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Notes to the Consolidated Financial Statements

General Disclosures

(1) Company information

The accompanying consolidated financial statements as of December 31, 2018, have been prepared with MERCK Kommanditgesellschaft auf Aktien (Merck KGaA, Darmstadt, Germany), Frankfurter Strasse 250, 64293 Darmstadt, Germany, as parent company. Merck KGaA, Darmstadt, Germany, is registered under HRB 6164 with the Commercial Register of Darmstadt. In accordance with the provisions of the German financial reporting disclosure law (Publizitätsgesetz), consolidated financial statements are also prepared for E. Merck Kommanditgesellschaft (E. Merck KG, Darmstadt, Germany), Darmstadt, Germany, the ultimate parent company and general partner of Merck KGaA, Darmstadt, Germany, with an equity interest of 70.274% as of December 31, 2018 (December 31, 2017: 70.274%). These consolidated financial statements include Merck KGaA, Darmstadt, Germany, and its subsidiaries. The authoritative German versions of these financial statements are filed with the German Federal Gazette (Bundesanzeiger) and can be accessed at www.bundesanzeiger.de.

(2) Reporting principles

These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards in force on the reporting date as issued by the International Accounting Standards Board (IFRSs and IAS) and the IFRSs Interpretations Committee (IFRIC and SIC) and as adopted by the European Union as well as the additionally applicable provisions of section 315e of the German Commercial Code (HGB). The fiscal year corresponds to the calendar year. These financial statements have been prepared in euros, the reporting currency. The figures reported in the consolidated financial statements have been rounded, which may lead to individual values not adding up to the totals presented.

The accounting and measurement policies used in the consolidated financial statements are presented in Notes (50) ‟Measurement policies” to (69) ‟Share-based compensation programs”.

Regulations applicable as of fiscal 2018 and other presentation and measurement changes

The following regulations take effect as of fiscal 2018:

  • IFRS 9 ‟Financial Instruments”
  • IFRS 15 ‟Revenue from Contracts with Customers”
  • IFRIC 22 ‟Foreign Currency Transactions and Advance Consideration”
  • Amendment to IAS 40 ‟Investment Property”
  • Amendment to IFRS 2 ‟Share-based payment”
  • Amendment to IFRS 4 ‟Insurance Contracts”
  • Amendments to IFRS 15 ”Revenue from Contracts with Customers”
  • Annual Improvements to IFRS 2014 – 2016 Cycle: Amendments to IFRS 1 ‟First-time Adoption of International Financial Reporting Standards” and to IAS 28 ‟Investments in Associates and Joint Ventures”

Please refer to Note (49) ‟Effects from new accounting standards and other presentation and measurement changes” for further details on first-time application effects of IFRS 9 and IFRS 15. Note (49) also comprises details on the following effects: adjustments of the consolidated balance sheet as of January 1, 2018, resulting from the application of IAS 29 ‟Financial Reporting in Hyperinflationary Economies” regarding Argentina, disclosure adjustments for interest and penalties related to income taxes, and adjustments of the consolidated income statement according to IFRS 5, effective for 2017, in connection with the disposal of the Consumer Health business.

The other new regulations applicable for the first time in fiscal 2018 did not have a material impact on the consolidated financial statements.

Regulations applicable as of fiscal 2019

The following standards will take effect as of fiscal 2019:

  • IFRS 16 ‟Leases”
  • IFRIC 23 ‟Uncertainty over Income Tax Treatments”
  • Amendment to IAS 28 ‟Investments in Associates and Joint Ventures”
  • Amendment to IFRS 9 ‟Financial Instruments”

We did not opt for early application of any of these standards. With the exception of IFRS 16, none of these rules is expected to have a significant effect on the consolidated financial statements.

IFRS 16 ‟Leases” replaces IAS 17 ‟Leases” and the corresponding interpretations. The Group applies the modified retrospective method to implement IFRS 16. The cumulative transition effects will be recognized as at the date of first-time application (January 1, 2019). Previous-year figures will not be restated.

IFRS 16 introduces a uniform lessee accounting model that requires lessees to recognize all leases in the consolidated balance sheet. This model mandates that right-of-use assets be recognized for identified assets and lease liabilities recognized for entered payment obligations. The new lease accounting regulations affect the Group as a lessee, in particular regarding leased real estate and vehicles. The lessor accounting regulations remain largely unchanged; this business has no material relevance for the Group.

Furthermore, the Group’s consolidated financial statements will not be affected by the new sale-and-lease-back regulations introduced per IFRS 16.

Lease liabilities – recognized for leases with the Group as a lessee – are measured at the present value of the future lease payments, discounted using the interest rate implicit in the lease, or the relevant incremental borrowing rate. The resulting amount is also used to recognize the right-of-use asset, adjusted by directly attributable costs, if applicable. Furthermore, prepayments as well as liabilities relating to fiscal 2018 are taken into account. When remaining lease terms are determined at first-time application, the probability that purchase, extension, or termination options will be exercised is assessed based on the latest insights. These assessments were discretionary.

According to IFRS 16, right-of-use assets are recognized within property, plant and equipment, using the same line item that would have been used if the underlying asset had been purchased by the Group. Going forward, interest expenses from the unwinding of the discount on lease liabilities are recognized in the financial result; this differs from the previous accounting method, according to which operating lease expenses were recognized in full in the respective functional costs.

