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Other Disclosures

(45) Effects from new accounting standards and other presentation changes

Changes to accounting and measurement policies resulting from IFRS 16 “Leases”

The Group applied the accounting standard IFRS 16 “Leases” for the first time as of January 1, 2019. IFRS 16 replaces IAS 17 “Leases” and the corresponding interpretations. For transitioning to IFRS 16, the Group applied the modified retrospective method with recognition of the cumulative transition effect as of January 1, 2019. Prior-year comparative figures were not restated.

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

Lease liabilities – recognized for leases with the Group as a lessee – are to be measured at the present value of the outstanding lease payments in accordance with IFRS 16. The weighted average interest rate used to discount the leases existing as of January 1, 2019, amounted to 2.8%. The present value of outstanding lease payments adjusted for directly attributable costs was also used to recognize the right-of-use asset. Prepayments and liabilities related to previous periods were also still taken into consideration. When remaining lease terms are determined at first-time application, the probability that purchase, extension, or termination options will be exercised is assessed based on current knowledge. These assessments were discretionary.

According to IFRS 16, right-of-use assets are recognized within property, plant and equipment, using the same line item that would have been used if the underlying asset had been purchased by the Group. Interest expenses from the unwinding of the discount on lease liabilities are recognized in the financial result in accordance with IFRS 16; this differs from the previous accounting method in accordance with IAS 17, according to which operating lease expenses were recognized in full in the respective functional costs.

This had the following effects on the consolidated balance sheet: 

4.19 KBEXCEL
€ million Jan. 1, 2019
Property, plant and equipment  
Land, land rights, and buildings 384
Plant and machinery 17
Other facilities, operating and office equipment 67
Total right-of-use assets 467
   
Other current non-financial assets -2
   
Non-current financial debt  
Lease liabilities 349
Current financial debt  
Lease liabilities 116
Total lease liabilities 465

The following shows a reconciliation from the payment obligation for operating leases (IAS 17) as of December 31, 2018, to the opening balance for lease liabilities as of January 1, 2019:

4.46 KBEXCEL
€ million Jan. 1, 2019
Payment obligations for operating leases as of December 31, 2018 (IAS 17)1 561
Practical expedient for leasing low-value assets -54
Minimum lease payments (nominal value) of the liabilities from finance leases as of December 31, 2018 4
Variable lease payments depending on an index or an installment 19
Lease payments based on renewal options classified as sufficiently probable as of January 1, 2019 1
Lease payments based on termination options classified as not sufficiently probable as of January 1, 2019 27
Service agreements outside of the scope of IFRS 16 -33
Undiscounted lease liabilities as of January 1, 2019 525
Discount -56
Lease liability as of January 1, 2019 469
Present value of the lease liabilities from finance leases as of December 31, 2018 -4
Additional lease liabilities from the first-time application of IFRS 16 as of January 1, 2019 465
1 Previous year’s figure was restated.

 The Group made use of the following practical expedients of IFRS 16:

  • right-of-use assets, including the corresponding liabilities, from leases of low-value assets are not be recognized in the consolidated balance sheet;
  • leases of intangible assets within the scope of IAS 38 are not recognized in accordance with IFRS 16;
  • for right-of-use assets – except land, land rights, and buildings – the Group does not separate non-lease components from lease components;
  • leases that were previously subject to IAS 17 and the corresponding interpretations will continue to be treated as leases under IFRS 16;
  • at first-time application, no impairment tests for right-of-use assets were carried out – instead, the Group charged provisions for onerous contracts against the respective right-of-use assets;
  • at first-time application, no impairment tests for right-of-use assets were carried out – instead, the Group charged provisions for onerous contracts against the respective right-of-use assets;
  • if renewal or termination options existed, the term was determined retroactively;
  • for right-of-use assets and the lease liabilities of leases classified as finance leases under IAS 17, the carrying amounts were retained on the date of first-time application.

