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Capital Structure, Investments, and Financing Activities

(34) Equity

Accounting and measurement policies

Accounting treatment of the general partner’s equity

As a partnership limited by shares, Merck KGaA, Darmstadt, Germany, has two different shareholder groups who have contributed to the company: The general partner E. Merck KG, Darmstadt, Germany, as the personally liable partner and the shareholders.

From an accounting perspective, the contributions both shareholder groups are treated as equity, regardless of the general partner’s option to terminate its capital share. For this to happen, the limited liability shareholders must be able to decide, on the basis of the Articles of Association of Merck KGaA, Darmstadt, Germany, on the conversion of the company into a stock corporation and thus limit the general partner’s settlement claim to fulfillment in equity instruments.

Measurement of non-controlling interests within the scope of a company acquisition

In cases where a company was not acquired in full, non-controlling interests are measured using the fair value of the proportionate share of net assets.

Equity capital/capital reserves 

The equity capital of the company consists of the subscribed capital composed of shares and the equity interest held by the general partner E. Merck KG, Darmstadt, Germany (general partner’s equity). As of the balance sheet date, the company’s subscribed capital amounting to € 168 million was divided into 129,242,251 no-par value bearer shares plus one registered share. Each share therefore corresponds to € 1.30 of the subscribed 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 2018, the subscribed capital did not change in fiscal 2019.

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 subscribed capital (70.274% or 29.726% of the equity 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 must 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.

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, E. Merck KG, Darmstadt, Germany, shall be obliged to allocate to the profit brought forward/retained earnings of Merck KGaA, Darmstadt, Germany, a comparable sum determined according to the ratio of subscribed capital to general partner’s equity. 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 sum paid as a dividend to the shareholders and reflects their pro rata shareholding in the company.

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:

4.83 KBEXCEL
    2019 2018
€ million   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   -25 -24
Net income of Merck KGaA, Darmstadt, Germany, before reciprocal profit transfer   625 616
Corporation tax   14 20
Basis for appropriation of profits (100%) -25 639 -24 637
Profit transfer to E. Merck KG, Darmstadt, Germany (ratio of general partner’s equity to equity capital) (70.274%) 449 -449 447 -447
Profit/loss transfer to Merck KGaA, Darmstadt, Germany (ratio of subscribed capital to equity capital) (29.726%) 7 -7 7 -7
Corporation tax   -14 -20
Net income   431 169 430 162

The result of E. Merck KG, Darmstadt, Germany, on which the appropriation of profits adjusted for trade tax is based amounted to € -25 million (2018: € -24 million). This resulted in a profit/loss transfer to Merck KGaA, Darmstadt, Germany, of € -7 million (2018: € -7 million). Net income of Merck KGaA, Darmstadt, Germany, adjusted for corporation tax, on which the appropriation of its profit is based, amounted to € 639 million (2018: € 637 million). Merck KGaA, Darmstadt, Germany, transferred a profit/loss in the amount of € 449 million of its profit to E. Merck KG, Darmstadt, Germany (2018: € 447 million). In addition, an expense from corporation tax charges amounting to € 14 million resulted (2018: expense of € 20 million).

4.67 KBEXCEL
  2019 2018
€ million E. Merck KG, Darmstadt, Germany Merck KGaA, Darmstadt, Germany E. Merck KG, Darmstadt, Germany Merck KGaA, Darmstadt, Germany
Net income 431 169 430 162
         
Profit carried forward from previous year 61 26 60 25
Withdrawal from revenue reserves
Transfer to revenue reserves
Retained earnings Merck KGaA, Darmstadt, Germany   194   187
         
Withdrawal by E. Merck KG, Darmstadt, Germany -430   -430  
Dividend proposal   -168   -162
Profit carried forward 63 26 61 26

A dividend of € 1.25 per share was distributed for fiscal 2018. The dividend proposal for fiscal 2019 will be € 1.30 per share. The proposed dividend payment to shareholders amounts to € 168 million (2018: € 162 million). The amount withdrawn by E. Merck KG, Darmstadt, Germany, would amount to € 430 million (2018: € 430 million).

Appropriation of profits and changes in reserves

4.82 KBEXCEL  
             
2019 2018
€ million 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 -56 -449 -505 -62 -447 -509
Profit transfer from E. Merck KG, Darmstadt, Germany -7 -7 -7 -7
Transfer to revenue reserves 2 2 1 1
Profit transfer to E. Merck KG, Darmstadt, Germany, including changes in reserves -56 -455 -510 -62 -454 -515
Result of E. Merck KG, Darmstadt, Germany, before reciprocal profit transfer, adjusted for trade tax   -25     -24  
Profit transfer to E. Merck KG, Darmstadt, Germany /withdrawal by E. Merck KG, Darmstadt, Germany -56 -430   -62 -430  

Based on the assumed appropriation of profits, the profit/loss transfer to E. Merck KG, Darmstadt, Germany, for 2019, including changes in reserves, amounted to € -510 million. This consisted of the profit transfer to E. Merck KG, Darmstadt, Germany, (€ -449 million), the profit/loss transfer to Merck KGaA, Darmstadt, Germany (€ -7 million), the change in profit carried forward of E. Merck KG, Darmstadt, Germany (€ 2 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 (€ -56 million). For 2018, the profit/loss transfer to E. Merck KG, Darmstadt, Germany, including changes in reserves amounted to € -515 million. This consisted of the profit transfer to E. Merck KG, Darmstadt, Germany (€ -447 million), the profit/loss 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).

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 (2018: € 430 million) results from the total amount of the profit/loss transfer to E. Merck KG, Darmstadt, Germany, including changes in reserves, and the profit/loss 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 equity and the 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, in Versum Materials Taiwan Co., Ltd., Taiwan, and in Merck Ltd., Thailand, a subsidiary of Merck KGaA, Darmstadt, Germany.

(35) Cash and cash equivalents

Accounting and measurement policies

Cash and cash equivalents include short term investments with a maximum remaining term of up to three months which can be readily converted to a determined amount of cash.

Cash and cash equivalents comprised the following items:

3.89 KBEXCEL
€ million Dec. 31, 2019 Dec. 31, 2018
Cash, bank balances, and checks 618 780
Short-term cash investments (up to 3 months) 162 1,391
Cash and cash equivalents 781 2,170

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 € 240 million (December 31, 2018: € 295 million). This related mainly to cash and cash equivalents at subsidiaries to which the Group only had restricted access owing to foreign exchange controls.

The maximum default risk was equivalent to the carrying amount of cash and cash equivalents.

(36) Other financial assets

Accounting and measurement policies

This section does not cover the accounting and measurement policies for derivative financial instruments. They are presented in Note (39) “Derivative financial instruments”.

Recognition and initial measurement

Financial assets are initially measured at fair value and recognized as of the settlement date. For financial assets not subsequently measured at fair value through profit or loss in subsequent periods, initial measurement also includes directly attributable transaction costs.

Detailed information on the measurement methods for financial assets measured at fair value are presented in Note (43) “Information on fair value measurement”.

