Merck uses derivative financial instruments (hereinafter “derivatives”) to hedge and reduce risks from currency and interest rate positions. Merck uses marketable forward exchange contracts, options and interest rate swaps as hedging instruments. Depending on the nature of the hedged item, changes in the fair values of derivatives are recorded in the consolidated income statement either in the operating result or in the financial result. The strategy to hedge interest rate and foreign exchange rate fluctuations arising from forecast transactions and transactions already recognized in the balance sheet is set by a Merck Group risk committee, which meets on a regular basis. Extensive guidelines regulate the use of derivatives. There is a ban on speculation. Derivative transactions are subject to continuous risk management procedures. Trading, settlement and control functions are strictly separated. Derivatives are only entered into with banks that have a good credit rating. Related default risks are continuously monitored.
The following derivatives were held as of the balance sheet date:
| Nominal volume | Fair value | |||
|---|---|---|---|---|
| € million | Dec. 31, 2015 | Dec. 31, 2014 | Dec. 31, 2015 | Dec. 31, 2014 |
| Cash flow hedge | 2,161.0 | 10,041.8 | – 90.3 | 313.4 |
| Interest | – | 650.0 | – | – 99.9 |
| Currency | 2,161.0 | 9,391.8 | – 90.3 | 413.3 |
| Fair value hedge | – | – | – | – |
| Interest | – | – | – | – |
| Currency | – | – | – | – |
| No hedge accounting | 5,468.1 | 3,682.6 | – 103.1 | 9.4 |
| Interest | 1,100.0 | – | – 99.3 | – |
| Currency | 4,368.1 | 3,682.6 | – 3.8 | 9.4 |
| 7,629.1 | 13,724.4 | – 193.4 | 322.8 | |
Cash flow hedges include currency hedges in a nominal volume of € 1,386.6 million (2014: € 8,913.1 million) with a remaining term of up to one year and hedges in a nominal volume of € 774.4 million (2014: € 478.7 million) with a remaining term of more than one year. Of the interest rate hedges held in the prior year in the context of cash flow hedges in a total amount of € 650.0 million, € 100.0 million had a remaining term of up to one year and € 550.0 million had a remaining term of more than one year.
The nominal volume corresponds to the total of all nominal values of currency hedges (translated at the closing rate into euros) as well as all the nominal values of interest rate hedges. The fair value results from the actuarial valuation of the derivatives on the basis of quoted prices or current market data as of the balance sheet date provided by a recognized information service and the application of a discount for own credit risk or counterparty credit risk. Any offsetting effects from hedged items are not taken into account in the derivatives’ fair value.
The maturities of the derivatives (nominal volume) were as follows as of the balance sheet date:
|
€ million |
Remaining
maturity less than 1 year |
Remaining
maturity more than 1 year |
Total
Dec. 31, 2015 |
Remaining
maturity less than 1 year |
Remaining
maturity more than 1 year |
Total
Dec. 31, 2014 |
|---|---|---|---|---|---|---|
| Forward exchange contracts | 5,714.5 | 765.2 | 6,479.7 | 11,942.6 | 433.9 | 12,376.5 |
| Currency options | 40.2 | 9.2 | 49.4 | 653.1 | 44.8 | 697.9 |
| Interest rate swaps | – | 1,100.0 | 1,100.0 | 100.0 | 550.0 | 650.0 |
| 5,754.7 | 1,874.4 | 7,629.1 | 12,695.7 | 1,028.7 | 13,724.4 |
Currency hedging serves to economically protect the company from the foreign exchange risks of the following types of transaction:
Exchange rate fluctuations of mainly the following currencies against the euro were hedged:
| Nominal volume € million | Dec. 31, 2015 | Dec. 31, 2014 |
|---|---|---|
| USD | 3,673.8 | 10,233.5 |
| CNY | 480.2 | – |
| JPY | 458.3 | 920.8 |
| CHF | 401.9 | 431.2 |
| TWD | 343.2 | 255.5 |
| GBP | 311.6 | 383.6 |
Forecast transactions and firm purchase commitments in non- functional currency are hedged using forward exchange contracts and currency options which are due within the next 36 months. Overall, forecast transactions and firm purchase commitments in non-functional currency were hedged in the amount of € 1,920.8 million (2014: € 9,044.6 million). In 2014, a major portion related to the hedging of the U.S. dollar-denominated purchase price payment made for the acquisition of the Sigma-Aldrich Corporation, USA in 2015. The nominal amount of the forward exchange and currency option contracts for this purpose was US$ 9,900 million (€ 7,689 million). Based on the translation of the purchase price into euros at the exchange rate on the acquisition date, the hedge lowered the purchase price by € 1,380.3 billion.