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

Other presentational changes

To improve comparability and transparency, the presentation of functional costs in the consolidated income statement and the consolidated balance sheet classification were adjusted. The changes in the consolidated income statement concern the functional presentation of expenses and income from so-called “adjustments” which were previously included in other operating income and other operating expenses. The “adjustments” are now presented directly in the respective functional cost in order to make the connection to functional cost of the relevant expenses and income directly apparent. In the consolidated balance sheet, the other assets and other liabilities are assigned to financial and non-financial assets and liabilities in accordance with their nature. Contract assets are now presented as a separate balance sheet item. Furthermore, trade accounts receivable and other receivables were combined. Under Group equity, reserves were divided into capital reserves and retained earnings.

The restated 2018 comparative figures in the consolidated income statement and consolidated balance sheet can be seen in the following tables.

Effects of new accounting standards and other presentation changes in the consolidated income statement and the consolidated balance sheet

The following table shows the effects of the aforementioned changes to accounting and measurement policies on the consolidated balance sheet.

10.56 KBEXCEL  
                 
Dec. 31, 2018 Reclassification Reclassification Reclassification Reclassification Dec. 31, 2018 Application of IFRS 16 Jan. 1, 2019
€ million (as reported) Receivables/liabilities Derivatives Non-financial assets/liabilities Equity/reserves (after reclassification)   (after adjustment)
Non-current assets                
Goodwill 13,764 13,764 13,764
Other intangible assets 7,237 7,237 7,237
Property, plant and equipment 4,811 4,811 467 5,278
Other non-current financial assets 610 46 656 656
Other non-current receivables   17 17 17
Other non-current non-financial assets   76 –  76 76
Other non-current assets 138 -17 -46 -76 –       
Deferred tax assets 1,091 1,091 1,091
  27,652 27,652 467 28,119
Current assets                
Inventories 2,764 2,764 2,764
Trade accounts receivable 2,931 -2,931      
Trade and other current receivables   3,226 3,226 3,226
Contract assets   52 52 52
Other current financial assets 24 4 29 29
Other current non-financial assets   536 536 -2 534
Other current assets 886 -295 -4 -587        
Income tax receivables 460 460 460
Cash and cash equivalents 2,170 2,170 2,170
  9,236 9,236 -2 9,234
Total assets 36,888 36,888 465 37,353
                 
Total equity                
Equity capital 565 565 565
Reserves 15,006 -15,006      
Capital reserves   3,814 3,814 3,814
Retained earnings   11,192 11,192 11,192
Gains/losses recognized in equity 1,629 1,629 1,629
Equity attributable to shareholders of Merck KGaA, Darmstadt, Germany 17,200 17,200 17,200
Non-controlling interests 33 33   33
  17,233 17,233 17,233
Non-current liabilities                
Provisions for pensions and other post-employment benefits 2,336 2,336 2,336
Other non-current provisions 780 780 780
Non-current financial debt 6,681 6,681 349 7,030
Other non-current financial liabilities   13 20 33 33
Other non-current non-financial liabilities   19 19 19
Other non-current liabilities 52 -13 -20 -19      
Deferred tax liabilities 1,288 1,288 1,288
  11,138 11,138 349 11,487
Current liabilities                
Current provisions 600 600 –  600
Current financial debt 2,215 2,215 116 2,331
Other current financial liabilities   1,019 58 1,077 1,077
Trade and other current payables 1,766 1,766 1,766
Refund liabilities 472 472 472
Income tax liabilities 1,176 1,176 1,176
Other current non-financial liabilities   1,211 1,211 1,211
Other current liabilities 2,288 -1,019 -58 -1,211      
  8,517 8,517 116 8,633
Total equity and liabilities 36,888 36,888 465 37,353
4.64 KBEXCEL  
Consolidated income statement
   
2018
€ million as reported changes in presentation adjusted
Net sales 14,836 14,836
Cost of sales -5,382 -5,382
Gross profit 9,454 9,454
Marketing and selling expenses -4,384 -13 -4,396
Administration expenses -993 -190 -1,183
Research and development costs -2,225 -2 -2,227
Other operating income and expenses -126 205 79
Operating result (EBIT)1 1,727 1,727
1 Not defined by International Financial Reporting Standards (IFRSs).
4.64 KBEXCEL  
Healthcare results of operations
   
