Show all results

Operating Assets, Liabilities, and Contingent Liabilities

(18) Goodwill

Accounting and measurement policies

In the course of business combinations, goodwill is recognized on the acquisition date. The option to measure non-controlling interests at fair value on the date of their acquisition (full goodwill method) is not utilized.

Method for impairment test

Goodwill impairment tests take place at the level of the business sectors because it is the lowest level at which goodwill at the Group is monitored for internal management purposes. In 2019, the recoverable amount for the cash-generating units Healthcare and Life Science was determined on the basis of the value in use (2018: value in use). The impairment test of the cash-generating unit Performance Materials took place in 2019 on the basis of the fair value less costs of disposal (2018: value in use). It was performed both including and excluding the acquired business of Versum Materials, Inc., United States, (Versum). The information below refers to the impairment test where the acquired Versum Materials business was included on the basis of the preliminary purchase price allocation.

The methodology used in Performance Materials to calculate the fair value less costs of disposal took into account the perspective of an independent market participant. The measurement took into consideration non-observable input factors in the market pursuant to Level 3 in the fair value hierarchy of IFRS 13.

Moreover, the methodology used in the implementation of the impairment tests and the main assumptions for determining value are shown below:

10.21 KBEXCEL
Measurement basis Value in use Fair value less costs of disposal
      
Measurement method Discounted cash flow method
Planning basis Last medium-term plan approved by the Executive Board
Detailed planning period 4 years
      
Determining the value of the key assumptions  
Net cash flows:  
  
  • Sales growth in the detailed planning period
Based on plan approved by the Executive Board, taking into consideration internal past experience and external market data and market estimations, for example regarding market shares, and excluding new products from the development pipeline and other expansion investments Based on past experiences and management estimates, taking into consideration largely non-observable input factors in the market, for example regarding future market shares, selling prices and volumes
  
  • Profit margins in the detailed planning period
Based on past experiences, adjusted for expected cost developments
    
Long-term growth rate after the detailed planning period Taking into consideration expected long-term growth and long-term inflation expectations
    
Discount factor after tax (weighted average cost of capital – WACC)  
      
  
  • Risk-free interest rate:
Derived from the returns of long-term government bonds
  
  • Beta factor:
Derived from the respective peer group
  
  • Market risk premium:
Based on a combination of different estimating methods; e.g. historical and implied stock yields
  
  • Cost of debt and capital structure:
Derived from the market data of the respective peer group companies
    


Significant measurement assumptions  
Expected average sales growth in the detailed planning period for Healthcare in 2019 was a low single-digit percentage rate, as in the previous year. In line with the value-in-use concept, this did not include net sales from the launch of new products. Expected average sales growth in the cash-generating unit Life Science in the detailed planning period totaled a mid single-digit percentage rate, as in the previous year. The calculation of the fair value less costs of disposal of the cash-generating unit Performance Materials included expected average sales growth in the detailed planning period amounting to a mid single-digit percentage rate (2018: low single-digit percentage rate). The EBITDA pre margins used to calculate the recoverable amounts of the cash-generating units Performance Materials and Life Science in the detailed planning period, taking into account Group costs allocated on a pro rata basis, were around 30% each in 2019 as well as in 2018.

The additional significant assumptions for determining value underlying the goodwill impairment tests are quantified below:

4.53 KBEXCEL
Long-term growth rate Discount factor
Weighted cost of capital after tax Weighted cost of capital before tax
% 2019 2018 2019 2018 2019 2018
Healthcare 0.00% 0.00% 5.8% 6.4% 7.8% 8.5%
Life Science 1.75% 1.75% 7.1% 7.2% 8.9% 8.8%
Performance Materials1 1.00% 0.50% 6.3% 5.8% 8.0% 7.4%
1 In 2019 considering Versum Materials Inc., United States, on the basis of the preliminary purchase price allocation.


Net cash flows were discounted using cost of capital after tax. The aforementioned cost of capital before tax was subsequently derived iteratively. The first-time application of IFRS 16 had no material effect on the goodwill impairment test.

Significant discretionary decisions and sources of estimation uncertainty

The determination of the recoverable amount is subject to discretion and significant estimation uncertainty. Assumptions regarding the amount of net cash flows, long-term growth rates, and discount factors are considered a material source of estimation uncertainty due to their inherent uncertainty.

In all the impairment tests performed, the recoverable amount in 2019 and in 2018 was more than 15% higher than the carrying amount of the respective cash-generating unit or group of cash-generating units. Regardless of this, the planning data used was checked for plausibility against external analyst forecasts and the recoverable amounts determined were validated using validation multiples based on peer group information.

In addition, sensitivity analyses of the key assumptions were performed as part of the impairment tests. As a result, no change of a significant assumption deemed possible by management would have resulted in an impairment. The following table presents the amount by which key assumptions would have to change before the impairment test would trigger the recognition of an impairment loss:

4.46 KBEXCEL
Reduction in net cash flows Decrease in long-termgrowth rate
Increase in cost of capital after tax
  % percentage points percentage points
  2019 2018 2019 2018 2019 2018
Healthcare > 10% > 10% > 2 > 2 > 2 > 2
Life Science > 10% > 10% > 1 > 1 > 1 0.9
Performance Materials1 > 10% > 10% > 2 > 2 > 1.5 > 2
1 In 2019 considering Versum Materials Inc., United States, on the basis of the preliminary purchase price allocation.

Goodwill shown below was incurred mainly in the course of the acquisitions of the Versum Materials Inc., United States, the Sigma-Aldrich Corporation, United States, the AZ Electronic Materials S.A., Luxembourg, the Millipore Corporation, United States, and the Serono SA, Switzerland.