All hedging transactions for forecast transactions and firm purchase commitments in non-functional currency represent cash flow hedges.
Intragroup financing as well as receivables and payables in non-functional currency are hedged exclusively using forward exchange contracts. Overall, balance sheet items amounting to € 4,608.3 million (2014: € 4,029.8 million) were hedged. In this context, the hedging transactions are largely purely economic hedges for which hedge accounting is not applied.
To fix the interest rate level of a bond issued in August 2015 for refinancing purposes with a volume of € 550 million, in 2012 and 2013 forward starting payer interest rate swaps were entered into with a nominal volume of € 550.0 million and interest payments from 2015 to 2022. Up until May 2015, these interest hedging relationships represented cash flow hedges. With entry into offsetting transactions in May 2015, the hedging relationship was terminated voluntarily. The original transactions as well as the offsetting transactions are now classified as “held for trading”. The changes in fair value are reflected in the income statement.
In 2015, the ineffective portion from hedge accounting amounted to € – 2.6 million. In the previous year, there was no ineffectiveness.
Market fluctuations with respect to foreign exchange and interest rates represent significant profit and cash flow risks for Merck. Merck aggregates these Group-wide risks and steers them centrally also by using derivatives. Merck uses scenario analyses to estimate existing risks of foreign exchange and interest rate fluctuations. Merck is not subject to any material risk concentration from financial transactions. The Report on Risks and Opportunities included in the combined management report provides further information on the management of financial risks.
Owing to its international business focus, Merck is exposed to foreign exchange-related transaction risks within the scope of both ordinary business and financing activities. Different strategies are used to limit or eliminate these risks. Foreign exchange risks from transactions already recognized on the balance sheet are eliminated as far as possible through the use of forward exchange contracts. Foreign exchange risks arising from forecast transactions are analyzed regularly and reduced if necessary through forward exchange contracts or currency options by applying the hedge accounting rules.
The Merck Group is exposed to currency translation risks since many Merck companies are located outside the eurozone. The financial statements of these companies are translated into euros. Exchange differences resulting from currency translation of the assets and liabilities of these companies are recognized in equity. These effects are not taken into consideration in the following tables.
The following table presents the net exposure of the Merck Group in relation to exchange rate fluctuations of the major currencies against the euro:
| € million | CHF | CNY | JPY | TWD | USD |
|---|---|---|---|---|---|
| Net exposure Dec. 31, 2015 | – 265.3 | 202.9 | 135.0 | 214.7 | 1,406.9 |
| Net exposure Dec. 31, 2014 | – 246.6 | 355.8 | 121.6 | 260.0 | 753.0 |
The net exposure by currency consists of the following components:
The following table shows the effects of exchange rate movements of the key currencies against the euro in relation to the net income and equity of the Group on the balance sheet date. The effects of planned cash flows of the next 12 months are not taken into consideration here. By contrast, the effects of cash flow hedges are taken into consideration in the equity of the Group and are included in the following table.
| € million Dec. 31, 2015 |
CHF | CNY | JPY | TWD | USD | |
|---|---|---|---|---|---|---|
| Exchange rate + 10% (Appreciation vs. €) | Consolidated income statement | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Equity | 12.0 | – 15.4 | – 15.3 | – 20.5 | – 108.7 | |
| Exchange rate – 10% (Depreciation vs. €) |
Consolidated income statement | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Equity | – 14.7 | 18.9 | 16.9 | 25.1 | 132.9 | |
| € million Dec. 31, 2014 |
CHF | CNY | JPY | TWD | USD | |
|---|---|---|---|---|---|---|
| Exchange rate + 10% (Appreciation vs. €) | Consolidated income statement | 0.0 | 0.0 | 0.1 | 0.0 | 0.0 |
| Equity | 0.0 | 0.0 | – 14.2 | – 10.8 | 844.1 | |
| Exchange rate – 10% (Depreciation vs. €) |
Consolidated income statement | 0.0 | 0.0 | 32.1 | 0.0 | 0.0 |
| Equity | 0.0 | 0.0 | 9.2 | 9.1 | – 681.7 | |
The Merck Group’s exposure to interest rate changes comprises the following:
| € million | Dec. 31, 2015 | Dec. 31, 2014 |
|---|---|---|
| Short-term or variable interest rate monetary deposits | 1,059.2 | 5,131.9 |
| Short-term or variable interest rate monetary borrowings | – 5,799.7 | – 2,169.0 |
| Net interest rate exposure | – 4,740.5 | 2,962.9 |
The effects of a parallel shift in the yield curve by + 100 or – 100 basis points on the consolidated income statement as well as on equity relative to all current or variable interest rate balance sheet items, all securities classified as “available for sale” as well as all derivatives are presented in the following table.
