million), the result transfer from E. Merck KG, Darmstadt, Germany, to Merck KGaA, Darmstadt, Germany (€ –5 million), the change in profit carried forward of E. Merck KG, Darmstadt, Germany, (€ 22 million) as well as the profit transfer from Merck & Cie, Altdorf, Switzerland, a subsidiary of Merck KGaA, Darmstadt, Germany, to E. Merck KG, Darmstadt, Germany (€ –63 million).

Merck & Cie, Altdorf, Switzerland, a subsidiary of Merck KGaA, Darmstadt, Germany, is a partnership under Swiss law that is controlled by Merck KGaA, Darmstadt, Germany, but distributes its operating result directly to E. Merck KG, Darmstadt, Germany. This distribution is a payment to shareholders and is therefore also presented under changes in equity.

The proposed withdrawal of E. Merck KG, Darmstadt, Germany, in the amount of € 430 million (2017: € 515 million) results from the total amount of the profit transfer to E. Merck KG, Darmstadt, Germany, including changes in reserves, and the result of E. Merck KG, Darmstadt, Germany, before reciprocal profit transfer.

Non-controlling interests

The calculation of non-controlling interests was based on the stated equity of the subsidiaries concerned after any adjustment required to ensure compliance with the accounting policies of the Group as well as pro rata consolidation entries.

The net equity and profit attributable to non-controlling interests mainly related to the minority interests in the publicly traded company P.T. Merck Tbk, Jakarta, Indonesia, a subsidiary of Merck KGaA, Darmstadt, Germany, and in Merck Ltd., Bangkok, Thailand, a subsidiary of Merck KGaA, Darmstadt, Germany. As part of the divestment of the Consumer Health business with effect from December 1, 2018, the shareholdings in the publicly traded company Merck Ltd., Mumbai, India, a subsidiary of Merck KGaA, Darmstadt, Germany, were also divested; as of December 31, 2018, therefore, non-controlling interests in this company are only included in profit after tax and no longer in equity.

Other changes in equity

On the occasion of the 350th anniversary of the company in 2018, a promise of a one-time grant in the form of shares of Merck KGaA, Darmstadt, Germany, in the amount of € 350 was made to employees of the Group in Germany. For the grant of shares of Merck KGaA, Darmstadt, Germany, in 2018, the required shares were purchased on the stock market by a third party on behalf of the Group and then transferred to the eligible employees. New shares were not issued. In fiscal 2018, in accordance with IFRS 2, the award led to personnel expenses of € 4 million as well as to a decline in retained earnings of € 1 million. In the previous year, personnel expenses of € 1 million and a corresponding increase in retained earnings in equity were recognized; the latter was recorded in the item ‟other” in the consolidated statement of changes in net equity.

(37) Derivative financial instruments

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

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DEC. 31, 2018

€ million Nominal volume Fair value/carrying amount
Positive market values Negative market values
Financial transactions Operative transactions Financial transactions Operative transactions
Current Non-current Current Non-current Current Non-current Current Non-current Current Non-current
Cash flow hedge 1,573 366 4 1 58 20
Interest
Currency 1,573 366 4 1 58 20
No hedge accounting 5,286 1,100 16 14 45 16 73
Interest 1,100 14 73
Currency 5,286 16 16
Equity 45
6,859 1,466 16 14 4 46 16 73 58 20
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DEC. 31, 2017

€ million Nominal volume Fair value/carrying amount
Positive market values Negative market values
Financial transactions Operative transactions Financial transactions Operative transactions
Current Non-current Current Non-current Current Non-current Current Non-current Current Non-current
Cash flow hedge 1,898 1,360 30 15 25 18
Interest
Currency 1,898 1,360 30 15 25 18
No hedge accounting 4,376 1,100 9 13 46 27 86
Interest 1,100 13 86
Currency 4,376 9 27
Equity 46
6,274 2,460 9 13 30 62 27 86 25 18

Derivative financial instruments in connection with financial transactions are shown in financial assets and liabilities. Derivative financial instruments in connection with transactions in operating business are shown in other assets and other liabilities. As in the previous year, all hedging relationships were recognized at a point in time.

Netting of derivatives from an economic perspective was possible due to the existing framework agreements on derivatives trading that the Group had entered into with commercial banks. Actual netting only takes place in the case of insolvency of the contract partner. Balance sheet netting of derivatives did not take place, as with other financial assets and financial liabilities.