Classification and subsequent measurement

At initial recognition, financial assets are assigned to one of the following measurement categories which at the Group also correspond to the financial instrument classes as defined in IFRS 9: 

  • Subsequent measurement at amortized cost
  • Subsequent measurement at fair value through other comprehensive income
  • Subsequent measurement at fair value through profit or loss

This classification is based on the business model and the structure of contractual payment flows. Financial assets subsequently measured at amortized cost are accounted for using the effective interest method and considering any impairment losses. The calculation of impairment losses is described in Note (42) “Management of financial risks”. These financial assets are intended to collect contractual cash flows from the assets held which are exclusively principal repayments and interest payments on the outstanding capital amount.

Except for derivative financial instruments with positive market value, the Group only applies subsequent measurement at fair value through profit or loss for debt instruments with contractual properties resulting in cash flows that do not exclusively represent principal repayments and interest payments on the outstanding capital amount. In particular, this includes contingent consideration that was contractually agreed with the acquirer within the context of the disposal of businesses within the meaning of IFRS 3 (see Note (43) “Information on fair value measurement”). The Group does not utilize the existing option of the subsequent measurement of debt instruments at fair value through profit or loss.

Equity instruments not subject to mandatory subsequent measurement at fair value through profit or loss are consistently measured at fair value through other comprehensive income in subsequent periods because they are intended to be held for the longer term. Further details on the measurement of financial assets at fair value are presented in Note (43) “Information on fair value measurement”.

Financial assets are only reclassified in rare cases in which the Group changes its business model in managing financial assets.

Derecognition

The Group derecognizes financial assets if there is no reasonable expectation that the contract party will fulfill its contractual obligations or if the Group transfers the contractual rights including all material risks and rewards of the financial asset to a contract partner.

Recognition

The following table provides details on the measurement effects of debt instruments on the consolidated balance sheet and the consolidated income statement:

9.74 KBEXCEL
Category Asset type Impairment losses/reversals of impairment losses Net gain
(or loss) on disposal/value adjustments
Foreign currency
gains or losses
Interest income or expenses
Subsequent measurement atamortized cost
Operational Impairment losses and reversals of impairment losseson financial assets (net)
Other operating income or other operating expenses Other operating income or other operating expenses Financial result (using the effective interest method)
Financial Financial result Financial result Financial result
Subsequent measurementat fair value
through other
comprehensive income
Operational Impairment losses and reversals of impairment losseson financial assets (net)
Group equity (upon derecognition: reclassification to other operating income or other operating expenses) Other operating income or other operating expenses Financial result
Financial Financial result Group equity (upon derecognition: reclassification to financial result) Financial result
Subsequent measurement at fair value through profit or loss Operational   Other operating income or other operating expenses Other operating income or other operating expenses Financial result
Financial Financial result Financial result

The following table provides details on the measurement effects of equity instruments on the consolidated balance sheet and the consolidated income statement:

4.55 KBEXCEL
Category Asset type Impairment losses/reversals of impairment losses Value adjustments Foreign currency
gains or losses
Dividend income
Subsequent measurement at fair value through other comprehensive income Operational   Results recognized directly in equity (value adjustments) Foreign currency
gains and losses recognized directly in equity
Other operating income
Recycling of the cumulative results previously recognized directly in equity through retained earnings when asset is disposed
Financial   Results recognized directly in equity (value adjustments) Foreign currency gains and losses recognized directly in equity Financial result
Recycling of the cumulative results previously recognized directly in equity through retained earnings when asset is disposed
Subsequent measurement at fair value through profit or loss
Operational   Other operating income or other operating expenses Other operating income or other operating expenses Other operating income
Financial Financial result Financial result Financial result
5.68 KBEXCEL
Dec. 31, 2019 Dec. 31, 20181
€ million Current Non-current Total Current Non-current Total
Subsequent measurement at amortized cost 1 8 9 1 9 10
Loans against third parties 1 8 9 1 9 9
Other
Subsequent measurement at fair value through other comprehensive income 29 408 438 8 278 285
Equity instruments 399 399 274 274
Debt instruments 29 9 39 8 4 12
Subsequent measurement at fair value through profit or loss 20 322 342 16 369 385
Equity instruments
Contingent considerations 258 258 259 259
Other debt instruments 50 50 50 50
Derivatives without a hedging relationship (financial transactions) 20 14 33 16 14 30
Derivatives without a hedging relationship (operational) 45 45
Derivatives with a hedging relationship (operational) 7 7 4 1 4
Financial assets 57 738 795 29 656 685
1 Previous year’s figures have been adjusted, see Note (45) “Effects from new accounting standards and other presentation changes”.

As in 2018, contingent considerations included claims from the divestments of the Biosimilars and Kuvan® businesses.

The shares held in Progyny, Inc., United States, and in the Intrexon Corporation, United States, in particular, were disclosed in equity instruments with subsequent measurement at fair value through other comprehensive income. Please refer to Note (52) “List of shareholdings” for a detailed list of all investments made in equity instruments with subsequent measurement at fair value through other comprehensive income.

(37) Financial debt/Capital management

Accounting and measurement policies

Except for lease liabilities and derivatives with negative market values, all financial debt is subsequently measured at amortized cost using the effective rate method.

The accounting and measurement policies of lease liabilities and derivatives are presented in Notes (21) “Leasing” and (39) “Derivative financial instruments”.

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

8.4 KBEXCEL
Nominal value
  Dec. 31, 2019
€ million
Dec. 31, 2018
€ million
Maturity Interest rate
%
€ million Currency
Eurobond 2015/2019 799 Sept. 2019 0.750% 800
Eurobond 2009/2019 70 Dec. 2019 4.250% 70
USD bond 2015/2020 669 March 2020 2.400% 750 USD
Eurobond 2010/2020 1,350 March 2020 4.500% 1,350
Bonds (current) 2,019 869        
Commercial paper 205 113        
Bank loans 1,337 370        
Liabilities to related parties 809 824        
Loans from third parties and other financial debt 53 20        
Liabilities from derivatives (financial transactions) 19 16        
Liabilities from finance leases (IAS 17)   2        
Lease liabilities (IFRS 16) 109          
Current financial debt 4,550 2,215        
             
USD bond 2015/2020 655 March 2020 2.400% 750 USD
Eurobond 2010/2020 1,348 March 2020 4.500% 1,350
USD bond 2015/2022 891 872 March 2022 2.950% 1,000 USD
Eurobond 2015/2022 549 548 Sept. 2022 1.375% 550
Eurobond 2019/2023 600 Dec. 2023 0.005% 600
USD bond 2015/2025 1,419 1,389 March 2025 3.250% 1,600 USD
Eurobond 2019/2027 596 July 2027 0.375% 600
Eurobond 2019/2031 796 July 2031 0.875% 800
Hybrid bond 2014/2074 997 994 Dec. 20741 2.625% 1,000
Hybrid bond 2014/2074 498 498 Dec. 20742 3.375% 500
Hybrid bond 2019/2079 495 June 20793 1.625% 500
Hybrid bond 2019/2079 995 June 20794 2.875% 1,000
Bonds (non-current) 7,835 6,304        
Bank loans 250 250        
Liabilities to related parties        
Loans from third parties and other financial debt 44 51        
Liabilities from derivatives (financial transactions) 56 73        
Liabilities from finance leases (IAS 17)   2        
Lease liabilities (IFRS 16) 458          
Non-current financial debt 8,644 6,681        
             
Financial debt 13,194 8,896        
less:            
Cash and cash equivalents 781 2,170        
Current financial assets 50 24        
Net financial debt5 12,363 6,701        
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 Merck KGaA, Darmstadt, Germany, has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in December 2024.
4 Merck KGaA, Darmstadt, Germany, has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in June 2029.
5 Not defined by International Financial Reporting Standards (IFRSs).