| € million | 2015 | 2014 | ||
|---|---|---|---|---|
| Change in market interest rate | + 100 basis points | – 100 basis points | + 100 basis points | – 100 basis points |
| Effects on consolidated income statement | – 47.4 | 23.4 | 21.3 | – 1.3 |
| Effects on equity | 0.0 | 0.0 | 40.5 | – 22.9 |
The scenario calculations here assumed that for material variable interest-bearing loan agreements, the risk-free interest rate component (EURIBOR) cannot fall below 0%.
Changes in market interest rates did not have effects on equity since an interest rate hedge for a bond issued in August 2015 for refinancing purposes was voluntarily terminated in the reporting period with the entry into an offsetting transaction. Additionally, the level of interest-bearing securities declined significantly in comparison with 2014 and was immaterial as of the balance sheet date.
The shares in publicly listed companies amounting to € 15.6 million (2014: € 1.3 million) are generally exposed to a risk of fluctuations in fair value. A 10% change in the value of the stock market would impact equity by € 1.6 million (2014: € 0.1 million). This change in value would initially be recognized in equity and then in profit or loss at the time of disposal.
The liquidity risk, meaning the risk that Merck cannot meet its payment obligations resulting from financial liabilities, is limited by establishing the required financial flexibility and by effective cash management. Information on bonds issued by the Merck Group and other sources of financing can be found in Note [28] “Financial liabilities / Capital management”.
Liquidity risks are monitored and reported to management on a regular basis.
Trade payables amounting to € 1,921.2 million (2014: € 1,539.4 million) had a remaining term of less than one year.
The following tables present the contractual cash flows such as repayments and interest on financial liabilities and derivative financial instruments with a negative fair value:
| Cash flows < 1 year | Cash flows 1 – 5 years | Cash flows > 5 years | |||||
|---|---|---|---|---|---|---|---|
| € million Dec. 31, 2015 | Carrying amount | Interest | Repayment | Interest | Repayment | Interest | Repayment |
| Bonds and commercial paper | 9,851.4 | 236.8 | 1,272.1 | 852.0 | 4,200.8 | 400.7 | 4,428.6 |
| Liabilities to banks | 3,006.0 | 18.8 | 2,135.4 | 13.0 | 619.2 | 1.7 | 250.0 |
| Liabilities to related parties | 577.8 | 0.2 | 577.8 | – | – | – | – |
| Loans from third parties and other financial liabilities | 89.2 | 5.7 | 26.6 | 10.6 | 59.5 | – | 3.1 |
| Liabilities from derivatives (financial transactions) | 183.7 | 17.3 | 79.9 | 65.2 | – | 26.0 | – |
| Financing leasing liabilities | 4.8 | 0.2 | 2.0 | 0.1 | 2.8 | – | – |
| 13,712.9 | 279.0 | 4,093.8 | 940.9 | 4,882.3 | 428.4 | 4,681.7 | |
| Cash flows < 1 year | Cash flows 1 – 5 years | Cash flows > 5 years | |||||
|---|---|---|---|---|---|---|---|
| € million Dec. 31, 2014 | Carrying amount | Interest | Repayment | Interest | Repayment | Interest | Repayment |
| Bonds and commercial paper | 4,624.2 | 170.9 | 1,450.0 | 442.3 | 342.1 | 197.6 | 2,850.0 |
| Liabilities to banks | 267.4 | 5.1 | 67.4 | 2.8 | 200.0 | – | – |
| Liabilities to related parties | 501.4 | 1.6 | 501.4 | – | – | – | – |
| Loans from third parties and other financial liabilities | 84.5 | 5.8 | 18.6 | 11.8 | 61.6 | – | 4.3 |
| Liabilities from derivatives (financial transactions) | 153.0 | 2.5 | 36.0 | 63.7 | 17.3 | 40.7 | – |
| Financing leasing liabilities | 6.5 | 0.2 | 2.8 | 0.2 | 3.7 | – | – |
| 5,637.0 | 186.1 | 2,076.2 | 520.8 | 624.7 | 238.3 | 2,854.3 | |
Merck is only subject to a relatively low credit risk. On the one hand, financial contracts are only entered into with banks and industrial companies with good credit ratings, and on the other hand, the broad-based business structure with a large number of different customers results in a diversification of credit risks within the Merck Group. The credit risk from financial contracts is monitored daily on the basis of rating information as well as market information on credit default swap rates.
