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Notes to the Consolidated Financial Statements1

1 Owing to the impact of the Covid-19 pandemic, Note (4) Subsequent Events and (50) Information on preparation and approval have been supplemented accordingly.

General Disclosures

(1) Company information

The accompanying consolidated financial statements for the year ended December 31, 2019, were prepared for MERCK Kommanditgesellschaft auf Aktien (Merck KGaA, Darmstadt, Germany), Darmstadt, Germany, registered under HRB 6164 with the Commercial Register of Darmstadt. The ultimate parent company of the Group is the parent company of Merck KGaA, Darmstadt, Germany, E. Merck Kommanditgesellschaft (E. Merck KG, Darmstadt, Germany), Darmstadt, Germany. The consolidated financial statements for E. Merck KG, Darmstadt, Germany, can be accessed at www.bundesanzeiger.de.

(2) Reporting principles

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

The accounting and measurement policies used in the consolidated financial statements are presented in the following Notes and are marked there.

Regulations binding for the first time as of fiscal 2019 and other presentation changes

The following regulations are binding as of fiscal 2019:

  • IFRS 16 “Leases”
  • IFRIC 23 “Uncertainty over Income Tax Treatments”
  • Amendment to IAS 19 “Employee Benefits”
  • Amendment to IAS 28 “Investments in Associates and Joint Ventures”
  • Amendment to IFRS 9 “Financial Instruments”
  • Annual Improvements to IFRSs 2015–2017 Cycle


Please refer to Note (45) “Effects from new accounting standards and other presentation changes” for further details on first-time application effects of IFRS 16. Other presentation changes affecting the presentation of functional costs in the consolidated income statement and the consolidated balance sheet classification are described there.

The first-time application of IFRIC 23 did not have an impact on the consolidated financial statements because the accounting of uncertainties over income tax already corresponded to this provision in terms of both measurement and presentation.

The other new regulations applicable for the first time in fiscal 2019 did not have a material impact on the consolidated financial statements.

Regulations binding as of fiscal 2020

The following regulations are binding as of fiscal 2020:

  • Amendment to IAS 1 “Presentation of Financial Statements”
  • Amendment to IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”
  • Amendment to IAS 39 “Financial Instruments: Recognition and Measurement”
  • Amendment to IFRS 7 “Financial Instruments: Disclosures”
  • Amendment to IFRS 9 “Financial Instruments”
  • Amendments to References in the Conceptual Framework in International Financial Reporting Standards


We did not opt for early application of any of these standards. These regulations are not expected to have a material effect on the consolidated financial statements.

Standards published but not yet endorsed by the European Union

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

  • IFRS 17 “Insurance Contracts”
  • Amendment to IFRS 3 “Business Combinations”


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

Accounting and measurement policies – currency translation

Functional currency
To a predominant extent, the subsidiaries of Merck KGaA, Darmstadt, Germany, conduct their business independently so that the functional currency is normally the respective local currency.
Some subsidiaries, particularly in the Performance Materials business sector, use the U.S. dollar as a functional currency in deviation from the local currency.

Transactions in non-functional currency
When the financial statements of consolidated companies are prepared, business transactions that are conducted in currencies other than the functional currency are translated using the exchange rate on the date of the transaction.

Translation of financial statements into the reporting currency (euro)
The financial statements of consolidated companies prepared in foreign currencies are translated into the reporting currency, euros. In this process, assets and liabilities are measured at the closing rate, and income and expenses are measured at average rates. Any currency translation differences arising during consolidation of Group companies are recognized in equity.

Hyperinflation
Argentina’s economy has been classified as hyperinflationary in accordance with IAS 29 “Financial Reporting in Hyperinflationary Economies.” Accordingly, the Group’s business activities in Argentina are no longer disclosed at historical cost but are shown adjusted for inflation. For this purpose, the Group uses a combination of the wholesale index IPIM (Índice de precios internos al por mayor) and the consumer price index IPC (Índice de precios al consumidor). The index applied as of the balance sheet date stood at 3,722.0 (December 31, 2018: 2,462.1 / January 1, 2018: 1,656.6).