6.55 KBEXCEL
Goodwill
€ million Healthcare Life Science Performance Materials Total
Cost as of Jan. 1, 2018 1,785 10,519 1,278 13,582
Changes in scope of consolidation
Additions
Disposals
Transfers
Reclassification to assets held for sale -251 -31 -282
Currency translation difference -1 408 57 464
Dec. 31, 2018 1,534 10,896 1,334 13,764
         
Accumulated amortization and impairment losses as of Jan. 1, 2018
Changes in scope of consolidation
Impairment losses
Disposals
Transfers
Reversals of impairment losses
Reclassification to assets held for sale
Currency translation difference
Dec. 31, 2018
         
Net carrying amounts as of Dec. 31, 2018 1,534 10,896 1,334 13,764
         
Cost as of Jan. 1, 2019 1,534 10,896 1,334 13,764
Changes in scope of consolidation 40 3,161 3,201
Additions
Disposals
Transfers
Reclassification to assets held for sale
Currency translation difference 199 -23 175
Dec. 31, 2019 1,534 11,135 4,472 17,141
         
Accumulated depreciation and impairment losses as of Jan. 1, 2019
Changes in scope of consolidation
Impairment losses
Disposals
Transfers
Reversals of impairment losses
Reclassification to assets held for sale
Currency translation difference
Dec. 31, 2019
         
Net carrying amounts as of Dec. 31, 2019 1,534 11,135 4,472 17,141

The changes in goodwill caused by foreign exchange rates resulted almost exclusively from translating the goodwill from the acquisitions of the Sigma-Aldrich Corporation, the Versum Materials, Inc., the AZ Electronic Materials S.A., and the Millipore Corporation, which were partially denominated in U.S. dollars, into the reporting currency.

Changes in the scope of consolidation in fiscal 2019 mainly resulted from the acquisition of Versum Materials, Inc., United States. See Note (5) “Acquisitions and divestments” for additional information on the acquisitions.

In the Healthcare business sector, the reclassification as assets held for sale in 2018 related to the sale of the Consumer Health business to The Procter & Gamble Company, United States, while in the Life Science business sector it related to the sale of the flow cytometry business to the Luminex Corporation, United States.

As in 2018, there was no impairment loss recognized on goodwill in fiscal 2019.

(19) Other intangible assets

Accounting and measurement policies

Recognition and initial measurement of purchased intangible assets

For intangible assets acquired in the course of in-licensing, the portion of the consideration paid by the Group to acquire intellectual property is recognized as an intangible asset. If development services are also acquired from the selling contract party, an appropriate portion of the consideration is allocated to research and development costs in line with the service performance.

Contingent consideration in the form of milestone payments in connection with the purchase of intangible assets outside of a business combination is capitalized as an intangible asset and recognized as a financial liability once the milestone is reached, since the consideration is contingent upon future events that are beyond the Group’s control.

Intangible assets acquired in the course of business combinations are recognized at fair value on the acquisition date. This also includes contingent considerations.

Capitalization of internally generated intangible assets

Owing to the high risks until pharmaceutical products are approved, the criteria for the capitalization of development costs in accordance with IAS 38 are not met in the Healthcare business sector for the development of drug candidates. Costs incurred after regulatory approval are insignificant and are therefore not recognized as intangible assets. In the Life Science and Performance Materials business sectors, development expenses are capitalized as soon as the criteria have been met. This includes expenses that arose as part of registration for REACH. Furthermore, development expenses for internally developed software are capitalized provided that the relevant criteria have been fulfilled.

Subsequent measurement

In the course of subsequent measurement, the option to remeasure intangible assets at fair value is not exercised.

Intangible assets with a finite useful life are amortized using the straight-line method. The useful lives of customer relationships, brand names, and trademarks as well as marketing authorizations, acquired patents, licenses and similar rights, and software are between three and 24 years. In determining these useful lives, the Group considers factors including the typical product life cycles for each asset and publicly available information about the estimated useful lives of similar assets.

An impairment test is performed if there are indications of impairment. Such indications of impairment and the need to reverse an impairment is determined during an annual process involving the responsible departments and considering external and internal information. Impairment losses are reversed if the original reasons for impairment no longer apply.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment when a triggering event arises or at least once a year. Amortization does not begin until the product is ready for commercial use and is charged on a straight-line basis over the shorter of the patent or contract term and the estimated useful life.

Significant discretionary decisions and sources of estimation uncertainty

Purchased intangible assets

Identification and measurement of intangible assets acquired in the course of business combinations are subject to significant discretion and estimation uncertainty (for further details on measurement methods and on sensitivity analyses regarding the acquisition of Versum Materials, Inc., United States, see Note (5) “Acquisitions and divestments”).

In connection with in-licensing agreements in the Healthcare business sector, the Group moreover has to make a discretionary estimate of the extent to which up-front payments and milestone payments represent remuneration for services received or whether such payments result in an in-licensing of an intangible asset that has to be capitalized.

Determination of the amortization amount

Substantial assumptions and estimates are required to determine the appropriate level of amortization of other intangible assets. This is especially relevant for to the determination of the underlying remaining useful life.

If the amortization of intangible assets from customer relationships, brands, trademarks, marketing authorizations, patents, licenses and similar rights and other had been 10% higher, for example due to shortened remaining useful lives, profit before income tax would have been € 112 million lower in fiscal 2019 (2018: € 117 million).

In fiscal 2019, an extension of the useful life of the intangible asset reported in connection with the drug Rebif® by one year would have raised profit before income tax by € 185 million (2018: € 123 million).

Identification of  impairment loss and reversal of impairment losses

Discretionary decisions are required in the identification of objective evidence of impairment as well as in identifying the need to reverse the impairment of other intangible assets.