The credit risk with customers is monitored using established credit management processes that take the individual customer risks into account. This is done in particular by continuously analyzing the age structure of trade accounts receivable. Merck continuously reviews and monitors open positions of all trading partners in the affected countries and takes risk-mitigating measures if necessary. If there is objective evidence that particular accounts receivable are fully or partially impaired, respective impairment losses are recognized to provide for credit defaults. On the balance sheet date, the theoretically maximum default risk corresponded to the net carrying amounts less any compensation from credit insurance.
There were no indications of impairment for financial assets neither past due nor impaired on the balance sheet date.
The following table presents the reconciliation of the balance sheet items to categories of financial instruments pursuant to the disclosures required by IFRS 7 and provides information on the measurement of fair value:
| Subsequent measurement according to IAS 39 | Subsequent measurement according to IAS 39 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| € million | Carrying amount Dec. 31, 2015 | Amortized cost | At cost | Fair value | Carrying amount according to IAS 17 | Non-financial items | Fair value, Dec. 31, 2015 | Carrying amount Dec. 31, 2014 | Amortized cost | At cost | Fair value | Carrying amount according to IAS 17 | Non-financial items | Fair value Dec. 31, 2014 |
| Assets | ||||||||||||||
| Cash and cash equivalents | 832.2 | 832.2 | – | – | – | – | 832.2 | 2,878.5 | 2,878.5 | – | – | – | – | 2,878.5 |
| Current financial assets | 227.0 | 32.7 | – | 194.3 | – | – | 2,199.4 | 24.6 | – | 2,174.8 | – | – | ||
| Held for trading (non-derivatives) | – | – | – | – | – | – | – | – | – | – | – | – | – | – |
| Derivatives without a hedging relationship | 32.7 | – | – | 32.7 | – | – | 32.7 | 39.8 | – | – | 39.8 | – | – | 39.8 |
| Held to maturity | 29.8 | 29.8 | – | – | – | – | 29.8 | 21.7 | 21.7 | – | – | – | – | 21.7 |
| Loans and receivables | 2.9 | 2.9 | – | – | – | – | 2.9 | 2.9 | 2.9 | – | – | – | – | 2.9 |
| Available for sale | 161.6 | – | – | 161.6 | – | – | 161.6 | 2,135.0 | – | – | 2,135.0 | – | – | 2,135.0 |
| Derivatives with a hedging relationship | – | – | – | – | – | – | – | – | – | – | – | – | – | – |
| Trade accounts receivable1 | 2,738.3 | 2,738.3 | – | – | – | – | 2,219.5 | 2,219.5 | – | – | – | – | ||
| Loans and receivables1 | 2,738.3 | 2,738.3 | – | – | – | – | 2,738.3 | 2,219.5 | 2,219.5 | – | – | – | – | 2,219.5 |
| Other current and non-current other assets1 | 624.0 | 155.1 | – | 13.8 | – | 455.1 | 1,282.8 | 168.5 | – | 471.4 | – | 642.9 | ||
| Derivatives without a hedging relationship | 1.6 | – | – | 1.6 | – | – | 1.6 | 0.7 | – | – | 0.7 | – | – | 0.7 |
| Loans and receivables1 | 155.1 | 155.1 | – | – | – | – | 155.1 | 168.5 | 168.5 | – | – | – | – | 168.5 |
| Derivatives with a hedging relationship | 12.2 | – | – | 12.2 | – | – | 12.2 | 470.7 | – | – | 470.7 | – | – | 470.7 |
| Non-financial items | 455.1 | – | – | – | – | 455.1 | 642.9 | – | – | – | – | 642.9 | ||
| Non-current financial assets | 131.5 | 16.5 | 82.0 | 33.0 | – | – | 94.4 | 13.7 | 66.9 | 13.8 | – | – | ||
| Derivatives without a hedging relationship | 4.6 | – | – | 4.6 | – | – | 4.6 | – | – | – | – | – | – | – |
| Held to maturity | – | – | – | – | – | – | – | – | – | – | – | – | – | – |
| Loans and receivables | 16.5 | 16.5 | – | – | – | – | 16.5 | 13.7 | 13.7 | – | – | – | – | 13.7 |
| Available for sale1 | 110.4 | – | 82.0 | 28.4 | – | – | 28.4 | 80.7 | – | 66.9 | 13.8 | – | – | 13.8 |