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

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€ million
Dec. 31, 2018
Potential netting volume
Gross presentation Netting Net presentation due to master netting agreements due to financial collateral Potential net amount
Derivative financial assets 80 80 29 51
Derivative financial liabilities – 168 – 168 – 29 – 139
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€ million
Dec. 31, 2017
Potential netting volume
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

The reserves for cash flow hedges and the cost of cash flow hedging of the Group applied to the following hedging instruments:

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€ million Cost of hedging Cash flow hedge
Time value of options Forward component of currency forwards Intrinsic value of options Spot component of currency forwards Interest rate swaps
January 1, 2017 – 123 – 68
Adjustment due to mandatory retrospective adoption of IFRS 91 3
January 1, 2017 (after adjustment) 3 – 123 – 68
Fair value adjustment (directly recognized in equity) – 5 5 85 – 2
Reclassification to profit or loss – 1 13
Reclassification to assets
Tax effect 1 – 2 – 25 – 4
December 31, 2017 – 1 3 – 64 – 60
         
January 1, 2018 – 1 3 – 64 – 60
Fair value adjustment (directly recognized in equity) 1 – 48 – 3 – 68
Reclassification to profit or loss 5 38 14
Reclassification to assets
Tax effect 10 13 – 1
December 31, 2018 – 33 1 – 81 – 47
1
Effect of the first-time application of IFRS 9, see (49) ‟Effects from new accounting standards and other presentation and measurement changes”.

(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, partly 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 marketable forward exchange contracts, options and interest rate swaps as hedging instruments. 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. The use of derivatives is regulated by extensive guidelines and subject to constant risk controls by Group Treasury. Speculation is prohibited. A strict separation of functions between trading, settlement and control functions is ensured. 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 transactional foreign exchange risks within the scope of both its business activities and financing activities. Foreign exchange risks are continuously analyzed and different hedging strategies used to limit or eliminate these risks. Foreign exchange risks from the following transactions are hedged through the use of forward exchange contracts and currency options:

  • Forecast transactions in non-functional currency, the expected probability of which is very high for the next 36 months,
  • Firm purchase commitments of the next 36 months in non-functional currency,
  • Intragroup financing in non-functional currency as well as
  • Receivables and liabilities against third parties in non-functional currency.

Forward exchange contracts are used to hedge foreign exchange risks arising from transactions already recognized in the balance sheet. Forecast transactions and firm purchase commitments in non-functional currency are hedged using forward exchange contracts and currency options which are due within the next 36 months.

The following table shows the net exposure and the effects of transactional 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.

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€ million Dec. 31, 2018 USD CHF CNY TWD JPY KRW
Net exposure 618 – 274 741 153 132 163
Exchange rate – 10% (€ depreciation) Consolidated income statement – 62 27 – 74 – 15 – 13 – 16
Equity – 135 20 – 9 – 19 – 11 – 14
Exchange rate + 10% (€ appreciation) Consolidated income statement 62 – 27 74 15 13 16
Equity 110 – 16 8 15 10 12
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€ million Dec. 31, 2017 USD CHF CNY TWD JPY KRW
Net exposure 1,215 – 184 449 135 75 115
Exchange rate – 10%
(€ depreciation)
Consolidated income statement – 122 18 – 45 – 14 – 8 – 12
Equity – 172 39 – 44 – 38 – 19 – 18
Exchange rate + 10%
(€ appreciation)
Consolidated income statement 122 – 18 45 14 8 12
Equity 147 – 31 36 31 17 15

In this presentation, effects of cash flow hedges are taken into consideration in the equity of the Group. The net exposure of each of the aforementioned currencies consisted 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 at a hedging ratio of 30% – 70%.

Balance sheet items in the aforementioned currencies were economically hedged in full in both 2018 and 2017 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 impact of cash flow hedge accounting for forecasted transactions in foreign currency on the Group’s net assets and results of operations was as follows for the major currencies:

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€ million Dec. 31, 2018 USD CHF CNY TWD JPY KRW
Notional amount 1,180 178 85 169 125 129
thereof: current 1,055 125 85 122 101 85
thereof: non-current 125 53 - 47 24 44
Fair value of the hedging instrument – 49 – 2 – 5 – 8 – 10
thereof: positive market value (asset) - 2 - - 3
thereof: negative market value (liability) – 49 – 3 – 5 – 8 – 3 – 10
Maturity date January 2019 – December 2020 January 2019 – December 2020 January 2019 –December 2019 January 2019 – December 2020 January 2019 – December 2020 January 2019 – January 2021
Hedge ratio1 1:1 1:1 1:1 1:1 1:1 1:1
Change in value of outstanding hedging instruments since January 1, 2018 – 58 5 – 3 – 3 – 6 – 7
Change in value of hedged item used to determine hedge effectiveness since January 1, 2018 58 – 5 3 3 6 7
Weighted average hedged rate for the year (including forward points) 1.22 1.12 8.48 36.68 126.74 1,397.39
1
The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.

In addition to the previously described transactional foreign exchange risks, the Group was exposed to currency translation risks since many of the subsidiaries of Merck KGaA, Darmstadt, Germany, were located outside the eurozone and had functional currencies other than the reporting currency. Exchange differences resulting from translation of the assets and liabilities of these companies into euros, the reporting currency, are recognized in equity.