11.41 KBEXCEL
Customer relationships, brands and trademarks Marketing authorizations, patents, licenses, similar rights and other items Software and software in development Advance payments Total
€ million   Finite useful life Not yet available for use      
Cost as of Jan. 1, 2018 7,171 10,685 1,017 705 19,577
Changes in scope of consolidation
Additions 1 14 35 55 1 106
Disposals -6 -37 -111 -8 -162
Transfers 57 -56 4 -1 4
Reclassification to assets held for sale -29 -51 -7 -87
Currency translation difference 265 71 6 342
Dec. 31, 2018 7,402 10,739 885 755 19,780
             
Accumulated amortization and impairment losses as of Jan. 1, 2018 -1,868 -8,438 -596 -357 -11,260
Changes in scope of consolidation
Depreciation, amortization, and write-downs -427 -747 -57 -1,231
Impairment losses -21 -19 -40
Disposals 5 14 7 26
Transfers -1
Reversals of impairment losses
Reclassification to assets held for sale 24 38 2 65
Currency translation difference -61 -40 -3 -104
Dec. 31, 2018 -2,326 -9,195 -596 -426 -12,544
             
Net carrying amounts as of Dec. 31, 2018 5,076 1,543 289 329 7,237
             
Cost as of Jan. 1, 2019 7,402 10,739 885 755 19,780
Changes in scope of consolidation 2,372 342 181 2,895
Additions 46 40 122 208
Disposals -2 -19 -4 -26
Transfers -1 1 -1 5 -1 5
Reclassification to assets held for sale
Currency translation difference 94 34 -4 5 129
Dec. 31, 2019 9,865 11,143 1,101 883 22,992
             
Accumulated depreciation and impairment losses as of Jan. 1, 2019 -2,326 -9,195 -596 -426 -12,544
Changes in scope of consolidation
Depreciation -466 -654 -75 -1,195
Impairment losses -33 -1 -33
Disposals 2 17 4 23
Transfers 6 -5
Reversals of impairment losses
Reclassification to assets held for sale
Currency translation difference -39 -26 -4 -68
Dec. 31, 2019 -2,829 -9,853 -634 -501 -13,817
             
Net carrying amounts as of Dec. 31, 2019 7,036 1,290 467 382 9,175

Changes in the scope of consolidation in fiscal 2019 mainly included additions to intangible assets from the acquisition of Versum Materials, Inc., United States. This acquisition and the accompanying effects are described in detail in Note (5) “Acquisitions and divestments”.

The additions to market authorizations, patents, licenses, similar rights, and other items with finite useful lives in the amount of € 46 million (2018: € 14 million) were mainly attributable to the Life Science and Healthcare business sectors.

The additions to marketing authorizations, patents, licenses, similar rights, and other items not yet available for use amounted to € 40 million in fiscal 2019 (2018: € 35 million) and were mostly attributable to the Healthcare business sector.

Impairment losses on market authorizations, patents, licenses, similar rights, and other items not yet available for use amounted to € 33 million (2018: € 0 million) and were accounted for by the Healthcare business sector. They were mostly attributable to the restructuring of the collaboration with F-star Delta Ltd., United Kingdom (see Note (6) “Collaboration agreements”). These impairment losses were recognized as impairment losses on non-financial assets under other operating expenses on the consolidated income statement.

The additions to software and software in development in the amount of € 122 million (2018: € 55 million) resulted mainly from development costs in connection with new ERP programs.

The reclassifications in 2018 to assets held for sale were made in connection with the divestment of the Consumer Health business and of the flow cytometry business (see Note (5) ‟Acquisitions and divestments”).

The carrying amounts of customer relationships, brands, and trademarks as well as marketing authorizations, patents, licenses, similar rights, and other items were attributable to the business sectors as follows:

6.39 KBEXCEL
€ million Remaining useful life in years Healthcare Life Science Performance Materials Total Dec. 31, 2019 Total Dec. 31, 2018
Customer relationships, brands, and trademarks   4,598 2,438 7,036 5,076
Customer relationships 1.5-17.9 3,873 2,389 6,262 4,263
thereof: from the acquisition of the Sigma-Aldrich Corporation 16.9-17.9 3,231 3,231 3,496
thereof: from the acquisition of Versum Materials, Inc. 6.8-18.8 2,238 2,238
thereof: from the acquisition of Millipore Corporation 1.5-7.5 470 470 569
Brands and trademarks 3.5-7.9 725 49 774 813
thereof: from the acquisition of the Sigma-Aldrich Corporation 7.9 563 563 655
             
Marketing authorizations, patents, licenses, similar rights, and other items            
Finite useful life   120 314 856 1,290 1,543
Marketing authorizations 58 58 500
Xalkori® 2.0 45 45 68
Rebif® 369
Saizen® 31
Other marketing authorizations   13 13 32
Patents, licenses, and similar rights 0.5-13.3 309 845 1,154 966
thereof: from the acquisition of AZ Electronic Materials S.A. 1.3-13.3 516 516 616
thereof: from the acquisition of Versum Materials, Inc. 4.8-6.8 277 277
Other   62 5 11 78 77
Not yet available for use   269 14 184 467 289
thereof: from the acquisition of Versum Materials, Inc. 177 177

(20) Property, plant and equipment

Accounting and measurement policies

Recognition and initial measurement

In the course of determining cost, government grants received are deducted from the asset’s carrying amount within the scope of IAS 20. Grants receivable for financial support that are not linked to future costs are recognized in profit or loss.

Subsequent measurement

Subsequent measurement is based on amortized cost. Property, plant and equipment is depreciated using the straight-line method over the useful life of the asset concerned and depreciation expenses are allocated to the respective functional costs. Depreciation of property, plant and equipment is based on the following useful lives:

3.82 KBEXCEL
Useful life
Production buildings No more than 33 years
Administration buildings No more than 40 years
Plant and machinery 6 to 25 years
Operating and office equipment, other facilities 3 to 10 years

The useful lives of the assets are reviewed regularly and adjusted if necessary.

An impairment test is performed if there are indications of impairment. External and internal information is used in this context. In the event of impairment, an impairment loss is recorded under other operating expenses. Impairment losses are reversed to the amortized cost and presented in other operating income if the original reasons for impairment no longer apply.

SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION UNCERTAINTY

Determination of the amotization amount

Assumptions and estimates are required to determine the appropriate level of amortization of property, plant and equipment. This is related in particular to the determination of the underlying remaining useful life. In making these estimates, the Group considers the useful lives of the property, plant and equipment derived from past experience.

Identification of a need to recognize impairment loss and reverse impairment loss

Discretionary decisions are required in the identification of objective evidence of impairment as well as in identifying the need to reverse impairment of property, plant and equipment.