The repayment profile of the bonds was as follows:

1 The nominal volumes of bonds denominated in U.S. dollars were converted into euros at the closing rate on December 31, 2019.
2 For the hybrid bonds repayment is assumed at the earliest possible date.

For the 2014/2074 hybrid bond issued in two tranches and the 2019/2079 hybrid bond also 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 issuances, thus making the issuances more favorable to the Group`s credit rating than a traditional bond issue. The bonds are recognized in full as financial liabilities in the balance sheet.

The financial debt of the Group was 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 2.5% (December 31, 2018: 2.7%).

Information on liabilities to related parties can be found in Note (46) “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, 2019, there were liabilities of € 3.90 billion (December 31, 2018: € 2.77 billion) from a debt issuance program most recently renewed in 2019. 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 € 205 million had been utilized as of December 31, 2019 (December 31, 2018: € 113 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:

9.41 KBEXCEL
Dec. 31, 2019 Dec. 31, 2018
€ million Financing
commitments from
banks
Utilization Financing
commitments from
banks
Utilization Interest Maturity of
financing
commitments
Syndicated loan 2,000 2,000 variable 2024
Loan agreement with banking syndicate for acquisition financing 1,017 1,017 variable 2022
Bilateral credit agreement with banks 250 250 250 250 variable 2022
Various bank credit lines 552 320 549 370 variable < 1 year
  3,820 1,587 2,799 620    

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

(38) Other financial liabilities

ACCOUNTING AND MEASUREMENT POLICIES

All other financial liabilities apart from liabilities from derivatives and contingent considerations, which are recognized in the context of business combinations according to IFRS 3, are initially measured at fair value and in subsequent periods at amortized cost, applying the effective interest method. The accounting and measurement policies of derivatives are presented in Note (39) “Derivative financial instruments”.

Other financial liabilities comprised the following:

4.57 KBEXCEL
Dec. 31, 2019 Dec. 31, 2018
€ million Current Non-current Total Current Non-current Total
Miscellaneous other financial liabilities 1,081 43 1,124 1,019 13 1,032
thereof: Liabilities to related parties 512 512 511 511
thereof: interest accruals 119 119 94 94
Liabilities from derivatives with a hedging relationship (operational) 46 46 58 20 78
Other financial liabilities 1,127 43 1,170 1,077 33 1,110

The liabilities to related parties primarily consist of liabilities to E. Merck KG, Darmstadt, Germany.

(39) Derivative financial instruments

Accounting and measurement policies

The IFRS 9 provisions are applied for hedge accounting. Hedging transactions are entered into for highly probable forecast transactions in foreign currencies and for hedging fair values of assets on the balance sheet. Cash flow hedge accounting for forecasted transactions in foreign currency will lead to the hedged item being recognized at a fixed exchange rate on a net basis – instead of being recognized at the spot exchange rate at the transaction date.

As a result of hedging fair values of assets on the balance sheet, the compensating changes in value of the corresponding hedged item and hedging instrument offset each other.

The Group only uses derivatives as hedging instruments. The Group uses the dollar offset method as well as regression analyses to measure hedge effectiveness.

Hedging ineffectiveness may occur in the timing of forecasted cash flows or if hedged items are dissolved. Derivatives that do not or no longer meet the documentation or effectiveness requirements for hedge accounting, whose hedged item no longer exists, or for which hedge accounting rules are not applied are classified, depending on their balance, as “financial assets or liabilities at fair value through profit or loss”.

In the case of hedging relationships where the Group uses options as hedging instruments, only the intrinsic value of options is designated as the hedging instrument. Changes in the fair value of the time value component of options that are used for hedge accounting are recognized in other comprehensive income and in the cost of cash flow hedge reserve within equity. The subsequent accounting of these amounts depends on the type of the hedged transaction.

In the case of hedging relationships where the Group uses forward contracts as hedging instruments, only the spot element is designated as the hedging instrument. Changes in the fair value of the forward element in forward contracts are initially recognized in the cost of cash flow hedge reserve within equity. The subsequent accounting of these amounts depends on the type of hedged transaction.

Reclassifications of the cash flow hedge reserve to profit or loss are recognized in the operating result, while reclassifications of the cost of cash flow hedge reserve are recognized in the financial result.

Derivative financial instruments are recognized in the consolidated balance sheet, the consolidated income statement, and the consolidated statement of comprehensive income – with the exception of the balance sheet treatment of amounts included directly from the reserve in the initial cost or in the other carrying amount of a non-financial asset or liability – as follows:

5.26 KBEXCEL
Changes in fair value in the consolidated income statement/consolidated statement of comprehensive income
Hedging relationship Type of collateral Type of hedged item Market value Presentation on the balance sheet during the term at maturity
Derivatives with a cash flow hedging relationship Interest rate hedge Financial transactions Positive market values Other financial assets Fair value adjustments (in equity) Financial result
Negative market values Financial debt Fair value adjustments (in equity) Financial result
Currency hedging Financial transactions Positive market values Other financial assets Fair value adjustments (in equity) Financial result
Negative market values Financial debt Fair value adjustments (in equity) Financial result
Transactions in operating business Positive market values Other financial assets Fair value adjustments (in equity) Other operating income
Negative market values Other financial liabilities Fair value adjustments (in equity) Other operating expenses
Derivatives without a hedging relationship Interest rate hedge Financial transactions Positive market values Other financial assets Financial result Financial result
Negative market values Financial debt Financial result Financial result
Currency hedging Financial transactions Positive market values Other financial assets Financial result Financial result
Negative market values Financial debt Financial result Financial result
Transactions in operating business Positive market values Other financial assets Other operating income Other operating income
Negative market values Other financial liabilities Other operating expenses Other operating expenses

The nominal amounts of the Group’s derivative exposures were as follows:

4.48 KBEXCEL
Dec. 31, 2019 Dec. 31, 2018
€ million Current Non-current Current Non-current
Cash flow hedge 2,765 2 1,573 366
Interest rate
Currency 2,765 2 1,573 366
No hedge accounting 5,147 1,100 5,286 1,100
Interest rate 1,100 1,100
Currency 5,147 5,286
Equity
  7,912 1,102 6,859 1,466

The fair values of the Group’s derivative exposures were as follows:

5.27 KBEXCEL   
DECEMBER 31, 2019
                 
Positive market values Negative market values
Financial transactions Transactions in operating business Financial transactions Transactions in operating business
€ million Current Non-current Current Non-current Current Non-current Current Non-current
Cash flow hedge 7 46
Interest rate
Currency 7 46
No hedge accounting 20 14 19 56
Interest rate 14 56
Currency 20 19
Equity
  20 14 7 19 56 46
5.29 KBEXCEL   
DECEMBER 31, 2018
                 
Positive market values Negative market values
Financial transactions Transactions in operating business Financial transactions Transactions in operating business
€ million Current Non-current Current Non-current Current Non-current Current Non-current
Cash flow hedge 4 1 58 20
Interest rate
Currency 4 1 58 20
No hedge accounting 16 14 45 16 73
Interest rate 14 73
Currency 16 16
Equity 45
  16 14 4 46 16 73 58 20

As in the previous year, all hedging relationships were transaction related. 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 other financial liabilities.