At the time these consolidated financial statements were prepared, and based on the knowledge and contractual status at that time, the Group expected the following impact on financial position and performance from the application of IFRS 16:

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Consolidated Balance Sheet The Group carried out a Group-wide analysis to establish the projected impact from the first-time application of IFRS 16. As of January 1, 2019, an increase in lease liabilities and corresponding right-of-use assets in the amount of € 470 million will be recognized. Financial liabilities will increase by 5.3% accordingly. As a result, the Groups’s equity ratio will decline by about one percentage point (0.6%) according to our projections. The right-of-use assets to be recognized as of first-time application of IFRS 16 affect the following items within property, plant and equipment:
 
€ million
Non-current assets January 1, 2019
Land, land rights and buildings, including buildings on third-party land € ~ 385 million
Plant and machinery € ~ 15 million
Other facilities, operating and office equipment € ~ 70 million
 
Consolidated Income Statement Based on the leasing portfolio held at first-time application (January 1, 2019) and the latest contractual status, we expect for fiscal 2019 depreciation of about € 120 million, and corresponding interest expenses of about € 10 million. To date, expenses from operating lease agreements were recognized over the lease term, on a straight-line basis, in operating expenses. These changes in accounting principles will translate into improved KPIs. Based on the current contractual status, the operating result (EBIT) will improve by about € 10 million, and the EBITDA pre by about € 130 million. However, the first-time application of IFRS 16 will have no material impact on the business free cash flow (BFCF).
Consolidated Cash Flow Statement The repayment components of about € 115 million included in the lease payments represent repayments of financial liabilities and are therefore recognized as cash flows from financing activities. To date, such repayment components were recognized within payments from operating lease agreements in cash flows from operating activities.

The Group will make use of the following practical expedients of IFRS 16:

  • as before, right-of-use assets, including the corresponding liabilities, from leases of low-value assets will not be recognized in the consolidated balance sheet;
  • leases of intangible assets within the scope of IAS 38 will not be recognized in accordance with IFRS 16;
  • regarding all right-of-use assets – except land, land rights and buildings, including buildings on third-party land – the Group will not separate non-lease components from lease components;
  • leases that were previously subject to IAS 17 and the corresponding interpretations, will be treated as leases under IFRS 16 as well;
  • at first-time application, no impairment tests for right-of-use assets will be carried out – instead, the Group will charge provisions for onerous contracts against the respective right-of-use assets;
  • at first-time application, directly attributable costs incurred at contract inception will not be taken into consideration.

The Group will not apply the practical expedient regarding leases with a term of less than 12 months.

Published accounting standards not yet endorsed by the European Union

As of the balance sheet date, the following standards were published by the International Accounting Standards Board, but not yet endorsed by the European Union:

  • IFRS 17 ‟Insurance Contracts”
  • Amendment to IAS 1 ‟Presentation of Financial Statements”
  • Amendment to IAS 8 ‟Accounting Policies, Changes in Accounting Estimates and Errors”
  • Amendment to IAS 19 ‟Employee Benefits”
  • Amendment to IFRS 3 ‟Business Combinations”
  • Annual Improvements to IFRSs 2015 – 2017 Cycle
  • Amendments to References to the Conceptual Framework in IFRS Standards

From today’s perspective, the new rules are not expected to have any material effects on the consolidated financial statements.

The European Union announced on October 30, 2015, that it would not endorse the interim standard ‟IFRS 14 Regulatory Deferral Accounts” published by the International Accounting Standards Board on January 30, 2014. On December 17, 2015, the International Accounting Standards Board decided to defer the date of the mandatory first-time application of the amendments to the IAS 28 ‟Investments in Associates and Joint Ventures” and IFRS 10 ‟Consolidated Financial Statements” standards published on September 11, 2014, indefinitely.

(3) Management judgments and sources of estimation uncertainty

The preparation of the consolidated financial statements required the Group to make discretionary decisions and assumptions as well as estimates to a certain extent. The discretionary decisions, assumptions relating to the future and sources of estimation uncertainty described below are associated with the greatest potential effects on these consolidated financial statements.

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Items Discretionary scope/ estimation uncertainty Carrying amount Dec. 31, 2018 (€ million) See Note for details Sensitivity
analysis
IFRSs
Goodwill 13,764 ➞ 19 yes
Determination of recoverable amount high IAS 36
Other intangible assets 7,237 ➞ 20 yes
In-licensing of intangible assets medium IAS 38
Identification of impairments (or reversal of impairments) medium IAS 36
Determination of amortization medium IAS 38
Property, plant and equipment 4,811 ➞ 21 no
Identification of impairments (or reversal of impairments) medium IAS 36
Determination of depreciation medium IAS 16
Inventories 2,764 ➞ 23 no
Identification of impairments (or reversal of impairments) medium IAS 2
Trade accounts receivable 2,931 ➞ 24, 38 yes
Determination of impairment amount medium IFRS 9
Other financial assets ➞ 34, 39 yes
Determination of fair values of contingent considerations high 259 IFRS 13
Determination of fair values of equity instruments medium 274 IFRS 9, IFRS 13
Provisions for pensions and other post-employment benefits ➞ 25 yes
Determination of present value of defined-benefit obligations medium – 4,719 IAS 19
Other provisions and contingent liabilities – 1,381 ➞ 26, 27 no
Recognition and measurement of contingent liabilities high IAS 37
Recognition and measurement of other provisions high IAS 37
Determination of fair values of share-based compensation programs medium IFRS 2
Revenue recognition ➞ 6, 8, 30 yes
Determination of type and timing of revenue recognition (including upfront and milestone payments received) medium IFRS 15
Measurement of sales deductions, and refund liabilities medium IFRS 15
Income tax ➞ 14 no
Recognition and measurement of income tax liabilities high –1,176 IAS 12
Recognition and measurement of deferred taxes from temporary differences medium IAS 12
Recognition of deferred tax assets from loss carryforwards medium 33 IAS 12
Assets held for sale ➞ 5 no
Date on which assets and liabilities are classified as ‟held for sale” high IFRS 5