| Derivatives with a hedging relationship | – | – | – | – | – | – | – | – | – | – | – | – | – | – |
| Liabilities | ||||||||||||||
| Current and non-current financial liabilities | 13,712.9 | 13,524.4 | – | 183.7 | 4.8 | – | 5,637.0 | 5,477.5 | – | 153.0 | 6.5 | – | ||
| Derivatives without a hedging relationship | 138.5 | – | – | 138.5 | – | – | 138.5 | 25.4 | – | – | 25.4 | – | – | 25.4 |
| Other liabilities | 13,524.4 | 13,524.4 | – | – | – | – | 13,705.5 | 5,477.5 | 5,477.5 | – | – | – | – | 5,835.6 |
| Derivatives with a hedging relationship | 45.2 | – | – | 45.2 | – | – | 45.2 | 127.6 | – | – | 127.6 | – | – | 127.6 |
| Finance lease liabilities | 4.8 | – | – | – | 4.8 | – | 4.8 | 6.5 | – | – | – | 6.5 | – | 6.5 |
| Trade accounts payable | 1,921.2 | 1,921.2 | – | – | – | – | 1,539.4 | 1,539.4 | – | – | – | – | ||
| Other liabilities | 1,921.2 | 1,921.2 | – | – | – | – | 1,921.2 | 1,539.4 | 1,539.4 | – | – | – | – | 1,539.4 |
| Current and non-current other liabilities | 2,427.0 | 904.3 | – | 60.8 | – | 1,461.9 | 2,356.6 | 696.1 | – | 35.4 | – | 1,625.1 | ||
| Derivatives without a hedging relationship | 3.5 | – | – | 3.5 | – | – | 3.5 | 5.7 | – | – | 5.7 | – | – | 5.7 |
| Other liabilities | 904.3 | 904.3 | – | – | – | – | 904.3 | 696.1 | 696.1 | – | – | – | – | 696.1 |
| Derivatives with a hedging relationship | 57.3 | – | – | 57.3 | – | – | 57.3 | 29.7 | – | – | 29.7 | – | – | 29.7 |
| Non-financial items | 1,461.9 | – | – | – | – | 1,461.9 | 1,625.1 | – | – | – | – | 1,625.1 | ||
|
||||||||||||||
Net gains and losses on financial instruments mainly include measurement results from currency translation, fair value adjustments, impairments and reversals of impairments, disposal gains / losses as well as the recognition of premiums and discounts. Dividends and interest are not recognized in the net gains and losses on financial instruments, except for dividends and interest in the category “held for trading”. At Merck, the category “held for trading” only includes derivatives not in a hedging relationship.
The net gains or losses on financial instruments by category were as follows:
| Net gains or losses | |||||||
|---|---|---|---|---|---|---|---|
|
€ million
2015 |
Interest | Impairments | Reversals of impairment |
Fair value
adjustments |
Disposal gains / losses | ||
| Financial instrument of the category | |||||||
| Held for trading | – | – | – | – 14.9 | – | ||
| Held to maturity | 2.7 | – | – | – | – | ||
| Loans and receivables | 18.4 | – 84.1 | 40.2 | – | – | ||
| Available-for-sale | 10.9 | – | 7.2 | – | 17.5 | ||
| Other liabilities | – 314.1 | – | – | – | – | ||
| Net gains or losses | |||||
|---|---|---|---|---|---|
|
€ million
2014 |
Interest | Impairments | Reversals of impairment |
Fair value
adjustments |
Disposal gains / losses |
| Financial instrument of the category | |||||
| Held for trading | – | – | – | – 90.8 | – |
| Held to maturity | 1.4 | – | – | – | – |
| Loans and receivables | 18.2 | – 41.9 | 41.8 | – | – |
| Available-for-sale | 10.0 | – 4.4 | – | – | 0.2 |
| Other liabilities | – 141.4 | – | – | – | – |
In 2015, foreign exchange losses of € – 48.8 million resulting from receivables and payables in operating business, their economic hedging, as well as hedging of forecast transactions in operating business were recorded (2014: gains of € 53.3 million). Foreign exchange losses of € – 39.9 million resulting from financial balance sheet items, their economic hedging as well as fair value fluctuations of option contracts to hedge forecast transactions were recorded (2014: losses of € – 13.0 million).