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

4.38 KBEXCEL      
DECEMBER 31, 2019
             
Potential netting volume
€ million Gross presentation Netting Net presentation due to master netting agreements due to financial collateral Potential net amount
Derivative assets 40 40 32 7
Derivative financial liabilities -122 -122 -32 -89
4.35 KBEXCEL      
December 31, 2018
             
Potential netting volume
€ million Gross presentation Netting Net presentation due to master netting agreements due to financial collateral Potential net amount
Derivative assets 80 80 29 51
Derivative financial liabilities -168 -168 -29 -139

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

5.17 KBEXCEL
Cost of hedging cash flows Cash flow hedge
€ million Time value of options Forward component of currency forwards Intrinsic value of options Spot component of currency forwards Interest rate swaps
Jan. 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
Dec. 31, 2018 -33 1 -81 -47
           
Jan. 1, 2019 -33 1 -81 -47
Fair value adjustment (directly recognized in equity) -1 12 13 -29
Reclassification to profit or loss -22 14 -52 17 14
Reclassification to assets 22 -1 35 26
Tax effect -6 -18 -10 -3 -3
Dec. 31, 2019 -8 -25 -13 -70 -36

(40) Finance income and expenses / Net gains and losses from financial instruments

Finance income and expenses were as follows:

4.55 KBEXCEL
€ million 2019 2018
Interest income and similar income 66 55
Income from fair value changes from debt instruments with subsequent measurement at fair value through profit or loss 5 5
Income from the change of the fair value of share-based compensation programs 14
Currency differences from financing activities 12 16
Finance income 97 77
     
Interest expenses and similar expenses -430 -323
Capital loss from disposal of debt instruments with subsequent measurement at amortized cost -1 -1
Expenses from fair value changes from debt instruments with subsequent measurement at fair value through profit or loss -5 -2
Expenses from fair value changes of share-based compensation programs -15
Other interest expenses -46 -1
Finance costs -481 -343
     
Financial result -385 -266

Interest income and expenses and similar income and expenses were as follows:

4.68 KBEXCEL
  2019 2018
€ million Interest income Interest expenses Interest income Interest expenses
Financial instruments 27 -270 35 -259
Leases -14
Pension provisions -47 -42
Other non-current provisions -26 -14
Other interest income/expenses and similar income and expenses 39 -86 20 -23
Capitalized borrowing costs for 13 15
Property, plant and equipment 11 7
Other intangible assets 2 8
Interest income/expenses and similar income and expenses 66 -430 55 -323

The rise in other interest expenses and similar expenses compared to 2018 resulted, in particular, from interest expenses for tax matters and from the restructuring of financial liabilities in connection with the acquisition of Versum Materials, Inc., United States.

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

5.5 KBEXCEL    
2019
Interest result Net gains and losses
­
€ million
Currency differences Dividends Interest income Interest expenses Impairment losses Reversals of impairment losses Fair value adjustments Disposal gains/losses
Financial assets                
Subsequent measurement at amortized cost -31   7   -95 87   -1
Subsequent measurement at fair value through other comprehensive income                
Equity instruments              
Debt instruments      
Subsequent measurement at fair value through profit or loss 1 20     -714  
Financial debt                
Subsequent measurement at amortized cost 24     -270      
Subsequent measurement at fair value through profit or loss       782  
Total -7 27 -270 -95 87 67 -1
5.38 KBEXCEL    
2018
Interest result Net gains and losses
­
€ million
Currency differences Dividends Interest income Interest
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 debt                
Subsequent measurement at amortized cost -54     -259      
Subsequent measurement at fair value through profit or loss       735  
Total -101 35 -259 -77 105 66

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

(41) Net cash flows from financing activities

Accounting and measurement policies  

In determining the cash flows from financing activities, the option to recognize dividend payments in the cash flows from financing activities is exercised.

The change in financial debt was as follows:

5.53 KBEXCEL     
2019
                     
Cash Non-cash
€ million Jan. 1, 20191 Cash inflows Repayments Other Change in lease liabilities Exchange rate effects Fair value adjustment Other Changes in scope of consolidation Dec. 31, 2019
Bonds 7,173 3,482 -1,290 59 9 420 9,854
Financial liabilities to E. Merck KG, Darmstadt, Germany 821 406 -418 808
Other current and non-current financial liabilities 1,367 1,193 -1,281 -11 198 24 495 546 2,531
Financial debt 9,361 5,080 -2,989 -11 198 84 495 9 966 13,194
Derivative assets (current and non-current) -30 499 -502 -33
1 Values effective January 1, 2019, have been adjusted due to the first-time application of IFRS 16, see Note (45) “Effects from new accounting standards and other presentation and measurement changes”.
5.08 KBEXCEL     
2018
                 
Cash Non-cash
€ million Jan. 1, 2018 Cash inflows Repayments Exchange rate effects Fair value adjustment Other Changes in scope of consolidation Dec. 31, 2018
Bonds 7,375 -323 121 7,173
Financial liabilities to E. Merck KG, Darmstadt, Germany 765 375 -319 821
Other current and non-current financial liabilities 2,687 32 -2,316 -2 500 902
Financial debt 10,827 407 -2,958 119 500 8,896
Derivative assets (current and non-current) -22 495 -503 -30

An inflow of € 3,482 million in the reporting period resulted from the issuance of bonds to finance the acquisition of Versum Materials, Inc., United States.

Other cash changes show interest payments for lease liabilities that are recognized in the net cash flow from operating activities. Changes in lease liabilities include additions and retirements of right-of-use from leases and the effects from unwinding of the discount on lease liabilities. Other non-cash changes resulted from the effects of the application of the effective interest method.  

Fair value adjustments of other current and non-current financial liabilities are attributable to liabilities from derivatives. In the consolidated cash flow statement, cash changes of assets from derivatives were recognized together with repayments of other current and non-current financial liabilities. In the above reconciliation, changes of assets from derivatives were recognized separately because they did not form part of financial liabilities.

The amount of undrawn borrowing facilities that could be tapped for future operating activities and to meet obligations is disclosed in Note (37) “Financial liabilities/capital management”.

(42) 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. To estimate existing risks of foreign exchange and interest rate fluctuations, the Group uses scenario analyses. The Group is not subject to any material risk concentration from financial transactions.

The Group uses marketable forward exchange contracts, options, and interest 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 ongoing risk controls by Group Treasury. Speculation is prohibited. The 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 the international nature of its business, 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.