Interest rate risks

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

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€ million Dec. 31, 2018 Dec. 31, 2017
Short-term or variable interest rate monetary deposits 2,196 684
Short-term or variable interest rate monetary borrowings – 2,465 – 3,641
Net interest rate exposure – 269 – 2,957

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 within the scope of IAS 32, except contingent considerations, are presented in the following table. In the event of a downward shift, the interest rate for instruments subject to a contractual interest rate floor of zero percent was limited accordingly.

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€ million 2018 2017
Change in market interest rate + 100 basis points – 100 basis points + 100 basis points – 100 basis points
Effects on consolidated income statement 6 – 9 – 26 16
Effects on equity

Share price risks

The shares in publicly listed companies amounting to € 134 million (December 31, 2017: € 16 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 € 13 million (December 31, 2017: € 2 million). This change in value would be recognized in equity.

Liquidity risks

The risk that the Group cannot meet its payment obligations resulting from financial liabilities, is limited by establishing the required financial flexibility and by Group-wide cash management. Information on issued bonds and other sources of financing can be found in Note (35) ‟Financial liabilities/capital management”.

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

The following liquidity risk analysis presents the contractual cash flows such as repayments and interest on financial liabilities and derivative financial instruments with a negative fair value:

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€ million
Dec. 31, 2018
Cash flows
< 1 year
Cash flows
1 – 5 years
Cash flows
> 5 years
Carrying amount Interest Repayment Interest Repayment Interest Repayment
Subsequent measurement at amortized cost              
Bonds and commercial paper 7,286 208 984 458 4,430 85 1,899
Bank loans 620 17 369 2 250
Trade accounts payable 1,766 1,766
Liabilities to related parties 1,335 1,335
Other financial liabilities 522 508 13
Loans from third parties and other financial liabilities 67 1 17 3 50
Subsequent measurement at fair value through profit or loss              
Contingent considerations 5 1 4
Derivatives without a hedging relationship 90 15 16 45
Derivatives with a hedging relationship 78 58 20
Refund liabilities 472 472
Finance lease liabilities 4 2 2
12,244 241 5.528 508 4,769 85 1,899
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€ million
Dec. 31, 2018
Cash flows
< 1 year
Cash flows
1 – 5 years
Cash flows
> 5 years
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
Finance lease liabilities 4 1 2
14,120 243 6,046 657 6,179 143 1,839

Credit risks

Credit risk for the Group means the risk of a financial loss if a customer or other contract partner is not able to meet its contractual payment obligations. The Group is generally exposed to credit risks from existing trade accounts receivable other debt instruments, derivatives and contract assets.

According to IFRS 9, there is a rebuttable presumption that the credit risk has increased significantly when contractual payments are more than 90 days past due. The Group therefore analyzes all financial assets that are more than 90 days past due and examines whether there is objective evidence of impairment requiring additional risk provisions.

If the financial asset is subject to a significant default risk, the impairment booked for the expected credit risks is increased accordingly. A default generally exists when the debtor cannot fully meet its liabilities. By contrast, a debtor’s creditworthiness is assumed to be impaired if there are objective indications of the debtor being in financial difficulties, such as the disappearance of an active market for its products or impending insolvency.

The Group derecognizes an asset if the likelihood of receiving payments from the debtor in question is considered to be negligible. In such a case the Group does not expect any material payments from derecognized assets. The Group does, however, also use legal means to recognize the existing entitlement to payment where possible.

On the balance sheet date, the theoretical maximum default risk corresponded to the net carrying amounts less any compensation from credit insurance.

The following table shows impairments for financial assets and contract assets as well as gains from their release recognized in the consolidated income statement for fiscal year 2018:

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2018
Impairment losses – 77
of trade accounts receivable – 75
of debt instruments subsequently measured at amortized cost – 2
of debt instruments subsequently measured at fair value through other comprehensive income
Reversal of impairment losses 105
of trade accounts receivable 69
of debt instruments subsequently measured at amortized cost 35
of debt instruments subsequently measured at fair value through other comprehensive income
Net impairment losses on financial assets 27

The above-described impairments for trade accounts receivable applied entirely to receivables resulting from contracts with customers. Reversals of impairment losses on debt instruments subsequently measured at amortized cost mainly related to an other receivable from a final payment in connection with the generics business divested in 2007.

Credit risks from trade accounts receivable

The credit risk from trade accounts receivable is largely impacted by the specific circumstances of individual customers. The Group also takes into account additional factors such as the general default risk in the respective industry and country in which the customer operates.