2018
€ million as reported changes in presentation adjusted
Net sales 6,246 6,246
Cost of sales -1,425 -1,425
Gross profit 4,820 4,820
Marketing and selling expenses -2,339 -10 -2,349
Administration expenses -301 -28 -329
Research and development costs -1,686 -1 -1,687
Other operating income and expenses 237 39 276
Operating result (EBIT)1 731 731
1 Not defined by International Financial Reporting Standards (IFRSs).
4.65 KBEXCEL
Life Science results of operations
       
  2018
€ million as reported changes in presentation adjusted
Net sales 6,185 6,185
Cost of sales -2,723 -2,723
Gross profit 3,463 3,463
Marketing and selling expenses -1,775 -2 -1,777
Administration expenses -282 -52 -335
Research and development costs -249 -1 -251
Other operating income and expenses -121 56 -65
Operating result (EBIT)1 1,036 1,036
1 Not defined by International Financial Reporting Standards (IFRSs).
4.61 KBEXCEL
Performance Materials results of operations
       
  2018
€ million as reported changes in presentation adjusted
Net sales 2,406 2,406
Cost of sales -1,231 -1,231
Gross profit 1,175 1,175
Marketing and selling expenses -255 -255
Administration expenses -90 -17 -107
Research and development costs -242 -242
Other operating income and expenses -81 16 -64
Operating result (EBIT)1 508 508
1 Not defined by International Financial Reporting Standards (IFRSs).

Accounting and measurement policies

Related parties in respect of the Group are E. Merck KG, Darmstadt, Germany, Emanuel-Merck-Vermögens-KG, Darmstadt, Germany, and E. Merck Beteiligungen KG, Darmstadt, Germany. Furthermore, direct or indirect subsidiaries of Merck KGaA, Darmstadt, Germany, associates of the Group, jointly controlled companies where the Group is involved, as well as pension funds that are classified as defined benefit plans in accordance with IAS 19 are also related parties within the meaning of IAS 24. Members of the Executive Board and the Supervisory Board of Merck KGaA, Darmstadt, Germany, the Executive Board and the Board of Partners of E. Merck KG, Darmstadt, Germany, as well as close members of their families are also related parties, as are companies controlled by this group of persons.

As of December 31, 2019, there were liabilities by Merck Financial Services GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, Merck KGaA, Darmstadt, Germany, and Merck & Cie, Switzerland, a subsidiary of Merck KGaA, Darmstadt, Germany, to E. Merck KG, Darmstadt, Germany, in the amount of € 1,320.0 million (December 31, 2018: € 1,331.6 million). The balances result mainly from mutual profit transfers between Merck KGaA, Darmstadt, Germany, and E. Merck KG, Darmstadt, Germany, as well as the profit transfer by Merck & Cie, Switzerland, a subsidiary of Merck KGaA, Darmstadt, Germany, to E. Merck KG, Darmstadt, Germany. These included financial liabilities of € 808.4 million (December 31, 2018: € 820.8 million), subject to standard market conditions. Neither collateral nor guarantees existed for any of the balances either in favor or to the disadvantage of the Group.

From January to December 2019, Merck KGaA, Darmstadt, Germany, performed services for E. Merck KG, Darmstadt, Germany, with a value of € 1.2 million (2018: € 1.0 million) and for E. Merck Beteiligungen KG, Darmstadt, Germany, with a value of € 0.3 million (2018: € 0.3 million); Merck Real Estate GmbH, a subsidiary of Merck KGaA, Darmstadt, Germany, performed services for Emanuel-Merck-Vermögens-KG, Darmstadt, Germany, with a value of € 0.2 million (2018: € 0.0 million). During the same period, E. Merck KG, Darmstadt, Germany, performed services for Merck KGaA, Darmstadt, Germany, with a value of € 0.5 million (2018: € 0.5 million).

As of December 31, 2019, there were receivables of € 5.4 million (December 31, 2018: € 12.0 million) and liabilities of € 5.9 million (December 31, 2018: € 10.1 million) vis-à-vis non-consolidated subsidiaries. From January to December 2019, the Group generated revenues of € 0.1 million (December 31, 2018: € 0.1 million) with these companies. During the same period, expenses amounting to € 0.3 million (December 31, 2018: € 0.3 million) were incurred as a result of transactions with these companies.