A more rule-based hedging approach was gradually introduced for hedging foreign exchange risks as of the beginning of the past fiscal year. The entire foreign exchange exposure is divided into several defined risk levels and systematically hedged using suitable hedging instruments. Furthermore, the number of currencies included in hedging was once again expanded in the reporting period. Hedging is performed based on of a regularly reviewed basket of currencies. As part of the new hedging concept, the time horizon for hedging was reduced from a maximum of 36 months to 12 months. The new hedging concept aims to ensure a consistent hedging quality at lower costs.

Foreign exchange risks from the following transactions are hedged using foreign exchange contracts and currency options:

  • Forecast transactions in non-functional currency, the expected probability of which is very high for the next 12 months (2018: 36 months),
  • Firm purchase commitments over the next 12 months (2018: 36 months) in non-functional currency.

Foreign exchange risks from the following transactions are economically hedged through the use of foreign exchange contracts and currency options:

  • Intragroup financing in non-functional currency,
  • Receivables from and liabilities to third parties in non-functional currency.

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:

4.82 KBEXCEL
DECEMBER 31, 2019
               
€ million   USD CHF CNY TWD JPY KRW
Net exposure   802 -493 933 200 39 284
Exchange rate -10%­
(appreciation vs. €)
Consolidated income statement 80 -49 93 20 4 28
Equity­
(other comprehensive income)
-114 6 -18 -12 -10 -10
Exchange rate +10%­
(depreciation vs. €)
Consolidated income statement -80 49 -93 -20 -4 -28
Equity­
(other comprehensive income)
83 -5 14 8 7 7
4.8 KBEXCEL
DECEMBER 31, 2018 
               
€ million   USD CHF CNY TWD JPY KRW
Net exposure   618 -274 741 153 132 163
Exchange rate -10%­
(appreciation vs. €)
Consolidated income statement 62 -27 74 15 13 16
Equity­
(other comprehensive income)
-135 20 -9 -19 -11 -14
Exchange rate +10%­
(depreciation vs. €)
Consolidated income statement -62 27 -74 -15 -13 -16
Equity­
(other comprehensive income)
110 -16 8 15 10 12

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 above currencies consisted of the following components:

  • Planned cash flows in the next 12 months in the respective currency less
  • The nominal values of hedging instruments of these planned cash flows.

The planned cash flows in the next 12 months are usually hedged at a ratio of 25% to 90% (2018: 30% to 70%).

Balance sheet items in the above currencies were economically hedged in full in both 2019 and 2018 by derivatives if they did not correspond to the functional currency of the respective subsidiary. 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:

5.48 KBEXCEL
DECEMBER 31, 2019
             
€ million USD CHF CNY TWD JPY KRW
Notional amount 1,794 55 392 151 139 165
thereof: current 1,794 55 392 151 139 163
thereof: non-current 2
Fair value of the hedging instrument -28 2 -6 -2 -4
thereof: positive market values 2 2
thereof: negative market values -31 -6 -3 -4
Maturity profile January 2020 – December 2020 January 2020 – December 2020 January 2020 – December 2020 January 2020 – December 2020 January 2020 – December 2020 January 2020 – January 2021
Hedge ratio1 1:1 1:1 1:1 1:1 1:1 1:1
Change in value of outstanding hedging instruments since Jan. 1, 2019 -11 2 -2 -1
Change in value of hedged item used to determine hedge effectiveness since January 1, 2019 11 -2 2 1
Weighted average hedging rate 1.19 1.12 8.08 36.24 127.40 1,378.90
1 The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
5.52 KBEXCEL
DECEMBER 31, 2018
             
€ million 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 values 2 3
thereof: negative market values -49 -3 -5 -8 -3 -10
Maturity profile 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 Jan. 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 hedging rate 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 transactional foreign exchange risks described previously, the Group was exposed to currency translation risks since many of the Group’s subsidiaries 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:

3.89 KBEXCEL
€ million Dec. 31, 2019 Dec. 31, 2018
Short-term or variable interest rate monetary deposits 811 2,196
Short-term or variable interest rate monetary borrowings -4,761 -2,465
Net interest rate exposure -3,950 -269

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.

4.05 KBEXCEL
€ million 2019 2018
Change in market interest rate +100 basis points -100 basis points +100 basis points -100 basis points
Effects on consolidated income statement -23 11 6 -9
Effects on equity (other comprehensive income)

Share price risks

The shares in publicly listed companies amounting to € 209 million (December 31, 2018: € 134 million) are generally exposed to a risk of fluctuations in fair value. A 10% change in the price of these financial instruments would impact Group equity by € 21 million (2018: € 13 million). This change in value would be recognized in Group 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 (37) “Financial debt/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:

5.99 KBEXCEL   
DECEMBER 31, 2019
               
Cash flows
< 1 year
Cash flows
1–5 years
Cash flows
> 5 years
€ million Carrying amount Interest Repayment Interest Repayment Interest Repayment
Subsequent measurement at amortized cost              
Bonds and commercial paper 10,059 -120 -2,224 -519 -4,042 -223 -3,828
Bank loans 1,587 -25 -1,337 -1 -250
Trade accounts payables 2,054 -2,054
Liabilities to related parties 1,320 -1,320
Other financial liabilities 596 -569 -27
Loans from third parties and other financial debt 97 -1 -53 -8 -44
Subsequent measurement at fair value through profit or loss              
Contingent considerations 16 -16
Derivatives without a hedging relationship 76 -15 -19 -29
Derivatives with a hedging relationship 46 -46
Refund liabilities 565 -565
Lease liabilities 567 -12 -119 -30 -319 -20 -189
  16,982 -174 -8,305 -587 -4,698 -243 -4,017
6.01 KBEXCEL   
DECEMBER 31, 2018
               
Cash flows
< 1 year
Cash flows
1–5 years
Cash flows
> 5 years
€ million 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 payables 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 debt 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

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 exposed to credit risks mainly due to existing trade accounts receivable, other receivables, other debt instruments, derivatives, and contract assets.

Credit risks are continuously monitored by credit management. It additionally carries out the management of risks arising from extending credit to customers, suppliers, and in the course of other business relationships.

The Group analyzes all financial assets that are more than 90 days past due and examines whether the credit risk has risen significantly and, as a result, there is objective evidence of impairment requiring the recognition of additional risk provisions.

Accounting and measurement policies – CREDIT RISKS

Impairment of trade accounts receivable and contract assets

The Group uses the simplified impairment model for trade accounts receivable subsequently measured at amortized cost and contract assets, pursuant to which any credit losses expected to occur over the entire lifetime of an asset are taken into account. In order to measure expected credit risks, the assets are grouped based of the existing credit risk structure and the respective maturity structure.

The customer groups with comparable default risks to be considered are determined according to the business sector at the Group and the place of business of the respective customers.

The default rates used in the simplified impairment model are derived on the basis of past experience and current macroeconomic expectations. In doing so, country-specific ratings are taken into consideration since many of the Group’s customers depend directly or indirectly on the economic trends in the country where their place of business is located (public and private healthcare systems, universities and research companies from within the pharmaceutical industry as well as state subsidized industries, particularly in Asia). These country ratings are aggregated into three separate rating groups. Under the impairment model, past default rates and country ratings are used as an approximation of the defaults to be expected in the future.

Accordingly, when a country’s rating changes, the historical default rates of the rating group to which the respective country has been re-allocated have to be applied, rather than the historical default rates of the previous rating group.