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 analyzing the aging structure of trade accounts receivable. The Group continuously reviews and monitors open positions of all trading partners in the corresponding countries and takes risk-mitigating measures if necessary. If there is objective evidence that particular trade accounts receivable are fully or partially impaired, additional loss allowances are recognized to provide for expected credit defaults. The customer groups with comparable default risks to be taken into account are determined at the Group in accordance with the business sectors and location of the respective customers. Current macroeconomic expectations are also considered by taking into account country-specific ratings. For risk management purposes, the Group groups the existing trade accounts receivable based partly on the business sectors, as the customers’ risk profiles within the respective business sector are regarded as comparable, and partly on credit ratings in the respective countries in which the Group operates and from which the receivables originate. The table below contains an overview of the credit risk by business sector and country rating as of December 31, 2018:

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Dec. 31, 2018
€ million
Healthcare Life Science Performance Materials Group
External credit rating at least AA– (rating agency Standard & Poor’s)
or Aa3 (rating agency Moody’s)
856 827 437 2,120
External credit rating at least BBB– (rating agency Standard & Poor’s)
or Baa3 (rating agency Moody’s)
252 146 21 420
External credit rating lower than BBB– (rating agency Standard & Poor’s)
or Baa3 (rating agency Moody’s)
427 36 2 465
Trade accounts receivable before impairment losses 1,535 1,010 460 3,004

Goods were generally sold under retention of title so that a reimbursement claim exists in the event of default. Other guarantees generally were not demanded. The scope of credit-insured receivables was immaterial for the Group.

Impairments based on expected credit losses for trade accounts receivable as of December 31, 2018, were as follows:

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Dec. 31, 2018
€ million
Not yet due Overdue by 90 days Overdue by 180 days Overdue by 360 days More than 360 days past due Total
Expected loss rate 0.5% 0.8% 3.3% 34.8% 53.1%
Trade accounts receivable before loss allowances 2,415 399 60 66 64 3,004
thereof: credit impaired 2 1 2 16 30 51
Loss allowances – 12 – 3 – 2 – 23 – 34 – 73
thereof: credit impaired – 1 – 14 – 29 – 44

As of January 1, 2018, the date of first-time application of the impairment rules amended through IFRS 9, impairments based on expected credit losses for trade accounts receivable were as follows:

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Jan. 1, 2018
€ million
Not yet due Overdue by
90 days
Overdue by
180 days
Overdue by
360 days
More than 360 days past due Total
Expected loss rate 0.9% 1.3% 6.0% 14.1% 93.3%
Trade accounts receivable before loss allowances 2,408 402 61 45 360 3,277
thereof: credit impaired 4 7 12 336 359
Loss allowances – 22 – 5 – 4 – 6 – 336 – 373
thereof: credit impaired – 1 – 2 – 6 – 325 – 334

The corresponding loss allowances in 2018 developed as follows:

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Loss allowances of trade accounts receivable
December 31, 2017 – IAS 39 – 367
Adjustment on initial application of IFRS 9 – 6
January 1, 2018 – IFRS 9 – 373
Additions – 75
Utilizations 308
Reversals 69
Classification as held for sale or transfer to disposal group 4
Currency effects – 7
Change in scope of consolidation 1
December 31, 2018 – 73

The Group utilized a recognized impairment loss of € 299 million in 2018 in connection with loss allowances established on trade accounts receivable from the Venezuelan subsidiary, as the probability of receiving payments was considered to be minimal. The Venezuelan subsidiary was deconsolidated in fiscal year 2016 due to the absence of the possibility of exercising control.

The maturity structure of the carrying amounts of trade accounts receivable as of December 31, 2017, was as follows:

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€ million Dec. 31, 2017
Neither past due nor impaired 2,391
Past due, but not impaired
up to 3 months 392
up to 6 months 50
up to 12 months 32
up to 24 months 7
over 2 years 1
Impaired 51
Trade accounts receivable 2,923

The corresponding impairment in the previous year developed as follows:

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€ million 2017
January 1 – 464
Additions – 39
Reversals/utilizations 99
Currency translation and other changes 37
December 31 – 367

In fiscal 2017, previously recognized impairments were reversed as a result of the improved solvency of customers, particularly in the Middle East.

significant management judgements and sources of estimation uncertainty – impairment of trade accounts receivable and contract assets

In terms of the impairment of trade accounts receivable and of contract assets there is significant discretion and estimation uncertainty when it comes to

  • the identification of customer groups with identical default risks,
  • the identification of a substantial increase in the credit risk and
  • the calculation of the expected credit losses.

If the impairment of trade accounts receivable and contract assets had been 10% higher in 2018, profit before income tax would have been € 8 million lower.