11.74 KBEXCEL
€ million Land,
land rights and buildings
Plant 
and
machinery
Other facilities, operating and office equipment Construction in progress
and
advance payments to 
vendors and contractors
Total
Cost as of Jan. 1, 2018 3,517 4,136 1,178 1,026 9,857
Changes in scope of consolidation
Additions 16 41 47 786 890
Disposals -14 -64 -46 -28 -152
Transfers 319 237 140 -696
Reclassification to assets held for sale -43 -69 -20 -2 -134
Currency translation difference 43 31 6 10 90
Dec. 31, 2018 3,837 4,313 1,305 1,096 10,551
           
Accumulated depreciation and impairment losses as of Jan. 1, 2018 -1,474 -2,978 -887 -4 -5,343
Changes in scope of consolidation
Depreciation, amortization, and write-downs -156 -246 -115 -517
Impairment losses -12 -3 -1 -2 -18
Disposals 11 59 42 2 116
Transfers 24 -24
Reversals of impairment losses
Reclassification to assets held for sale 13 40 13 66
Currency translation difference -16 -23 -5 -44
Dec. 31, 2018 -1,609 -3,150 -977 -4 -5,740
           
Net carrying amounts as of Dec. 31, 2018 2,228 1,163 328 1,092 4,811
           
Cost as of Dec. 31, 2018 3,837 4,313 1,305 1,096 10,551
Adjustment on initial application of IFRS 16 384 17 67 467
Cost as of Jan. 1, 20191 4,222 4,330 1,372 1,096 11,019
Changes in scope of consolidation 139 271 58 84 553
Additions 190 45 57 812 1,104
Disposals -81 -88 -46 -8 -223
Transfers 299 327 100 -713 14
Reclassification to assets held for sale
Currency translation difference 47 26 13 8 95
Dec. 31, 2019 4,816 4,911 1,555 1,278 12,561
           
Accumulated depreciation and impairment losses as of Jan. 1, 20191 -1,609 -3,150 -977 -4 -5,740
Changes in scope of consolidation
Depreciation -273 -284 -153 -710
Impairment losses -6 -1 -8
Disposals 48 85 41 1 176
Transfers 1 -21 -20
Reversals of impairment losses
Reclassification to assets held for sale
Currency translation difference -14 -19 -10 -44
Dec. 31, 2019 -1,854 -3,390 -1,100 -4 -6,348
           
Net carrying amounts as of Dec. 31, 2019 2,962 1,521 456 1,274 6,213
1 Values effective January 1, 2019, have been adjusted, see Note (45) “Effects from new accounting standards and other presentation changes”.

Changes in the scope of consolidation in fiscal 2019 mainly included additions to property, plant and equipment from the acquisition of Versum Materials, Inc., United States. A detailed account of the acquisition is included in Note (5) “Acquisitions and divestments”.

The largest individual additions to property, plant and equipment in fiscal 2019 were related to the investment projects shown below:

4.29 KBEXCEL
     
Business sector Investment project Country
Healthcare Biotech development system Switzerland
Healthcare Filling and packaging center Switzerland
Healthcare Extention of research center United States
Healthcare Logistics center China
Healthcare Filling plant Switzerland
Life Science Production plant China
Life Science Production plant Ireland
Life Science Warehouse Korea
Life Science Laboratory China
Life Science Production plant Germany
Performance Materials Research center Germany
Performance Materials Production plant Germany

Impairment losses of € 8 million (2018: € 18 million) were recognized in fiscal 2019. They mainly referred to assets allocated to the Performance Materials business sector and related essentially to a research center in the United Kingdom. Reclassifications to assets held for sale in fiscal 2018 were mainly in connection with the divestment of the Consumer Health business.

The carrying amounts of the right-of-use assets arising from leases for fiscal 2019 are shown separately in Note (21) “Leasing” based on the requirements of IFRS 16 “Leases.” The following table shows the carrying amounts of the assets classified as finance leases in 2018 in accordance with the requirements of IAS 17 “Leases”.

3.81 KBEXCEL
   
€ million Dec. 31, 2018
Land and buildings 8
Other property, plant, and equipment 1
Net carrying amount of assets classified as finance lease 9

(21) Leasing

Accounting and measurement policies

The Group has applied the requirements of IFRS 16 “Leases” since January 1, 2019. The effects of the first-time application of IFRS 16 are set out in Note (45) “Effects from new accounting standards and other presentation changes”.

For further information on the accounting and measurement policies applied in 2018 for existing leases (IAS 17), please refer to the 2018 Annual Report.

IFRS 16 scope

The Group exercises the option of not recognizing leases of intangible and low-value underlying assets in the context of IFRS 16. If the provision of company cars to employees qualifies as an employee benefit within the meaning of IAS 19, IFRS 16 is not applied. In this case, its balance-sheet treatment is governed solely by IAS 19.

Separation of lease and non-lease components

For leases, the Group generally elects to exercise the option not to separate non-lease components from lease components. Only leases for land, land rights, and buildings are separated into lease and non-lease components.

Depreciation of the right-of-use assets arising from leases

Basically right-of-use assets are depreciated over the lease term. If it should be considered reasonably certain that an existing purchase option will be exercised or ownership will be automatically transferred at the end of the lease term, depreciation is applicable over the same period to corresponding assets under property, plant and equipment (see Note (20) “Property, plant and equipment”).

Determining the incremental borrowing rate

If the interest rate for the lease can not be determined, the incremental borrowing rate is applicable for measuring the lease. The incremental borrowing rate is determined on the basis of the risk-free interest rate of the currency of the respective Group company over a similar term. This interest rate is adjusted using a risk surcharge specific to the Group. The Group applies the repayment model to determine the current portion of the lease. The current portion of the lease corresponds to the repayment share of the next 12 months.

Determining the lease term

Where renewal or termination options are available, their exercise is assessed on a case-by-case basis, considering factors such as location strategies, leasehold improvements, and the degree of specificity.

SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION UNCERTAINTY

Identification of a lease

Discretionary decisions can arise during the identification of leases in answering the question of whether a lessor’s right of substitution is substantive. In cases of doubt, the Group classifies rights of substitution as not substantive if the facts and circumstances of the case do not support a different assessment.

Measurement of lease and non-lease components

In the case of leases for land, land rights, and buildings, discretion and estimation uncertainty may occur in the course of separating the lease into lease and non-lease components if observable prices are not available from the contract partner or other potential lessors.

Determining the lease term

When determining the lease term, existing renewal and termination options must be evaluated to determine the probability that such options will be exercised.

These assessments may be discretionary even though they rely on existing and material information on the general economic context, such as location strategies, leasehold improvements, or the degree of specificity. If the available information does not allow a reliable assessment, the Group uses historical experience for comparable situations.

The 20 largest leases accounted for around 50% of total lease liabilities. The subject matter of the leases essentially comprised right-of-use assets for office, warehouse, and laboratory buildings. If options to renew these leases were exercised in future, which is not yet considered likely, this would result in additional potential cash outflows of up to € 279 million.

Where individual contracts included termination options, it was considered unlikely that these would be exercised so that additional lease payments were already considered in the corresponding lease liability.

Determining the incremental borrowing rate

Determining the risk-free interest rate and determining the risk surcharge are both discretionary.

Initial measurement of the lease liability and the right-of-use asset

In measuring the lease liability the Group is subject to discretion and significant estimation uncertainty regarding:

  • measuring any payments in the course of promised residual value guarantees, and
  • assessing the probability that existing exercise options will be exercised.

In measuring right-of-use assets under leases, the Group is subject to estimation uncertainty regarding any demolition obligations and their resulting payments.

Right-of-use assets under leases are reported in the balance sheet item “Property, plant and equipment” (see Note (20) “Property, plant and equipment”).

The reconciliation of net carrying amounts of right-of-use assets from leases was as follows:

4.71 KBEXCEL
Right-of-use assets
€ million Land, land rights and buildings Plant and machinery Other facilities, operating and office equipment Total
Net carrying amounts as of Jan. 1, 2019 391 17 67 476
Changes in scope of consolidation 36 1 5 42
Additions 175 2 24 200
Disposals -22 -2 -24
Depreciation -100 -6 -39 -144
Impairment losses -1 -1
Reversals of impairment losses
Other 9 -1 2 10
Net carrying amounts as of Dec. 31, 2019 487 13 58 557

The net carrying amounts of other facilities, operating and office equipment mainly include the right-of-use assets for vehicles.

The leases existing under IFRS 16 affected the consolidated income statement as follows:

4.14 KBEXCEL
€ million 2019
Right-of-use assets  
Depreciation -144
Impairment losses -1
Reversals of impairment losses
Expenses for leasing low-value assets -22
Expenses for leases with variable lease payments
   
Income from subleasing right-of-use assets 1
Income from sale-and-lease-back transactions 21
   
Interest expenses for lease liabilities -14
Total -160

Payments from leases are shown in the consolidated cash flow statement as follows:

3.76 KBEXCEL
€ million 2019
Net cash flows from operating activities -33
Net cash flows from financing activities -136
Total -169

The expected maturities of the lease liabilities were as follows:

4.06 KBEXCEL
€ million
Dec. 31, 2019
Within 1 year 1-5 years After more than 5 years Total
Future lease payments 119 319 189 627
Interest portion of future payments -12 -30 -20 -61
Present value of future lease payments 107 289 169 565

(22) Other non-financial assets

Accounting and measurement policies

Other non-financial assets are carried at amortized cost. Impairments are recognized for any credit risks.

Other non-financial assets are broken down as follows:

4.54 KBEXCEL
Dec. 31, 2019 Dec. 31, 2018
€ million Current Non-current Total Current Non-current Total
Receivables from non-income related taxes 340 4 344 318 8 326
Prepaid expenses 153 14 167 117 5 121
Assets from defined benefit plans 4 4 7 7
Other assets 94 79 172 94 62 157
Other non-financial assets 591 97 688 536 76 611

(23) Inventories

Accounting and measurement policies

In addition to directly attributable unit costs, manufacturing costs also include overheads attributable to the production process, which are determined on the basis of normal capacity utilization of the production facilities. Goods for resale are recognized at cost. When determining amortized cost or manufacturing costs, the “first-in, first-out” (FIFO) and weighted average cost formulas are used.

Inventories are tested for impairment using a business sector-specific method. Under this method, cost is compared to the net realizable values. The net realizable value corresponds to the expected sale proceeds less any costs for completing and distributing the product. If the net realizable value is lower than the amortized cost, the asset is written down by a corresponding amount which is recognized as an expense in the cost of sales for that period.

In addition to the impairment derived from the procurement and/or sales market, impairment losses may also be necessary for quality reasons or due to a lack of usability of the items, or their shelf life. If the reason for impairment no longer applies, the carrying amount is adjusted to the lower of cost and new net realizable value.

Since inventories are for the most part not manufactured within the scope of long-term production processes, the manufacturing costs exclude borrowing costs.

Inventory prepayments are recognized under other non-financial assets.

Significant discretionary decisions and sources of estimation uncertainty

Identification of impairment losses or reversal of impairment losses

Discretionary decisions are required in the identification of impairment as well as in identifying the need to reverse impairment of inventories. There are estimation uncertainties with respect to the calculation of the net realizable value. In particular, changes in selling prices and expected costs of completion are considered in calculating this value.

Inventories consisted of the following:

3.95 KBEXCEL
€ million Dec. 31, 2019 Dec. 31, 2018
Raw materials and supplies 622 510
Work in progress 943 834
Finished goods/merchandise sold 1,776 1,420
Inventories 3,342 2,764

The increase in inventories in 2019 was due to accelerating business volumes in all three business sectors. In the Healthcare business sector the build-up occurred mainly due to the positive market development in China due to Erbitux® stocks and products to treat infertility and diabetes.