If there is objective evidence that certain trade accounts receivable are fully or partially impaired, additional loss allowances are recognized to provide for expected credit defaults.

A default generally exists when the debtor cannot fully meet its liabilities.

A debtor’s creditworthiness is assumed to be impaired if there are objective indications that the debtor is in financial difficulties, such as the disappearance of an active market for its products or impending insolvency. On initial recognition, the credit losses expected over the overall term are deducted from the carrying amount of trade accounts receivable as originally credit-impaired financial assets.

Impairment of other receivables

The individual credit rating of the contract partner is used to determine impairment of other receivables. The general three-stage impairment model and the simplified approach are used to recognize loss allowances of financial instruments included in other receivables.

Individual cases are analyzed to ascertain whether objective findings suggest that the value of other receivables is impaired. Such suggestions may include, for example, economic difficulties of the debtor, contractual breaches or the renegotiation of contractual payment obligations. If the analysis concludes that the Group is subject to a substantially increased risk of default, the credit losses expected to occur over the entire lifetime are considered.

Impairment of other financial assets

Investments in debt instruments subsequently measured either at amortized cost or at fair value through other comprehensive income were primarily considered to be investments with low risk so that the expected credit loss in the upcoming 12 months was used to determine the impairment loss.

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. Therefore, no assessment of whether there had been a significant increase in the credit risk was carried out 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 impairment allowances recognized for expected credit losses were increased. In all other cases, there were no new risk assessments as of the balance sheet date and the risk profile initially assumed 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 considered.

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

Significant discretionary decisions and sources of estimation uncertainty – credit risks 

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.

As of December 31, 2019, trade accounts receivable were impaired by 2.4% (December 31, 2018: 2.4%). If it were necessary to recognize impairment on trade accounts receivable and contract assets at 10% higher in 2018, this would have caused a € 8 million reduction in profit before tax (2018: € 8 million).

Impairment of other financial assets

Discretionary judgement is applied in determining individual impairment allowances.

The following table shows impairments for financial assets from operative transactions and contract assets as well as gains from their reversals recognized in the consolidated income statement:

4.34 KBEXCEL
€ million 2019 2018
Impairment losses -95 -77
of trade accounts receivable -89 -75
of contract assets
of other debt instruments subsequently measured at amortized cost -5 -2
of other debt instruments subsequently measured at fair value through other comprehensive income
Reversals of impairment losses 87 105
of trade accounts receivable 85 69
of contract assets
of other debt instruments subsequently measured at amortized cost 2 35
of other debt instruments subsequently measured at fair value through other comprehensive income
Net impairment on financial assets -8 27

The loss allowances recognized for trade accounts receivable shown above applied entirely to receivables resulting from contracts with customers. Reversals of impairment losses in 2018 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 receivables is largely impacted by the specific circumstances of individual customers. The Group also considers 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 assessed using established credit management processes that take 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 its customers in the corresponding countries and takes steps to-mitigate risks if necessary.

The table below contains an overview of the credit risk by business sector and country rating established by leading rating agencies as of December 31, 2019:

4.38 KBEXCEL
DECEMBER 31, 2019
         
€ million
Healthcare Life Science Performance Materials Group
External credit rating of at least AA- or comparable 763 883 526 2,172
External credit rating of at least BBB- or comparable 278 164 20 463
External credit rating lower than BBB- or comparable 573 42 2 617
Trade accounts receivable before loss allowances 1,614 1,089 548 3,251
4.36 KBEXCEL
DECEMBER 31, 2018
         
€ million
Healthcare Life Science Performance Materials Group
External credit rating of at least AA- or comparable 856 827 437 2,120
External credit rating of at least BBB- or comparable 252 146 21 420
External credit rating lower than BBB- or comparable 427 36 2 465
Trade accounts receivable before loss allowances 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.

Loss allowances based on expected credit losses for trade accounts receivable as of December 31, 2019, were as follows:

4.68 KBEXCEL
DECEMBER 31, 2019
             
€ million
Not yet due Up to 90 days past due Up to 180 days past due Up to 360 days past due More than 360 days past due Total
Expected loss rate 0.6% 1.9% 6.1% 11.1% 41.3%  
Trade accounts receivable before loss allowances 2,669 367 59 43 112 3,251
thereof: credit impaired 5 1 2 3 42 53
Loss allowances -16 -7 -4 -5 -46 -77
thereof: credit impaired -2 -1 -1 -2 -41 -47

The carrying amounts, already reduced by their expected lifetime credit loss, of trade accounts receivable that are classified as originated credit impaired financial assets were € 3 million (2018: € 0 million) as of December 31, 2019. They are included in the above table under credit impaired trade accounts receivable. For these receivables, expected credit losses in the amount of € 3 million (2018: € 0 million) were recognized in fiscal 2019.

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

4.7 KBEXCEL
DECEMBER 31, 2018
             
€ million
Not yet due Up to 90 days past due Up to 180 days past due Up to 360 days past due 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

The corresponding loss allowances changed as follows:

4.15 KBEXCEL
€ million 2019 2018
1.1 -73 -373
Additions -89 -75
Utilizations 7 308
Derecognition 85 69
Reclassification to assets held for sale 4
Effects of currency translation -3 -7
Changes in scope of consolidation -3 1
31.12 -77 -73

In 2018, the Group utilized loss allowances of € 299 million recognized on trade accounts receivable from the Venezuelan subsidiary, as the probability of receiving payments was deemed negligible. The Venezuelan subsidiary was deconsolidated in fiscal year 2016 due to the absence of the possibility of exercising control.

Credit risks from other receivables

As of December 31, 2019, other receivables of € 340 million were almost exclusively allocated to Level 1 of the general three-stage impairment model, as in 2018 (other receivables as of December 31, 2018: € 314 million). In these cases, the credit loss expected in the next 12 months was used to determine the amount of impairment when examining the individual credit risk of the respective contract partner. The loss allowances recognized amounted to € 4 million as of December 31, 2019 (December 31, 2018: € 3 million).

Credit risks from other financial assets

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.

(43) Information on fair value measurement

Accounting and measurement policies

The measurement techniques and main input factors used to determine the fair value of financial instruments are as follows: 

4.61 KBEXCEL  
Fair value determined by official prices and quoted market values (Level 1)
       
Financial instruments concerned Description of the measurement technique Main input factors used to determine fair values
       
Financial assets
Subsequent measurement at fair value through other comprehensive income      
Equity instruments Shares Derived from active market Quoted prices in an active market
Other debt instruments Bonds
Other short-term cash investments
Subsequent measurement at fair value through profit or loss      
Other debt instruments Publicly-traded funds Derived from active market Quoted prices in an active market
       
Financial debt
Subsequent measurement at amortized cost      
Financial debt Bonds Derived from active market Quoted prices in an active market
5.26 KBEXCEL  
Fair value determined using input factors observable in the market (Level 2)
       
Financial instruments concerned Description of the measurement technique Main input factors used to determine fair values
       