Credit risks from other financial assets

As investments in debt instruments either subsequently measured at amortized cost or at fair value through other comprehensive income were largely classified as low-risk investments, the expected credit loss in the next 12 months was used as the sole basis for calculating the impairment loss on these debt instruments. For financial assets with only a minimal default risk, the rules concerning the mandatory establishment of a risk provision for the expected credit loss over the full term were not observed at the time of addition or during subsequent measurement. It was therefore not assessed whether there had been a significant increase in the credit risk for such assets. The Group does not presume an increased credit risk as of the balance sheet date if the contract partner has an investment grade rating. If there were indications that the debtor’s creditworthiness had worsened but that this was not yet reflected in its existing credit rating, the credit risk assessment was adjusted and the impairments established for expected credit losses were increased. In all other cases, no new risk assessment was undertaken as of the balance sheet date and the initially assumed risk profile was maintained.

Wherever the Group presumes a considerable increase in the default risk, the expected credit loss over the full term of the financial asset is taken into account.

The Group limits credit risks from other financial assets by concluding contracts only with contract partners whose creditworthiness is good. 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.

In the previous year, impairment losses were recognized for investments in companies and other non-current financial assets held for sale in a total amount of € 14 million. Positive and negative fair value adjustments recognized in equity offset each other in the previous year.

(39) Information on fair value measurement

The following table presents the carrying amounts and the fair values of the individual financial assets and liabilities as of December 31, 2018, for each individual financial instrument class pursuant to IFRS 9:

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€ million
Dec. 31, 2018
Carrying amount Fair value1
Current Non-current Total Fair value determined by official prices and quoted market values (Level 1) Fair value determined using inputs observable in the market (Level 2) Fair value determined using inputs unobservable in the market (Level 3) Total
Financial assets
Subsequent measurement at amortized cost
Cash and cash equivalents 2,170 2,170
Trade accounts receivable (excluding leasing receivables) 2,909 2,909
Other debt instruments 296 26 322
Subsequent measurement at fair value through other comprehensive income
Equity instruments 274 274 17 118 140 274
Trade accounts receivable 21 21 21 21
Other debt instruments 8 4 12 12 12
Subsequent measurement at fair value through profit or loss
Equity instruments
Contingent considerations 259 259 259 259
Other debt instruments 50 50 2 22 27 50
Derivatives without a hedging relationship 16 59 76 30 45 76
Derivatives with a hedging relationship 4 1 4 4 4
Finance lease receivables (measured in accordance with IAS 17)2 1 1
Total 5,425 673 6,098 30 174 492 696
 
Financial liabilities
Subsequent measurement at amortized cost
Trade accounts payable 1,766 1,766
Other financial liabilities 3,215 6,615 9,830 7,258 2,677 9,935
Subsequent measurement at fair value through profit or loss
Contingent considerations 1 4 5 5 5
Derivatives without a hedging relationship 16 73 90 90 90
Derivatives with a hedging relationship 58 20 78 78 78
Refund liabilities 472 472
Finance lease liabilities (measured in accordance with IAS 17)2 2 2 4
Total 5,530 6,714 12,244 7,258 2,845 5 10,108
1
The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
2
Measurements within the scope of IAS 17 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).

The following table presents the carrying amounts and the fair values for each individual class of financial instrument as of December 31, 2017, pursuant to IAS 39:

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€ million
Dec. 31, 2017
Carrying amount Subsequent measurement according to
IAS 39
Carrying amount according to IAS 172 Non-financial items Fair value, Dec. 31, 20171
Amortized cost At cost Fair value
Assets
Cash and cash equivalents 589 589
Current financial assets 90 47 44
Held for trading (non-derivatives)
Derivatives without a hedging relationship 9 9 9
Held to maturity
Loans and receivables 47 47
Available for sale 35 35 35
Derivatives with a hedging relationship
Trade accounts receivable 2,923 2,923
Loans and receivables 2,923 2,923
Other current and non-current assets 936 276 92 568
Derivatives without a hedging relationship 46 46 46
Loans and receivables 276 276
Derivatives with a hedging relationship 45 45 45
Non-financial items 568 568
Non-current financial assets 444 12 4 429
Derivatives without a hedging relationship 13 13 13
Held to maturity
Loans and receivables 12 12
Available for sale 420 4 416 416
Derivatives with a hedging relationship
 
Liabilities
Current and non-current financial liabilities 10,823 10,707 113 4
Derivatives without a hedging relationship 113 113 113
Other financial liabilities 10,707 10,707 11,074
Derivatives with a hedging relationship
Liabilities from finance leases 4 4
Trade accounts payable 2,195 2,195
Other financial liabilities 2,195 2,195
Current and non-current other liabilities 2,529 1,059 43 1,427
Derivatives without a hedging relationship
Other financial liabilities 1,059 1,059
Derivatives with a hedging relationship 43 43 43
Non-financial items 1,427 1,427
1
The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
2
Measurement within the scope of IAS 17 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).