Between January and December 2019, sales of € 0.0 million (2018: € 0.7 million) from supplies of goods resulted from transactions with Altmann-Analytik GmbH & Co. KG, Munich, whose managing director was a member of the Supervisory Board of Merck KGaA, Darmstadt, Germany, until April 26, 2019, and who also served as a member of the Board of Partners of E. Merck KG, Darmstadt, Germany, until January 27, 2019. In addition, there were receivables of € 0.0 million vis-à-vis this company as of December 31, 2019 (December 31, 2018: € 0.1 million).

Information on pension funds that are classified as defined benefit plans in accordance with IAS 19 can be found in Note (32) “Provisions for pensions and other post-employment benefits”.

Information on Executive Board and Supervisory Board compensation can be found in Note (47) “Executive Board and Supervisory Board compensation”. Activities above and beyond those set forth in Note (47) such as the provision of services or the granting of loans, between companies of the Group and members of the Executive Board or the Supervisory Board of Merck KGaA, Darmstadt, Germany, the Executive Board or the Board of Partners of E. Merck KG, Darmstadt, Germany, or members of their immediate families neither took place in 2019 nor 2018.

(47) Executive Board and Supervisory Board compensation

The compensation of the Executive Board of Merck KGaA, Darmstadt, Germany, is basically paid by the general partner, E. Merck KG, Darmstadt, Germany. From January to December 2019, companies included in these consolidated financial statements recognized expenses of € 3.8 million (2018: € 3.2 million) for services rendered by members of the Executive Board of Merck KGaA, Darmstadt, Germany, at these companies.

From January to December 2019, fixed salaries of € 5.6 million (2018: € 5.9 million), variable compensation of € 15.3 million (2018: € 17.2 million), and additional benefits of € 0.8 million (2018: € 0.4 million) were recorded by E. Merck KG, Darmstadt, Germany, and by companies included in these consolidated financial statements for members of the Executive Board of Merck KGaA, Darmstadt, Germany. Furthermore, additions to provisions at these companies also included expenses of € 7.1 million (2018: € 15.9 million) for the long-term incentive plan, and additions to pension provisions included current service costs of € 3.0 million (2018: € 3.1 million).

The compensation of the Supervisory Board amounting to € 880.8 thousand (2018: € 869.0 thousand) consisted of a fixed portion of € 823.8 thousand (2018: € 822.5 thousand) and meeting attendance compensation of € 57.0 thousand (2018: € 46.5 thousand).

Further individualized information and details can be found in the Compensation Report.

(48) Auditor’s fees

The costs for the auditors (KPMG) of the financial statements of the Group consisted of the following:

9.41 KBEXCEL
  2019 2018
€ million Group thereof:
KPMG AG
Wirtschafts-
prüfungs-
gesellschaft,
Germany
Group thereof:
KPMG AG
Wirtschafts-
prüfungs-
gesellschaft,
Germany
Audits of financial statements 9.6 2.8 10.0 3.5
Other audit-related services 0.7 0.3 0.4 0.2
Tax consultancy services 0.4 0.1 0.9 0.4
Other services 0.3 0.1
Total 11.0 3.3 11.3 4.1

Other audit-related services pertain to various statutory or contractually agreed audits. Tax consultancy services encompass services in connection with the preparation of tax returns for employees delegated abroad. Other services pertained to other consultancy services in regulatory and buisness matters. 

(49) Corporate governance

The Statement of Compliance in accordance with section 161 of the German Stock Corporation Act (Aktiengesetz) was published in the corporate governance section of the website www.emdgroup.com/ investors → Corporate governance in March 2019 and thus made permanently available.

(50) Information on preparation and approval

The Executive Board of Merck KGaA, Darmstadt, Germany, prepared the consolidated financial statements on February 14, 2020, and approved them for forwarding to the Supervisory Board. The Supervisory Board is responsible for the examination of the consolidated financial statements and declaring whether it approves them.

Subsequent to February 14, 2020, the impact of the Covid-19 situation created the need to adapt the consolidated financial statements.

Accordingly, the consolidated financial statements were amended on May 12, 2020 and approved for forwarding to the Supervisory Board.