Financial assets
Subsequent measurement at fair value through other comprehensive income      
Equity instruments Shares Derived from active market including a liquidity discount Quoted prices in an active market and volatilities observable on the market
Subsequent measurement at fair value through profit or loss      
Other debt instruments Convertible note/bond with embedded settlement option for equity in companies Nominal value considering a liquidity discount Volatilities observable on the market
Derivatives (without a hedging relationship) Forward exchange contracts and currency options­
Use of recognized actuarial methods Spot and forward rates observable on the market as well as exchange rate volatilities
Interest rate swaps Interest rate curves available on the market
Derivatives (with a hedging relationship)      
  Forward exchange contracts and currency options­
Use of recognized actuarial methods Spot and forward rates observable on the market as well as exchange rate volatilities
       
Financial debt
Subsequent measurement at fair value through profit or loss      
Derivatives (without a hedging relationship) Forward exchange contracts and currency options­
Use of recognized actuarial methods Spot and forward rates observable on the market as well as exchange rate volatilities
Interest rate swaps Interest rate curves available on the market
Derivatives (with a hedging relationship)      
  Forward exchange contracts and currency options­
Use of recognized actuarial methods Spot and forward rates observable on the market as well as exchange rate volatilities
Subsequent measurement at amortized cost      
Financial debt Liabilities to banks and other loan liabilities Discounting of future cash flows Interest rates observable on the market
5.47 KBEXCEL  
Fair value determined using input factors unobservable in the market (Level 3)
       
Financial instruments concerned Description of the measurement technique Main input factors used to determine fair values
       
Financial assets
Subsequent measurement at fair value through other comprehensive income      
Equity instruments Equity investments in unlisted companies Discounting of expected future cash flows Expected cash flows from recent business planning, average cost of capital, expected long-term growth rate
Derived from observable prices within the scope of equity refinancing sufficiently close to the balance sheet date, considered risk allowances Observable prices derived from equity refinancing
Cost-based determination Acquisition cost
Trade and other receivables Trade accounts receivable that are intended for sale due to a factoring agreement Nominal value less factoring fees Nominal value of potentially sold trade accounts receivable, average fees for sales of trade accounts receivable
Subsequent measurement at fair value through profit or loss      
Derivatives (without a hedging relationship) Option on equity instruments in unlisted companies Option pricing models Sales planning, milestone payments, probabilities of regulatory and commercial events, discount rates
Contingent considerations Contingent considerations from the sale of businesses or shares in corporations 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 Consideration of the fair value of companies in which the funds are invested Net asset values of the fund interests
Bonds with embedded settlement option for equity in an unlisted company Use of recognized actuarial methods Interest rates observable on the market
       
Financial debt
Subsequent measurement at fair value through profit or loss      
Contingent considerations Contingent considerations from the purchase of businesses Discounting of probability-weighted future milestone payments and license fees­
Sales planning,milestone payments,
probabilities of regulatory and commercial events, discount rates

Counterparty credit risk was taken into consideration for measurements of financial instruments at fair value. 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.

Equity investments in unlisted companies (Level 3)

The planning periods used to determine the fair value of equity investments in unlisted companies ranged from 1 to 9 years (December 31, 2018: 2 to 8 years). Cash flows for periods in excess of this are included in the terminal value calculation using long-term growth rates of between 1.0% and 2.0% (December 31, 2018: 0.5% and 2.0%). The applied average cost of capital (after tax) was 7.0% on December 31, 2019 (December 31, 2018: 7.0%).

Assets from contingent considerations (Level 3)

The fair values of assets from contingent considerations are calculated by weighting the expected future milestone payments and royalties using their probability of occurrence and discounting them. The main parameters when determining contingent considerations are

  • the estimated probability of reaching the individual milestone events,
  • the underlying sales planning used to derive royalties,
  • and the discount factor used.

When determining the probability of occurrence of the individual milestones events in connection with the development of drug candidates, the focus is 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 are used. The discount rate (after tax) as of December 31, 2019, of between 5.9% and 6.9% (December 31, 2018: 6.3% to 7.3%) was calculated using the weighted average cost of capital.

Significant discretionary decisions and sources of estimation uncertainty

Equity investments in unlisted companies 

Determining the parameters that are to be included in discounted cash-flow-methods and deriving the fair value from observable prices within the scope of equity refinancing are both subject to discretionary decisions and estimation uncertainty. 

Assets from contingent consideration

The calculation of the fair value of assets from contingent considerations is subject to significant discretionary judgment. The most significant contingent consideration was the future purchase price claim from the disposal of the Biosimilars business to Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, on August 31, 2017. It was calculated by an external valuation expert on initial recognition in 2017 and continued on this basis. As of December 31, 2019, the carrying amount was € 198 million (December 31, 2018: € 196 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, this would have led to the following changes in the measurement and the corresponding effects on the profit before income tax:

4.22 KBEXCEL   
DECEMBER 31, 2019
         
Change in probability of regulatory approval
€ million­
  -10% unchanged 10%
Change of discount rate 5.4% -28 6 40
5.9% (unchanged) -33 0 33
6.4% -37 -6 26
4.22 KBEXCEL   
DECEMBER 31, 2018
         
Change in probability of regulatory approval
€ million­
  -10% unchanged 10%
Change of discount rate 5.8% -34 5 45
6.3% (unchanged) -38 0 38
6.8% -42 -5 32

The following table presents the carrying amounts and the fair values of the individual financial assets and liabilities as of December 31, 2019, for each financial instrument class pursuant to IFRS 9:

8.44 KBEXCEL   
DECEMBER 31, 2019
                 
Carrying amount Fair value1
€ million
Consolidatednotes
Current Non-current Total Fair value determined by official prices and quoted market values (Level 1) Fair value determined using input factors observable in the market (Level 2) Fair value determined using input factors not observable in the market (Level 3) Total
Financial assets                
Subsequent measurement at amortized cost                
Cash and cash equivalents 35 781 781        
Trade and other receivables (excluding leasing receivables) 24 3,458 22 3,480        
Other debt instruments 36 1 8 9        
Subsequent measurement at fair value through other comprehensive income                
Equity instruments 36 399 399 209 190 399
Trade and other receivables 24 24 24 24 24
Other debt instruments 36 29 9 39 39 39
Subsequent measurement at fair value through profit or loss                
Equity instruments 36
Contingent considerations 36 258 258 258 258
Other debt instruments 36 50 50 2 22 26 50
Derivatives without a hedging relationship 36, 39 20 14 33 33 33
Derivatives with a hedging relationship 36, 39 7 7 7 7
Lease receivables (measured in accordance with IFRS 16)2 24 5 5        
Total   4,325 761 5,086 250 62 499 810
                 
Financial debt                
Subsequent measurement at amortized cost                
Trade payables and other liabilities 29 2,054 2,054        
Financial debt 37 4,422 8,129 12,551 10,183 2,706 12,889
Other financial liabilities 38 1,081 27 1,108        
Subsequent measurement at fair value through profit or loss                
Contingent considerations 38 16 16 16 16
Derivatives without a hedging relationship 37, 39 19 56 76 76 76
Derivatives with a hedging relationship 38, 39 46 46 46 46
Refund liabilities 11 565 565        
Lease liabilities (measured in accordance with IFRS 16)2 37 109 458 567        
Total   8,295 8,687 16,982 10,183 2,828 16 13,027
1 The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
2 Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).