The determination of the fair values of financial assets and liabilities is presented in the following table:

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Dec. 31, 2018

€ million

Fair Value
Fair value determined by official prices and quoted market values (Level 1) Financial instruments concerned Financial assets Financial liabilities Description of the measurement technique Main input factors used to determine fair values
Equity instruments Shares (equity investments in listed companies) 17 Derived from active market Quoted prices in an active market
Debt instruments (subsequent measurement through other comprehensive income) Bonds 12
Debt instruments (subsequent measurement through profit or loss) Publicly-traded funds 2
Other financial liabilities (subsequent measurement at amortized cost) Bonds 7,258
Total 30 7,258
 
Fair value determined using input factors observable in the market (Level 2)
Equity instruments Shares (equity investments in listed companies) 118 Derivation from active market considering liquidity discount Quoted prices in an active market and volatilities observable on the market
Debt instruments (subsequent measurement through profit or loss) Convertible note with conversion right to shares in companies 22 Nominal value considering liquidity discount Volatilities observable on the market
Derivatives (with or without a hedging relationship) Forward exchange contracts and currency options 21 95 Use of recognized actuarial methods Spot and forward rates observable on the market as well as exchange rate volatilities
Interest rate swaps 14 73 Interest rate curves available on the market
Other financial liabilities (subsequent measurement at amortized cost) Liabilities to banks and other loan liabilities 2,677 Discounting of future cash flows Interest rates obervable on the market
Total 174 2,845
 
Fair value determined using input factors unobservable in the market (Level 3)
Equity instruments Equity interests in unlisted companies 10 Discounting of expected future cash flows Expected cash flows from recent business planning, average cost of capital, expected long-term growth rate
129 Derived from observable prices within the scope of equity refinancing sufficiently close to the balance sheet date Observable prices derived from equity refinancing
1 Cost-based determination Acquisition cost
Trade accounts receivable Trade accounts receivable that are intended for sale due to a factoring agreement 21 Nominal value less factoring fees Nominal value of potentially sold trade accounts receiva- ble, average fees for sales of trade accounts receivable
Derivatives (without hedging relationship) Option on equity instruments in an unlisted company 45 Option pricing models Sales planning, milestone payments, probabilities of regulatory and commercial events, discount rates
Contingent considerations Contingent considerations from the sale and purchase of businesses or shares in corporations 259 5 Discounting of probability- weighted future milestone payments and license fees Sales planning, milestone payments, probabilities of regulatory and commercial events, discount rates
Other debt instruments Interests in unlisted funds 19 Taking into account the fair value of the companies in which the funds are invested Net asset values of the fund interests
Bond with embedded settlement option for equity in a unlisted company 7 Used of standard market valuation models Market observable interest rates
Total 492 5
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Dec. 31, 2017

€ million

Fair Value
Fair value determined by official prices and quoted market values (Level 1) Financial instruments concerned Financial assets Financial liabilities Description of the measurement technique Main input factors used to determine fair values
Classified as available for sale Shares (equity investments in listed companies) 16 Derived from active market Quoted prices in an active market
Bonds, investment funds 35
Publicly-traded funds 2
Classified as other liabilities Bonds 7,719
Total 53 7,719
 
Fair value determined using input factors observable in the market (Level 2)
Derivatives with and without a hedging relationship Forward exchange contracts and currency options 54 70 Use of recognized actuarial methods Spot and forward rates ob- servable on the market and exchange rate volatilities
Interest rate swaps 13 86 Interest rate curves available on the market
Classified as other Liabilities Liabilities to banks and other loan liabilities 3,355 Discounting of future cash flows Market observable interest rates
Total 67 3,511
 
Fair value determined using input factors unobservable in the market (Level 3)
Classified as available for sale/
classified as other liabilities
Equity interests in unlisted companies 6 Discounting of expected future cash flows Expected cash flows from recent business planning, average cost of capital, expected long-term growth rate
96 Derived from observable prices within the scope of equity refinancing sufficiently close to the balance sheet date Observable prices derived from equity refinancing
Contingent considerations from the sale and purchase of businesses or shares in corporations 277 3 Discounting of probability- weighted future milestone payments and license fees Sales planning, milestone payments, probabilities of regulatory and commercial events, discount rates
Interests in unlisted funds 18 Taking into account the fair value of the companies in which the funds are invested Net asset values of the fund interests
Derivatives without a hedging relationship Option on equity instruments in an unlisted company 46 - Option pricing models Sales planning, milestone payments, probabilities of regulatory and commercial events, discount rates
Total 443 3

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

The planning periods used to determine the fair value of equity investments in unlisted companies ranged from two to eight years. Cash flows for periods in excess of this are included in the terminal value calculation using long-term growth rates of between 0.5% and 2.0% (December 31, 2017: 0.5%). The applied average cost of capital (after tax) was 7.0% on December 31, 2018 (December 31, 2017: 7.0%)

significant management judgments
and sources of estimation uncertainty – contingent considerations

The fair values of contingent considerations were calculated by weighting the expected future milestone payments and royalties using their probability of occurrence and discounting them. This calculation is subject to judgment to a high degree. The main parameters when determining contingent considerations represent

  • the estimated probability of occurrence of the individual milestone events,
  • the sales planning assumed to derive royalties and
  • the discount rate used.