In the Life Science business sector, the increase in inventories resulted in particular from the Process Solutions and Research Solutions business units due to the good order situation. The increase in inventories in the Performance Materials business sector resulted mainly from the first-time consolidation of Versum Materials, Inc., United States. Impairment losses on inventories in 2019 amounted to € 275 million (2018: € 183 million); reversals of impairment losses came to € 74 million (2018: € 77 million).

The rise in impairments compared to 2018 was predominantly attributable to the Healthcare and Life Science business sectors.

As of the balance sheet date, no inventories were pledged as security for liabilities.

(24) Trade and other receivables

Accounting and measurement policies

Trade accounts receivable without significant financing components that are not the subject of a factoring agreement are measured at the amount of the unconditional claim for consideration on initial recognition. For additions to trade accounts receivable, loss allowances are recognized based on individual transactions to allow for expected credit losses.
At initial recognition, other receivables are measured at fair value plus the direct transaction costs incurred upon acquisition of the asset.

Trade accounts receivable that are potentially designated to be sold on account of a factoring agreement are measured at fair value through other comprehensive income.

The accounting and measurement policies applied in determining loss allowances for trade and other receivables are shown in Note (42) “Management of financial risks” in the “Credit risks” section.

Loss allowances and reversals of loss allowances are presented under the item “Impairment losses and reversals of impairment losses on financial assets (net)” in the consolidated income statement if the asset can be characterized as operational. If the asset can be characterized as financial, it is recognized in financial income or financial expenses.

Further information on the accounting and measurement policies governing financial assets can be found in Note (36) “Other financial assets”.

Trade and other receivables are measured as follows:

4.99 KBEXCEL
Dec. 31, 2019 Dec. 31, 2018
€ million Subsequently measured at amortized cost Subsequently measured at fair value through other comprehensive income Total Subsequently measured at amortized cost Subsequently measured at fair value through other comprehensive income Total
Gross trade accounts receivable 3,227 25 3,251 2,983 21 3,004
Gross other receivables 340 340 314 314
Gross trade and other receivables 3,567 25 3,591 3,297 21 3,319
Loss allowances on trade accounts receivable -77 -77 -73 -73
Loss allowances on other receivables -4 -4 -3 -3
Net trade and other receivables 3,485 24 3,510 3,222 21 3,243
thereof: current 3,463 24 3,488 3,205 21 3,226
thereof: non-current 22 22 17 17

In fiscal 2019, trade accounts receivable in Italy with a nominal value of € 22 million (2018: € 28 million) were sold for € 22 million (2018: € 28 million). These receivables did not involve any further rights of recovery against the Group.

The following table provides details on the development of trade accounts receivable before loss allowances:

4.26 KBEXCEL
€ million 2019 2018
Jan. 1 3,004 3,277
Additions 19,505 16,395
thereof: attributable to performance obligations satisfied in prior periods 1 1
Customer payments/derecognition of uncollectable receivables -19,452 -16,590
Effects of currency translation 43 6
Reclassification to assets held for sale -86
Changes in scope of consolidation/other 152 3
Dec. 31 3,251 3,004

(25) Contract assets

Accounting and measurement policies

Contract assets represent contractual claims to receive payment from customers for whom the contractual performance obligation has already been fulfilled although an unconditional claim to payment has yet to arise.

The following table shows the change in contract assets:

4.28 KBEXCEL
€ million 2019 2018
Jan. 1 52 35
Additions 311 205
thereof: attributable to performance obligations satisfied in prior periods 7
Reclassification to trade accounts receivable -270 -188
Reclassification to assets held for sale
Effects of currency translation 10 1
Changes in scope of consolidation/other 53
Dec. 31 156 52

Contract assets resulted in particular from rendering services and manufacturing of customer-specific equipment in the Life Science and Performance Materials business sectors. In the reporting period, the changes in the scope of consolidation/other were mainly attributable to the acquisition of Versum Materials, Inc., United States (see Note (5) “Acquisitions and divestments”).

(26) Other provisions

Other provisions developed as follows:

5.61 KBEXCEL
€ million Litigation
Restructuring
Employee benefits Environmental protection Acceptance and follow-on obligations Interest and penalties related to income taxes Other Total
Jan. 1, 2019 551 90 316 137 30 46 211 1,381
Additions 61 113 194 6 11 25 76 485
Utilizations -24 -25 -101 -8 -6 -9 -48 -222
Release -55 -51 -68 -3 -14 -20 -63 -274
Interest effect 14 1 11 26
Currency translation difference 3 2 6
Changes in scope of consolidation/other 1 8 3 9 1 23
Reclassification to assets held for sale
Dec. 31, 2019 548 135 347 143 21 51 179 1,424
thereof: current 531 62 110 25 10 51 144 933
thereof: non-current 17 73 237 117 11 35 490
Litigation

Accounting and measurement policies – other provisions for litigation

To assess a recognition obligation in relation to provisions for litigation and to quantify future outflows of resources, the Group draws on the knowledge of the legal department as well as outside counsel.

Assessing the need for recognizing provisions for litigation is based on the likelihood of possible outcomes for proceedings. In particular, the factors influencing this likelihood are:

  • the validity of the arguments brought forward by the opposing party and
  • the legal situation and current court rulings in comparable proceedings in the jurisdiction in question.

In addition, the following factors are also relevant in measuring other provisions for litigation:

  • the duration of proceedings in pending legal disputes,
  • the applicable license rate plus an expected infringement surcharge,
  • the usual damages and fines for other legal disputes, and
  • the discount factor to be used.

Significant discretionary decisions and sources of estimation uncertainty – other provisions for litigation

Like the measurement of provisions, the assessment of a recognition obligation for provisions for litigation is to a particular extent subject to a degree of estimation uncertainty. The uncertainties relate, in particular, to the assessment of the likelihood and the amount of an outflow of resources to cover probable obligations.

The legal matters described below represented the most significant legal risks.

