Information on fair value measurement

(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:

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 debt instruments	Other short-term cash investments
Subsequent measurement at fair value through profit or loss
Equity instruments	Shares	Derived from active market	Quoted prices in an active market
Other debt instruments	Publicly-traded funds
Other debt instruments	Other short-term cash investments

Financial liabilities
Subsequent measurement at amortized cost
Financial debt	Bonds	Derived from active market	Quoted prices in an active market

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 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
Derivatives (without a hedging relationship)	Interest rate swaps	Use of recognized actuarial methods	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 liabilities
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
Derivatives (without a hedging relationship)	Interest rate swaps	Use of recognized actuarial methods	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 liabilities	Liabilities to banks and other loan liabilities	Discounting of future cash flows	Interest rates observable on the market

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)	Virtual power purchase agreements	Discounting of expected future cash flows	Electricity future price curves, expected electricity production volumes, discount factors
Contingent consideration	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 liabilities
Subsequent measurement at fair value through profit or loss
Derivatives (without a hedging relationship)	Hedging instrument for virtual power purchase agreements	Use of recognized actuarial methods	Electricity future price curves, expected electricity production volumes, discount factors
Contingent consideration	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 (credit valuation adjustments and debit valuation adjustments) were used for derivatives.

Transfers between the individual hierarchy levels at fair value are made at the end of the month in which the triggering event – for example an initial public offering – took place.

Equity investments in unlisted companies (Level 3)

The planning periods used to determine the fair value of equity investments in unlisted companies ranged from four to seven years (December 31, 2021: three to eight 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 9.0% (December 31, 2021: 1.0% and 9.0%). The applied average cost of capital (after tax) was 7.0% on December 31, 2022 (December 31, 2021: 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 plan, internal sales plans and sales plans of external industry services are used. The discount rate (after tax) of between 6.3% and 7.3% as of December 31, 2022 (December 31, 2021: 5.4% to 6.5%) 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 a subsidiary of Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, Germany, 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, 2022, the carrying amount was € 219 million (December 31, 2021: € 206 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:

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December 31, 2022
		Change in probability of regulatory approval
€ million		-10%	unchanged	10%
Change of discount rate	5.8%	-18	3	24
	6.3% (unchanged)	-21	–	20
	6.8%	-24	-3	17

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December 31, 2021
		Change in probability of regulatory approval
€ million		-10%	unchanged	10%
Change of discount rate	4.9%	-21	4	30
	5.4% (unchanged)	-25	–	25
	5.9%	-29	-4	20

The following table presents the carrying amounts and the fair values of the individual financial assets and liabilities as of December 31, 2022, for each individual financial instrument class pursuant to IFRS 9:

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December 31, 2022

Carrying amount

Fair value¹

€ million

Consolidated notes

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

1,854

–

1,854

Trade and other receivables (excluding leasing receivables)

4,087

4,112

Other debt instruments

122

126

Subsequent measurement at fair value through other comprehensive income

–

Equity instruments

–

516

102

–

415

516

Trade and other receivables

–

Other debt instruments

–

Subsequent measurement at fair value through profit or loss

–

Equity instruments

–

Contingent considerations

235

250

–

250

Other debt instruments

154

182

–

182

Derivatives without a hedging relationship

36, 39

–

Derivatives with a hedging relationship

36, 39

–

Lease receivables (measured in accordance with IFRS 16)²

Total

6,289

984

7,273

271

833

1,174

Financial debt

Subsequent measurement at amortized cost

Trade payables and other liabilities

2,498

–

2,498

Financial debt

1,073

8,834

9,907

7,989

1,188

–

9,177

Other financial liabilities

1,240

123

1,364

Subsequent measurement at fair value through profit or loss

Contingent considerations

–

Derivatives without a hedging relationship

37, 38, 39

–

Derivatives with a hedging relationship

38, 39

–

Refund liabilities

912

–

912

Lease liabilities (measured in accordance with IFRS 16)²

125

366

491

Total

5,913

9,347

15,260

7,989

1,248

9,265

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, 2021, for each individual financial instrument class pursuant to IFRS 9:

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December 31, 2021

Carrying amount

Fair value¹

€ million

Consolidated notes

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

1,899

–

1,899

Trade and other receivables (excluding leasing receivables)