When determining the probability of occurrence of the individual milestone events in connection with the development of drug candidates, the focus was on empirically available probabilities of success of development programs in comparable phases of clinical development in the relevant therapeutic areas. To determine the sales planning, internal sales plans and sales plans of external industry services were used. The discount rate (after tax) of between 6.3% and 7.3% (December 31, 2017: 6.5% to 7.6%) was calculated using the weighted average cost of capital.

The most significant contingent consideration was the future purchase price claim from the disposal of the Biosimilars business. It was calculated by an external valuation expert on conclusion of the transaction in 2017. As of December 31, 2018, the carrying amount was € 196 million (December 31, 2017: € 228 million). If, in the context of determining the fair value of this contingent consideration at the date of transaction, the probability of approval as well as the discount factor of the three major development programs had been estimated to be lower or higher to the extent presented below, this would have led to the following changes in the measurement and the corresponding effects on the profit before income tax as of December 31, 2018:

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Change in probability of regulatory approval
€ million – 10% unchanged 10%
Change of discount rate 5.8% – 34 5 45
unchanged (6.3%) – 38 0 38
6.8% – 42 – 5 32

A change in the main input parameters used for the measurement of the other contingent compensations would not have had a material impact on profit before income tax.

The changes in financial assets and liabilities for each of the individual categories of financial instruments allocated to Level 3 and measured at fair value were as follows:

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€ million Financial assets Financial liabilities
Subsequent measurement at fair value through profit or loss Subsequent measurement at fair value through other comprehensive income Subsequent measurement at fair value through profit or loss
Equity instruments Other debt instruments Contingent considerations Derivatives without a hedging relationship Equity instruments Trade accounts receivable Contingent considerations
Net carrying amounts, December 31, 2017 (IAS 39) 440 18 277 46 102 – 3
Adjustment on initial application of IFRS 9 7 – 18 21 4
Net carrying amounts, January 1, 2018 (IFRS 9) 447 21 277 46 106 – 3
Additions due to acquisitions/divestments/ conclusion of factoring agreements 105 15 8 33 49
Transfers into Level 3 out of Level 1/Level 2
Fair value changes
Gains (+)/losses (–) recognized in profit or loss – 7 2 – 7 – 1 – 1
thereof: other operating result – 31 – 1 – 29 – 1
thereof: attributable to assets/liabilities held as of the balance sheet date – 37 – 1 – 36 – 1
thereof: financial result 24 3 22 – 1
thereof: attributable to assets/liabilities held as of the balance sheet date 24 3 22 – 1
Gains (+)/losses (–) recognized in other comprehensive income 30 30
Currency translation 1 1
Disposals due to divestments/payments received – 80 – 4 – 20 – 29 – 28
Transfers out of Level 3 into Level 1/Level 2 – 9 – 9
Other – 8 8
Net carrying amounts, December 31, 2018 (IFRS 9) 487 27 259 45 140 21 – 5

Additions during the reporting period comprised particularly acquisitions of equity investments by Merck Ventures B.V., Amsterdam, Netherlands, a subsidiary of Merck KGaA, Darmstadt, Germany, trade accounts receivable that are designated to be sold on account of a factoring agreement as well as bonds with a conversion right for shares in unlisted companies. Disposals during the reporting period related particularly to divestments of equity investments by Merck Ventures B.V., Amsterdam, Netherlands, a subsidiary of Merck KGaA, Darmstadt, Germany, as well as payments received in connection with the contingent consideration from the sale of the Biosimilars business. Transfers from Level 3 to Level 1 comprised the now listed equity investment Translate Bio Inc., United States. 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”.