Rebif®: The Group is involved in a patent dispute with Biogen Inc., United States, (Biogen) in the United States. Biogen claims that the sale of Rebif® in the United States infringes on a Biogen patent. The disputed patent was granted to Biogen in the United States in 2009. Subsequently, Biogen sued the Group and other pharmaceutical companies for infringement of this patent. The Group defended itself against all allegations and brought a countersuit against Biogen claiming that the patent was invalid and not infringed by the Group’s actions. In the first instance, a jury recognized the invalidity of the patent. This jury verdict was overturned by the judge in the same instance in September 2018. For the time being, the patent is thus deemed to be legally valid and to have been infringed. The Group filed a complaint with the United States Court of Appeals for the Federal Circuit (second instance) against the first-instance ruling in October 2018. A decision is expected in the first half of 2020. The Group recognized provisions in a three-digit million euro amount for these proceedings. Cash outflow within the next twelve months is considered possible at present.

PS-VA liquid crystals mixtures: In the Performance Materials business sector, the Group is involved in a legal dispute with JNC Corporation, Japan, (JNC). JNC claims that by manufacturing and marketing certain liquid crystals mixtures, the Group has infringed JNC patents. JNC asserts its claims in court in two jurisdictions. The Group maintains that JNC’s patent infringement assertion is invalid in three jurisdictions owing to relevant prior art and has filed the relevant nullity actions.

Two jurisdictions have yet to reach their final decisions. In 2019, the nullity action was concluded in one jurisdiction with legally binding effect in favor of the Group in 2019. In this jurisdiction, JNC refrained from filing a patent infringement claim. In view of this development, the provision was reduced in 2019. After the adjustment, the remaining provision for this matter amounts to a double-digit million euro sum. Cash outflow within the next 12 months is considered possible at present.

Antitrust and other proceedings

Antitrust review proceedings for the acquisition of Sigma-Aldrich Corporation, United States, (Sigma-Aldrich): On July 6, 2017, the Group received notice from the European Commission (EU Commission) in connection with the antitrust review proceedings for the acquisition of Sigma-Aldrich, in which the EU Commission informed the Group of its preliminary conclusion that the Group and Sigma-Aldrich allegedly transmitted incorrect and/or misleading information within the scope of the acquisition of Sigma-Aldrich. The EU Commission received registration of the merger on April 21, 2015, and granted clearance on June 15, 2015, subject to the condition that the Group and Sigma-Aldrich divest parts of the European solvents and inorganic chemicals businesses of Sigma-Aldrich in order to resolve antitrust concerns. According to the preliminary viewpoint of the EU Commission communicated in a letter dated July 6, 2017, the Group and Sigma-Aldrich withheld related important information about an innovation project. According to the EU Commission, the innovation project should have been included in the remedies package. At present, an administrative procedure is carried out at the EU Commission which might result in the issuance of a fine. The Group is entitled to legal recourse should a fine be imposed. The ongoing investigations are limited to the examination of violations of EU merger control procedures and do not affect the validity of the EU Commission’s decision to approve the merger. A provision in a fixed double-digit million-euro amount was still in place for this issue. A potential outflow of resources is considered possible for 2020.

Paroxetine: In connection with the divested generics business, the Group is subject to antitrust investigations by the British Competition and Market Authority (CMA) in the United Kingdom. In March 2013, the authorities informed the Group of the assumption that a settlement agreement entered into in 2002 between Generics (UK) Ltd. and several subsidiaries of GlaxoSmithKline plc, United Kingdom, in connection with the antidepressant drug paroxetine violates British and European competition law. The Group, the then owner of Generics (UK) Ltd., was allegedly involved in the negotiations for the settlement agreement and is therefore liable. The investigations into Generics (UK) Ltd. started in 2011, without this being known to the Group. On February 11, 2016, the CMA imposed a fine in this matter. The Group has taken legal action against this fine. The Appeals Tribunal has since submitted the relevant legal questions to the European Court of Justice (CJEU) for a preliminary ruling. The CJEU confirmed in January 2020 that such settlement agreements may breach European competition law. Appropriate accounting measures have been taken. A decision and an outflow of resources within the next 12 months are considered possible. The Group recognized provisions in a low double-digit million-euro amount for these proceedings.

In addition to provisions for the above-mentioned legal disputes, provisions existed as of the balance sheet date for various other pending legal disputes.

Restructuring

Accounting and measurement policies – other provisions for restructuring projects

The Group uses a formal restructuring plans to assess recognition obligation for provisions for restructuring projects and the amount of the expected outflow of resources.

The main parameters in determining the amount of the provisions are

  • the size of the affected business units,
  • the planned implementation date of the restructuring plan, and
  • the anticipated expenses arising from the change in or termination of the working relationships of the affected employees.

Significant discretionary decisions and sources of estimation uncertainty – other provisions for restructuring projects

Estimation uncertainty about the provisions for restructuring primarily relate to determining the amount of the expected outflow of resources.

The uncertainty factors arise in particular from the change in or termination of the working relationships of the affected employees.

Restructuring provisions mainly included commitments to employees in connection with communicated restructuring projects and provisions for related onerous contracts.
The additions to restructuring provisions in the amount of € 113 million were mainly attributable to reorganizational measures in the Performance Materials business sector, as well as to the ongoing expansion of shared services activities and the related relocation of activities. Outflows of resources are expected within the next five years.
In addition to the aforementioned programs, restructuring provisions also included obligations from the Life Science business sector, which, will carry out relocations that have already been decided and communicated as well as the gradual closure of operations at various German sites by 2022.

Employee benefits

Provisions for employee benefits include obligations from long-term variable compensation programs. More information on these compensation programs can be found in Note (33) “Share-based compensation”.

Obligations for partial retirement programs and other severance payments that were not set up in connection with restructuring programs as well as obligations in connection with long-term working hour accounts and anniversary bonuses are also included under provisions for employee benefits.

With respect to provisions for pensions and other post-employment benefits, see Note (32) “Provisions for pensions and other post-employment benefits”.

Environmental protection

ACCOUNTING AND MEASUREMENT POLICIES – OTHER PROVISIONS FOR ENVIRONMENTAL PROTECTION

To assess a recognition obligation in relation to provisions for environmental protection and to quantify future outflows of resources, the Group draws on external appraisals and the knowledge of in-house and outside specialists.