The fair value of financial assets and liabilities is based on the official market prices and market values quoted on the balance sheet date (Level 1 assets and liabilities) as well as mathematical calculation models with inputs observable in the market on the balance sheet date (Level 2 assets and liabilities). Level 1 assets comprise stocks and bonds and are classified as “available-for-sale”, Level 1 liabilities comprise issued bonds and are classified as “other liabilities”. Level 2 assets and liabilities are primarily liabilities to banks classified as “other liabilities”, interest-bearing securities classified as “available-for-sale” as well as derivatives with and without hedging relationships. The fair value of interest-bearing securities as well as of the liabilities classified as “other liabilities” is determined by discounting future cash flows using market interest rates. The calculation of the fair value of forward exchange contracts and currency options uses market spot and forward rates as well as foreign exchange volatilities applying recognized mathematical principles. The fair value of interest rate swaps is determined with standard market valuation models using interest rate curves available in the market.
Level 3 assets comprise investments in equity instruments classified as “available-for-sale”. These relate to non-controlling interests in a partnership. The fair value of these interests was determined through an internally performed valuation using the discounted cash flow method. Expected future cash flows based on the company’s latest medium-term planning were taken into account. The planning relates to a period of five years. Cash flows for periods beyond this are included by calculating the terminal value using a long-term growth rate of 0.5%. The discount rate used (after tax) was 7.0%.
Level 3 liabilities consist of contingent purchase price components from the acquisition of Qlight Nanotech Ltd., Israel. These are reported as “other liabilities” and amounted to € 0.9 million as of the balance sheet date.
Counterparty credit risk is taken into consideration for all valuations. In the case of non-derivative financial instruments, such as other liabilities or interest-bearing securities, this is reflected using risk-adequate premiums on the discount rate, while discounts on market value (so-called credit valuation adjustments and debit valuation adjustments) are used for derivatives.
The fair value of available-for-sale investments in equity instruments with a carrying amount of € 82.0 million (2014: € 66.9 million) could not be reliably determined since there is no quoted price for an identical instrument in an active market and it is not possible to make a reliable estimate of fair value. They were measured at cost. Financial investments primarily include equity investments in various companies. There is currently no intention to sell these financial instruments. The Merck Group has no information on a market for these financial instruments.
The financial instruments recognized for at fair value in the balance sheet and the additionally disclosed fair values for financial instruments were determined as follows:
|
€ million
Dec. 31, 2015 |
Assets | Liabilities |
|---|---|---|
| Fair value determined by official prices and quoted market values (Level 1) | 178.1 | 9,021.8 |
| thereof available-for-sale | 178.1 | – |
| thereof other liabilities | – | 9,021.8 |
| Fair value determined using inputs observable in the market (Level 2) | 51.1 | 4,928.2 |
| thereof available-for-sale | – | – |
| thereof derivatives with a hedging relationship | 12.2 | 102.5 |
| thereof derivatives without a hedging relationship | 38.9 | 142.0 |
| thereof other liabilities | – | 4,683.7 |
| Fair value determined using inputs unobservable in the market (Level 3) | 11.9 | 0.9 |
| thereof available-for-sale | 11.9 | – |
| thereof other liabilities | – | 0.9 |
|
€ million
Dec. 31, 2014 |
Assets | Liabilities |
|---|---|---|
| Fair value determined by official prices and quoted market values (Level 1) | 1,178.6 | 4,970.2 |
| thereof available-for-sale | 1,178.6 | – |
| thereof other liabilities | – | 4,970.2 |
| Fair value determined using inputs observable in the market (Level 2) | 1,470.1 | 1,053.8 |
| thereof available-for-sale | 958.9 | – |
| thereof derivatives with a hedging relationship | 470.7 | 157.3 |
| thereof derivatives without a hedging relationship | 40.5 | 31.1 |
| thereof other liabilities | – | 865.4 |
| Fair value determined using inputs unobservable in the market (Level 3) | 11.3 | – |
| thereof available-for-sale | 11.3 | – |
The changes in financial assets allocated to Level 3 and measured at fair value were as follows:
| € million | 2015 | 2014 |
|---|---|---|
| Net book values as of January 1 | 11.3 | – |
| Additions due to acquisitions | – 0.9 | 10.8 |
| Transfers into Level 3 out of Level 1 / Level 2 | – | – |
| Fair value changes | ||
| Gains (+) / losses (–) recognized in consolidated income statement | – | – |
| Gains (+) / losses (–) recognized in consolidated statement of comprehensive income | 0.6 | 0.5 |
| Sales | – | – |
| Transfers out of Level 3 into Level 1 / Level 2 | – | – |
| Net book values as of December 31 | 11.0 | 11.3 |
Gains and losses from Level 3 assets are reported in other comprehensive income in the consolidated statement of comprehensive income under the item “fair value adjustments” related to “available-for-sale financial assets”. If the discount rate used for the determination of the fair value of the non-controlling interests in a partnership had been one percentage point higher, other comprehensive income would have decreased by € 2.3 million. By contrast, a decline in the discount rate by one percentage point would have increased other comprehensive income by € 3.1 million.