3,622

3,646

Other debt instruments

Subsequent measurement at fair value through other comprehensive income

Equity instruments

–

462

117

–

345

462

Trade and other receivables

–

Other debt instruments

–

Subsequent measurement at fair value through profit or loss

Contingent considerations

–

271

–

271

Other debt instruments

149

161

–

161

Derivatives without a hedging relationship

36, 39

–

Derivatives with a hedging relationship

36, 39

–

Lease receivables (measured in accordance with IFRS 16)²

Total

5,719

937

6,656

244

738

1,044

Financial debt

Subsequent measurement at amortized cost

Trade payables and other liabilities

2,380

–

2,380

Financial debt

2,379

7,928

10,307

9,655

1,213

–

10,868

Other financial liabilities

1,110

1,166

Subsequent measurement at fair value through profit or loss

Contingent considerations

–

Derivatives without a hedging relationship

37, 38, 39

–

Derivatives with a hedging relationship

38, 39

–

Refund liabilities

839

–

839

Lease liabilities (measured in accordance with IFRS 16)²

117

342

459

Total

6,942

8,375

15,318

9,655

1,330

11,034

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 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 in the previous year:

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2021
	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	Other debt instruments	Contingent consideration	Derivatives without a hedging relationship	Equity instruments	Trade and other receivables	Contingent consideration	Derivatives without a hedging relationship	Total
Net carrying amounts as of Jan. 1, 2021	33	260	8	255	19	-26	-2	547
Additions	46	5	4	48	38	–	–	141
Transfers into Level 3 from Level 1/Level 2	–	–	–	–	–	–	–	–
Fair value changes
Gains (+)/losses (–) recognized in the consolidated income statement (other operating result)	-8	-12	10		–	-10	-7	-27
thereof: attributable to assets/liabilities held as of the balance sheet date	-8	-12	10		–	-10	-7	-27
Gains (+)/losses (–) recognized in the consolidated income statement (financial income and expenses)	15	18	1		–	-2	–	32
thereof: attributable to assets/liabilities held as of the balance sheet date	15	18	1		–	-2	–	32
Gains (+)/losses (–) recognized in other comprehensive income				91	–			91
Currency translation difference	2	–	1	–	–	-2	–	1
Disposals	-1	–	–	-13	-37	–	–	-50
Transfers out of Level 3 into Level 1/Level 2	–	–	–	-45	–	–	–	-45
Other	-8	–	–	8	–	–	–	–
Net carrying amounts as of Dec. 31, 2021	78	271	24	345	20	-39	-10	689

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 in fiscal 2022:

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2022
	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	Other debt instruments	Contingent consideration	Derivatives without a hedging relationship	Equity instruments	Trade and other receivables	Contingent consideration	Derivatives without a hedging relationship	Total
Net carrying amounts as of Jan. 1, 2022	78	271	24	345	20	-39	-10	689
Additions	27	–	–	87	70	–	–	184
Transfers into Level 3 from Level 1/Level 2	–	–	–	–	–	–	–	–
Fair value changes
Gains (+)/losses (–) recognized in the consolidated income statement (other operating result)	17	15	30		–	30	-13	79
thereof: attributable to assets/liabilities held as of the balance sheet date	17	7	30		–	4	-13	44
Gains (+)/losses (–) recognized in the consolidated income statement (financial income and expenses)	-4	10	1		–	-1	–	6
thereof: attributable to assets/liabilities held as of the balance sheet date	-4	9	1		–	–	–	6
Gains (+)/losses (–) recognized in other comprehensive income				-11	–			-11
Currency translation difference	2	–	2	-1	–	-3	–	–
Disposals	-21	-46	-4	-1	-68	10	–	-131
Transfers out of Level 3 into Level 1/Level 2	–	–	–	-11	–	–	–	-11
Other	-7	–	–	7	–	–	–	–
Net carrying amounts as of Dec. 31, 2022	93	250	53	415	22	-4	-23	806

Additions during the reporting period primarily comprised acquisitions of equity instruments and trade accounts receivable that are essentially designated to be sold under factoring agreements. Disposals during the reporting period related in particular to advance payments received in connection with trade accounts receivable under factoring agreements. 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”.

The following equity instruments measured at fair value through other comprehensive income were disposed of in 2022 and 2021:

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€ 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

2022¹

M Ventures Portfoliogesellschaften

Portfolio adjustment/restructuring and full acquisition by third parties

-19

2021¹

M Ventures Portfoliogesellschaften

Portfolio adjustment/restructuring and full acquisition by third parties

Precigen, Inc., USA

Portfolio adjustment/restructuring

–

¹	Disposals due to liquidations are not included.

M Ventures portfolio companies mainly include minority interests in listed and 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.

Capital Structure, Investments, and Financing Activities

(43) Information on fair value measurement

Accounting and Measurement Policies

Information on fair value measurement

Significant discretionary decisions and sources of estimation uncertainty

Equity investments in unlisted companies

Assets from contingent consideration

Related Links

Capital Structure, Investments, and Financing Activities

(43) Information on fair value measurement

Accounting and Measurement Policies

Information on fair value measurement

Significant discretionary decisions and sources of estimation uncertainty

Equity investments in unlisted companies

Assets from contingent consideration

Services

Related Links

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