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:

8.47 KBEXCEL   
DECEMBER 31, 2018
                 
Carrying amount Fair value1
€ million
Consolidatednotes
Current Non-current Total Fair value determined by official prices and quoted market values (Leve Fair value determined using input factors observable in the market (Level  Fair value determined using input factors not observable in the market (Level 3) Total
Financial assets2                
Subsequent measurement at amortized cost                
Cash and cash equivalents 35 2,170 2,170        
Trade and other receivables (excluding leasing receivables) 24 3,204 17 3,221        
Other debt instruments 36 1 9 10        
Subsequent measurement at fair value through other comprehensive income                
Equity instruments 36 274 274 17 118 140 274
Trade and other receivables 24 21 21 21 21
Other debt instruments 36 8 4 12 12 12
Subsequent measurement at fair value through profit or loss                
Equity instruments 36
Contingent considerations 36 259 259 259 259
Other debt instruments 36 50 50 2 22 27 50
Derivatives without a hedging relationship 36, 39 16 59 76 30 45 76
Derivatives with a hedging relationship 36, 39 4 1 4 4 4
Lease receivables (measured in accordance with IAS 17)3 24 1 1        
Total   5,425 673 6,098 30 174 492 696
                 
Financial liabilities2                
Subsequent measurement at amortized cost                
Trade payables and other liabilities 29 1,766 1,766        
Financial debt 37 2,196 6,601 8,797 7,258 1,645 8,903
Other financial liabilities 38 1,019 13 1,032        
Subsequent measurement at fair value through profit or loss                
Contingent considerations 37 1 4 5 5 5
Derivatives without a hedging relationship 37, 39 16 73 90 90 90
Derivatives with a hedging relationship 38, 39 58 20 78 78 78
Refund liabilities 11 472 472        
Lease liabilities (measured in accordance with IAS 17)3 37 2 2 4        
Total   5,530 6,714 12,244 7,258 1,813 5 9,076
1 The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
2 Previous year’s figures have been adjusted, see Note (45) “Effects from new accounting standards and other presentation changes”.
3 Measurements within the scope of IAS 17 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).


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

6.17 KBEXCEL     
2019
               
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
€ million Total Other debt instruments Contingent considerations Derivatives without a hedging relationship Equity instruments Trade and other receivables Contingent considerations
Net carrying amounts, Jan. 1, 2019 487 27 259 45 140 21 -5
Additions due to acquisitions/divestments/conclusion of factoring agreements 73 9 53 26 -13
Transfers into Level 3 from Level 1/Level 2
Fair value changes              
Gains (+)/losses (–) recognized in the consolidated income statement -22 3 19 -45   1
thereof: other operating result 3 2 -1   2
thereof: attributable to assets/liabilities held as of the balance sheet date -11 2 -15   2
thereof: financial result -25 1 20 -45  
thereof: attributable to assets/liabilities held as of the balance sheet date 20 1 20  
Gains (+)/losses (–) recognized in other comprehensive income 98       98  
Currency translation difference
Disposals due to divestments/payments received/payments made -50 -2 -20 -6 -22 1
Transfers out of Level 3 into Level 1/Level 2 -104 -104
Other -10 10
Net carrying amounts as of Dec. 31, 2019 483 26 258 190 24 -16

Additions during the reporting period comprised primarily acquisitions of equity instruments, 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 advance payments received in connection with trade accounts receivable under factoring agreements and payments received in connection with the contingent consideration from the sale of the Biosimilars business. The transfer from Level 3 to Level 1 relates to the  M Ventures portfolio company Progyny, Inc., United States which has since been listed. 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”.

6.16 KBEXCEL     
2018
               
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
€ million Total Other debt instruments Contingent considerations Derivatives without a hedging relationship Equity instruments Trade and other receivables Contingent considerations
Net carrying amounts, Jan. 1, 2018 447 21 277 46 106 -3
Additions due to acquisitions/divestments/conclusion of factoring agreements 105 15 8 33 49
Transfers into Level 3 from Level 1/Level 2
Fair value changes              
Gains (+)/losses (–) recognized in the consolidated income statement -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 difference 1 1
Disposals due to divestments/payments received/payments made -80 -4 -20 -29 -28
Transfers out of Level 3 into Level 1/Level 2 -9 -9
Other -8 8
Net carrying amounts as of Dec. 31, 2018 487 27 259 45 140 21 -5

The following equity instruments measured at fair value through other comprehensive income were disposed of in 2019 and 2018:

4.53 KBEXCEL
€ million Reasons for the disposal Fair value on the date of derecognition The cumulative gain (+) or loss (–) on disposal recognized in other comprehensive income Transfer of the cumulative gains (+) or losses (–) within group equity to retained earnings
20191        
M Ventures portfolio companies Portfolio adjustment/restructuring and full acquisition by third parties 13 5 5
20181        
M Ventures portfolio companies Portfolio adjustment/restructuring and full acquisition by third parties 40 32 32
Cascadian Therapeutics, Inc., United States Acquired in full by Seattle Genetics, Inc., United States -17 -17
Nature’s Best Health Products Ltd., United Kingdom Sale to The Procter & Gamble Company, United States
1 Disposals due to liquidations are not included.

M Ventures portfolio companies mainly include minority interests in unlisted companies. The mandate of M Ventures is to invest in innovative technologies and products that are related to the Group’s three business sectors. The M Ventures portfolio companies that were disposed of in fiscal 2019 were Translate Bio, Inc., United States, Canbex Therapeutics Ltd., United Kingdom, and shares in Progyny, Inc., United States (2018: Prexton Therapeutics SA, Switzerland, F-Star Gamma Limited, United Kingdom, and shares in ObsEva SA, Switzerland).

(44) Other financial obligations

Other financial obligations comprised the following:

4.13 KBEXCEL
€ million Dec. 31, 2019 Dec. 31, 2018
Acquisition of intangible assets 984 1,548
Acquisition of property, plant, and equipment 159 144
Operating lease (IAS 17)1   561
Other financial obligations 1,143 2,253
1 Previous year’s figure was restated.    

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 of their milestones, the Group would be obligated to pay up to € 984 million (December 31, 2018: € 1,548 million) for the acquisition of intangible assets. The decrease compared to 2018 is mainly attributable to the restructuring of the collaboration with F-Star Delta Ltd., United Kingdom (see Note (6) “Collaboration agreements”). The table above does not contain any other financial obligations from possible future sales-based license fees and milestone payments.

The expected maturities of the obligations to acquire intangible assets were as follows:

9.03 KBEXCEL
€ million Dec. 31, 2019 Dec. 31, 2018
Within 1 year 55 61
In 1–5 years 159 710
After more than 5 years 770 776
Obligations to acquire intangible assets 984 1,548

Other financial obligations were recognized at nominal value.

Due to the initial application of IFRS 16 and the associated accounting changes, the maturities of the obligations from lease agreements are only shown here for 2018. For details see Note (45) “Effects from new accounting standards and other presentation changes”:

4.5 KBEXCEL
DECEMBER 31, 2018
         
€ million Under 1 year In 1–5 years After more than
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 payments1 115 308 138 561
1 Previous year’s figure was restated.