The following are key parameters in calculating the present value of the future settlement amount of provisions for environmental protection:

  • the future settlement date,
  • the actual extent of environmental damages,
  • the applicable remediation methods,
  • the associated future costs, and
  • the discount factor.

Measurement is carried out regularly in consultation with independent experts.

Significant discretionary decisions and sources of estimation uncertainty – other provisions for environmental protection

The assessment of a recognition obligation as well as the measurement of the provisions for environmental protection are subject to a degree of estimation uncertainty.

The uncertainty relates, in particular, to the assessment of the timing and likelihood of a future outflow of resources and assessment of the extent of necessary remediation measures and the related calculation of the amount of present and potential liabilities.

Provisions for environmental protection resulted in particular from obligations for soil remediation and groundwater protection in connection with the crop protection business in Germany and Latin America that was discontinued in 1987.

Acceptance and follow-on obligations

Accounting and measurement policies – other provisions for acceptance and follow-on obligations

The assessment of the recognition obligation for provisions for acceptance and follow-on obligations and the quantification of future outflows of resources is based on internal project plans as well as on the assessment of the respective matters by in-house and external specialists.

The main parameters in determining the amount of the provision are

  • the ability to use or potential for modification of secured manufacturing capacities at third-party providers, particularly for pharmaceutical compounds,
  • the number and duration of continued treatments of affected patients in clinical development programs,
  • the expected date or period of the outflow of resources, and
  • the expectations concerning future events influencing the obligations.

Significant discretionary decisions and sources of estimation uncertainty – other provisions for acceptance and follow-on obligations

Estimation uncertainty regarding the provisions for acceptance and follow-on obligations primarily relates to determining the amount of the expected outflow of resources.

The uncertainties primarily involve assessing future events that will influence the obligation.

Provisions for acceptance and follow-on obligations primarily considered costs stemming from discontinued development projects as well as obligation surpluses from onerous contracts. Utilizations and releases were mainly attributable to development projects discontinued in previous years.

Provisions for interest and penalties related to income taxes mainly comprised interest payables associated with or resulting from tax payables.

Miscellaneous other provisions

Miscellaneous other provisions mainly comprised provisions related to remaining risks from the divestment of the Consumer Health business, for warranty obligations, and for uncertain commitments from contributions, fees, and other duties.

(27) Contingent liabilities

Accounting and measurement policies

To identify contingent liabilities from litigation and tax matters, the Group draws on the knowledge of the legal department and the tax department as well as the opinions of external consultants and attorneys.

The key factors in the assessment to identify contingent liabilities are:

  • the validity of the arguments brought forward by the opposing party or the tax authority and
  • the legal situation and current court rulings in comparable proceedings in the jurisdiction in question.

The amount of the contingent liability is based on the best possible estimate which in turn is based on likelihood of possible outcomes of proceedings and on the applicable license rate in patent disputes.

Significant discretionary decisions and sources of estimation uncertainty

The identification and the measurement of contingent liabilities are both strongly associated with discretionary decisions and estimation uncertainties.
This applies for assessing the likelihood of an outflow of resources and determining its amount for future and potential obligations.

3.81 KBEXCEL
€ million Dec. 31, 2019 Dec. 31, 2018
Contingent liabilities from litigation and tax matters 128 47
Other contingent liabilities 1 1

Contingent liabilities from litigation mainly related to obligations under civil law, labor law, and antitrust law. The potential civil law obligations primarily related to potential liabilities to pay damages due to a legal dispute under antitrust law. It is possible that the Group would be subject to claims for compensation for damages asserted by health insurance companies due to excessively high drug prices in case of a valid judgment under antitrust law.

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

Contingent liabilities from tax matters included various non-German income and non-income tax matters that were mainly attributable to the determination of earnings under tax law, customs regulations, and excise tax matters.

(28) Other non-financial liabilities

Accounting and measurement policies

Accruals for personnel expenses included in other non-financial liabilities comprise, in particular, liabilities resulting from vacation entitlements, bonuses, and social security contributions.

Contract liabilities include payments received by the Group prior to completion of contractual performance. In addition to consideration received within the scope of collaboration agreements, this applies particularly to service agreements.

Other non-financial liabilities comprise the following:

4.54 KBEXCEL
Dec. 31, 2019 Dec. 31, 2018
€ million Current Non-current Total Current Non-current Total
Accruals for personnel expenses 681 681 687 687
Contract liabilities 291 87 379 332 4 336
Liabilities from non-income related taxes 207 5 212 171 15 186
Other accruals 32 1 33 21 22
Other non-financial liabilities 1,211 93 1,304 1,211 19 1,230

The following table shows the development of contract liabilities in the period under review:

4.99 KBEXCEL
2019 2018
€ million Current Non-current Total Current Non-current Total
Jan. 1 332 4 336 311 194 506
Additions 693 209 902 391 2 393
Recognition of income/reversal -861 -3 -864 -563 -2 -564
Cumulative catch-up adjustments to revenue
Reclassification from non-current to current 122 -122 193 -193
Reclassification to assets held for sale
Currency translation difference 2 2 2 2
Changes in scope of consolidation/other 3 3 -2 2
Dec. 31 291 87 379 332 4 336

The increase in contract liabilities compared to the 2018 balance sheet date was mainly attributable to an accrued upfront payment from the collaboration agreement with GlaxoSmithKline plc, United Kingdom (see Note (6) “Collaboration agreements”).

As of January 1, 2019, contract liabilities amounted to € 336 million (January 1, 2018: € 506 million), of which € 328 million (2018: € 299 million) was recognized through profit or loss in fiscal 2019.

(29) Trade and other payables

Accounting and measurement policies

Trade and other payables are subsequently measured at amortized cost.

Trade and other payables amounted to € 2,054 million (December 31, 2018: € 1,766 million). This item included accrued amounts of € 673 million (December 31, 2018: € 622 million) from outstanding invoices.