Balance sheet netting is not possible. From an economic perspective, netting is only possible for derivatives. This possibility results from the framework agreements on derivatives trading which Merck enters into with commercial banks. Merck does not offset financial assets and financial liabilities in its balance sheet.
The following table presents the potential netting volume of the reported derivative financial assets and liabilities:
| Potential netting volume | ||||||
|---|---|---|---|---|---|---|
|
€ million
Dec. 31, 2015 |
Gross
presentation |
Netting | Net presentation |
due to
master netting agreements |
due to financial collateral | Potential net amount |
| Derivative financial assets | 51.1 | – | 51.1 | 45.7 | – | 5.4 |
| Derivative financial liabilities | – 244.5 | – | – 244.5 | – 45.7 | – | – 198.8 |
| Potential netting volume | ||||||
|---|---|---|---|---|---|---|
| € million
Dec. 31, 2014 |
Gross presentation |
Netting | Net presentation | due to master netting agreements |
due to financial collateral | Potential net amount |
| Derivative financial assets | 511.2 | – | 511.2 | 70.5 | – | 440.7 |
| Derivative financial liabilities | – 188.4 | – | – 188.4 | – 70.5 | – | – 117.9 |
| € million | Dec. 31, 2015 | thereof affiliates | Dec. 31, 2014 | thereof affiliates |
|---|---|---|---|---|
| Contingent liabilities from legal disputes and tax matters | 64.0 | – | 54.3 | – |
| Guarantees | 0.8 | – | 17.1 | – |
| Warranties | 0.2 | – | 0.5 | – |
Contingent liabilities from legal disputes included potential obligations, for which the probability of an outflow of resources did not suffice to recognize a provision as of the balance sheet date. These mainly related to obligations under civil law as well as under antitrust and environmental law. The potential civil law obligations primarily related to potential liabilities to pay damages due to a legal dispute under antitrust law. It was possible that Merck would be subject to claims for compensation for damages asserted by health insurance companies due to excess drug prices in case of a valid judgment under antitrust law.
Contingent liabilities pertaining to tax matters included various non-German income and non-income related tax matters that mainly related to intragroup business transfers as well as legal disputes attributable to the determination of earnings under tax law, customs regulations and transfer pricing adjustments.
Other financial obligations comprised the following:
| € million | Dec. 31, 2015 | thereof affiliates | Dec. 31, 2014 | thereof affiliates |
|---|---|---|---|---|
| Obligation to purchase the entire share capital of Sigma-Aldrich Corporation | – | – | 13,975.0 | – |
| Obligations to acquire intangible assets and to pay due to collaboration agreements | 3,021.2 | – | 2,897.6 | – |
| Obligations to acquire property, plant and equipment | 108.8 | – | 55.3 | – |
| Future operating lease payments | 343.7 | – | 199.7 | – |
| Long-term purchase commitments | 383.6 | – | 138.4 | – |
| Other financial obligations | 34.7 | – | 30.8 | – |
| 3,892.0 | – | 17,296.8 | – |
In connection with the offer to acquire the Sigma-Aldrich Corporation, USA, which was announced by Merck on September 22, 2014, a contingent financial obligation amounting to € 13,975.0 million (US$ 16,985.2 million; based on the exchange rate on December 31, 2014) existed in 2014 to acquire the entire share capital of Sigma-Aldrich for a cash consideration.
Since the acquisition of Sigma-Aldrich was successfully completed on November 18, 2015, the obligation no longer existed on December 31, 2015.
Obligations to acquire intangible assets existed in particular owing to conditional purchase price components and within the scope of research and development collaborations. Here Merck has obligations to make milestone payments when certain objectives are reached. In the unlikely event that all contract partners achieve all milestones, Merck would be obligated to pay up to € 1,543.8 million (2014: € 1,494.8 million) for the acquisition of intangible assets.