Exchange rates of most significant currencies
The exchange rates of the most significant currencies in these consolidated financial statements were as follows:

4.47 KBEXCEL
Average rate Closing rate
€1 = 2019 2018 Dec. 31, 2019 Dec. 31, 2018
Chinese renminbi (CNY) 7.740 7.815 7.803 7.869
Japanese yen (JPY) 122.314 130.372 121.765 126.131
Swiss franc (CHF) 1.112 1.153 1.086 1.128
South Korean won (KRW) 1,300.959 1,294.331 1,295.177 1,271.164
Taiwan dollar (TWD) 34.578 35.544 33.608 34.958
U.S. dollar (USD) 1.121 1.181 1.121 1.144

(3) Discretionary decisions and sources of estimation uncertainty

The preparation of the consolidated financial statements requires the Group to make discretionary decisions and assumptions as well as estimates to a certain extent. The discretionary scope and estimation uncertainty are assessed in a Group-specific manner. For example, significant discretion exists if extensive assumptions have to be made as part of the recognition or measurement of accounting matters. Estimation uncertainty is measured by the reliability and availability of historical experience and external data. The accounting matters with the most significant discretionary decisions, and the most comprehensive assumptions relating to the future and sources of estimation uncertainty, are described below:

7.49 KBEXCEL
Accounting matter Carrying amount as of Dec. 31, 2019 in € million IFRSs Discretionary scope/estimation uncertainty Sensitivity analysis
Note
Goodwill 17,141     yes 18
Determination of recoverable amount   IAS 36 high    
Other intangible assets 9,175     yes 5, 19
Identification and measurement of intangible assets within the scope of business combinations   IFRS 3 high yes  
In-licensing of intangible assets IAS 38 medium    
Determination of amortization IAS 38 medium  
Identification of impairments or reversal of impairments IAS 36 medium  
Property, plant and equipment 6,213     no 20
Determination of depreciation   IAS 16 medium    
Identification of impairments or reversal of impairments IAS 36 medium  
Leases     21
Recognition and measurement of lease arrangements 557 IFRS 16 medium yes  
Inventories 3,342     no 23
Identification of impairments or reversal of impairments   IAS 2 medium    
Trade and other receivables 3,488     yes 24, 42
Determination of loss allowance   IFRS 9 medium    
Other financial assets     yes 36, 43
Determination of fair values of contingent considerations 258 IFRS 13 high    
Determination of fair values of equity instruments 399 IFRS 9, IFRS 13 medium  
Provisions for pensions and other post-employment benefits       yes 32
Determination of present value of defined-benefit obligations -5,644 IAS 19 medium    
Other provisions and contingent liabilities -1,424     no 26, 27, 33
Recognition and measurement of other provisions and contingent liabilities   IAS 37 high    
Determination of fair values of share-based payment programs IFRS 2 medium  
Collaboration agreements     yes 6
Classification of joint arrangements IFRS 11 medium    
Revenue recognition for upfront and milestone payments in collaboration agreements medium  
Revenue recognition     no 11
Measurement of sales deductions and refund liabilities -565 IFRS 15 medium    
Income tax       no 17
Recognition and measurement of income tax liabilities -1,402 IAS 12 high    
Recognition and measurement of deferred taxes from temporary differences   IAS 12 medium  
Recognition of deferred tax assets from tax loss carryforwards 27 IAS 12 high  
Assets held for sale       no 5
Date on which assets and liabilities are classified as “held for sale” IFRS 5 medium    

(4) Subsequent events

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

Addendum dated May 12, 2020

These consolidated financial statements were originally prepared on February 14, 2020 by the Executive Board of Merck KGaA, Darmstadt, Germany. The rapid development of Covid-19 into a global pandemic implies the following consequences for the net assets, financial position and results of operations of the Group, which were not expected based on the information available on the date of preparation, namely February 14, 2020.

As a result of the Covid-19 pandemic, the net assets, financial position and results of operations could be lowered in the remainder of fiscal 2020 particularly as a result of the absence of customer orders, temporary plant closures and supply chain restrictions. In addition, deteriorations in the credit ratings of customers triggered by the Covid-19 pandemic could make it necessary to increase the allowances for trade receivables. Additional burdens stemming from the Covid-19 pandemic could also result from necessary impairments of non-financial assets as well as the deterioration of refinancing conditions in the capital market.

The aforementioned developments presented as an addendum to the financial statements prepared on February 14, 2020 have led to corresponding changes to the Report on Risks and Opportunities as well as on the Report on Expected Development that were made in the relevant chapters of the combined management report and accordingly identified as subsequent changes. The annual financial statements of Merck KGaA, Darmstadt, Germany, were changed on May 12, 2020 owing to the aforementioned impacts of the Covid-19 pandemic since these developments represent a transaction of particular significance which is to be classified as a value-relevant event within the meaning of section 285 No. 33 of the German Commercial Code (HGB). The adaptation of the combined management report gave rise to these consolidated financial statements.