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€ million Total Financial assets Financial liabilities
Available-for-sale financial assets thereof: contingent consideration Derivatives without a hedging relationship Other liabilities thereof: contingent consideration
Net carrying amounts, January 1, 2017 (IAS 39) 74 75 50 –1 –1
Additions as result of acquisitions/divestments 302 258 228 46 – 2 – 2
Transfers to Level 3 from previous measurement at cost/Level 1/Level 2 68 68
Fair value changes
Gains (+)/losses (–) recognized in profit or loss – 6 – 6
thereof: other operating result – 9 – 9 – 4
thereof: attributable to assets/liabilities held as of the balance sheet date – 9 – 9 – 4
thereof: financial result 3 3 3
thereof: attributable to assets/liabilities held as of the balance sheet date 3 3 3
Gains (+)/losses (–) recognized in other comprehensive income 5 5 –1
Currency translation – 2 – 2
Disposals due to divestments –1 –1
Transfers out of Level 3 into Level 1/Level 2
Net carrying amounts, December 31, 2017 (IAS 39) 440 397 277 46 – 3 – 3

The following equity instruments measured at fair value through other comprehensive income were disposed of in fiscal year 2018:

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2018
€ million
Reasons for the disposal Fair value at the date of disposal The cumulative gain (+) or loss (–) on disposal included in other comprehensive income Transfers of the cumulative gain (+) or loss (–) within group equity in retained earnings
Equity instrument1
M Ventures portfolio companies Portfolio adjustments and acquisitions 40 32 32
Cascadian Therapeutics, Inc., United States Acquired by Seattle Genetics, Inc., United States – 17 – 17
Nature’s Best Health Products Ltd., United Kingdom Sale of Consumer Health business to Procter & Gamble Company, United States
1
Disposals due to liquidations are not included.

The M Ventures portfolio companies that were disposed of are Prexton Therapeutics SA, Switzerland, ObsEva SA, Switzerland, and F-Star Gamma Limited, United Kingdom.

(40) Other financial obligations

Other financial obligations comprised the following:

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€ million Dec. 31, 2018 Dec. 31, 2017
Acquisition of intangible assets and due to collaboration agreements 2,763 3,328
Acquisition of property, plant and equipment 144 151
Operating lease 577 530
Long-term purchase commitments 150 236
Remaining other financial obligations 52 63
Other financial obligations 3,686 4,308

Obligations to acquire intangible assets existed in particular owing to contingent considerations within the scope of in-licensing and research and development collaborations. In these agreements the Group has entered into an obligation to make milestone payments once specific targets have been reached. In the not very likely event that all contract partners achieve all milestones, the Group would be obligated to pay up to € 1,548 million (December 31, 2017: € 1,968 million) for the acquisition of intangible assets. The table above does not contain other financial obligations from possible future sales-based license fees and milestone payments.

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 € 1,215 million (2017: € 1,360 million).

The expected maturities of these obligations were as follows:

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€ million Dec. 31, 2018 Dec. 31, 2017
Obligations to acquire intangible assets and from collaboration agreements
within one year 266 247
in 1 – 5 years 1,255 1,572
more than 5 years 1,242 1,509
2,763 3,328

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, 2018 Within 1 year 1 – 5 years More than 5 years Total
Present value of future payments from finance leases 2 2 - 4
Interest component of finance leases
Future finance lease payments 2 2 - 4
 
Future operating lease payments 131 308 138 577
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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 paymenhs 1 3 4
 
Future operating lease payments 137 287 106 530

Operating leasing agreements related mainly to leasing arrangements to lease real estate, vehicles as well as operating and office equipment. The payments resulting from operating leasing agreements amounted to € 153 million (2017: € 146 million) and were recorded as an expense in the reporting period.

(41) Net cash flows from financing activities

The change in financial debt was as follows:

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€ million Jan. 1, 2018 Cash inflows Repayments Changes in scope of consolidation Currency translation Fair value changes Other Dec. 31, 2018
Bonds 7,375 – 323 121 7,173
thereof: current 335 – 323 – 12 869 869
thereof: non-current 7,040 133 – 869 6,304
Liabilities to related parties 765 375 – 319 821
Other current and non-current financial liabilities1 2,687 32 – 1,821 – 2 5 902
Financial liabilities1 10,827 407 – 2,463 119 5 8,896
1
Values effective January 1, 2018, have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes” ‟Effects from new accounting standards and other presentation and measurement changes”.
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€ million Jan. 1, 2017 Cash inflows Repayments Changes in scope of consolidation Currency translation Fair value changes Other Dec. 31, 2017
Bonds 8,731 – 932 – 425 7,375
thereof: current 937 – 932 – 25 354 335
thereof: non-current 7,794 – 400 – 354 7,040
Liabilities to related parties 729 349 – 314 765
Other current and non-current financial liabilities 3,136 147 – 546 – 38 – 16 2,683
Financial liabilities 12,597 497 – 1,792 – 463 – 16 10,823

‟Other changes” relate to the reclassification of bonds owing to a change from long-term to short-term.

In 2017, the repayment of other current and non-current financial debt mainly related to the repayment of liabilities to finance the acquisition of the Sigma-Aldrich Corporation, United States. The repayment of the remaining current and non-current financial debt in the consolidated cash flow statement includes cash changes in assets from derivatives that are not contained in the changes noted above.

The amount of undrawn borrowing facilities that could be tapped for future operating activities and to meet obligations is disclosed in Note (35) Financial liabilities/capital management”.