Moreover, within the scope of collaboration agreements, individual research and development or commercialization budgets were contractually set upon the basis of which collaboration partners can commit Merck to make payments in the amount of up to € 1,447.4 million (2014: € 1,402.8 million).
The expected maturities of these obligations were as follows:
| € million | Dec. 31, 2015 | Dec. 31, 2014 |
|---|---|---|
| Obligations to acquire intangible assets and to pay due to collaboration agreements | ||
| within one year | 258.3 | 135.2 |
| in 1 – 5 years | 1,218.7 | 1,081.3 |
| more than 5 years | 1,544.2 | 1,681.1 |
| 3,021.2 | 2,897.6 |
Other financial obligations were recognized at nominal value.
The maturities of liabilities from lease agreements were as follows:
|
€ million
Dec. 31, 2015 |
within 1 year | 1 – 5 years | more than 5 years | Total |
|---|---|---|---|---|
| Present value of future payments from finance leases | 2.0 | 2.8 | – | 4.8 |
| Interest component of finance leases | 0.2 | 0.1 | – | 0.3 |
| Future finance lease payments | 2.2 | 2.9 | – | 5.1 |
| Future operating lease payments | 98.5 | 207.2 | 38.0 | 343.7 |
|
€ million
Dec. 31, 2014 |
within 1 year | 1 – 5 years | more than 5 years | Total |
|---|---|---|---|---|
| Present value of future payments from finance leases | 2.8 | 3.7 | – | 6.5 |
| Interest component of finance leases | 0.2 | 0.2 | – | 0.4 |
| Future finance lease payments | 3.0 | 3.9 | – | 6.9 |
| Future operating lease payments | 83.7 | 108.7 | 7.3 | 199.7 |
Operating leasing agreements related mainly to leasing arrangements to lease real estate, company fleet vehicles as well as operating and office equipment. The payments resulting from operating leasing agreements amounted to € 112.5 million (2014: € 91.8 million) and were recorded as an expense in the reporting period.
Personnel expenses comprised the following:
| € million | 2015 | 2014 |
|---|---|---|
| Wages and salaries | 2,992.8 | 2,630.9 |
| Compulsory social security contributions and special financial assistance | 431.6 | 376.6 |
| Pension expenses | 209.8 | 157.4 |
| 3,634.2 | 3,164.9 |
As of December 31, 2015, the Merck Group had 49,613 employees (2014: 39,639). The average number of employees during the year was 41,511 (2014: 38,930). The increase was mainly due to the acquisition of the Sigma-Aldrich Corporation, USA, which was completed on November 18, 2015.
The breakdown of personnel by function was as follows:
| Average number of employees | 2015 | 2014 |
|---|---|---|
| Production | 11,563 | 10,176 |
| Logistics | 2,581 | 2,207 |
| Marketing and Sales | 12,871 | 12,113 |
| Administration | 6,763 | 6,342 |
| Research and Development | 5,097 | 4,738 |
| Infrastructure and Other | 2,636 | 3,354 |
| 41,511 | 38,930 |
Material costs in 2015 amounted to € 1,736.8 million (2014: € 1,516.8 million) and were reported under cost of sales.
The costs of the auditors (KPMG) of the financial statements of the Merck Group consisted of the following:
| 2015 | 2014 | |||
|---|---|---|---|---|
| € million | Merck Group | thereof KPMG Germany | Merck Group | thereof KPMG Germany |
| Audits of financial statements | 7.9 | 2.2 | 5.4 | 1.6 |
| Other audit-related services | 1.0 | 0.8 | 0.6 | 0.5 |
| Tax consultancy services | 0.9 | 0.5 | 0.6 | 0.3 |
| Other services | 1.2 | 0.9 | 0.3 | 0.2 |
| 11.0 | 4.4 | 6.9 | 2.6 | |
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.merckgroup.com/investors ➞ corporate governance in March 2015 and thus made permanently available.
The following companies, which have been consolidated in these financial statements, have opted for exemption:
Allergopharma GmbH & Co. KG, Reinbek
Allergopharma Verwaltungs GmbH, Darmstadt
Biochrom GmbH, Berlin
Chemitra GmbH, Darmstadt
Litec-LLL GmbH, Greifswald
Merck Accounting Solutions & Services Europe GmbH, Darmstadt
Merck Consumer Health Holding GmbH, Darmstadt
Merck Export GmbH, Darmstadt
Merck Life Science GmbH, Eppelheim
Merck Selbstmedikation GmbH, Darmstadt
Merck Serono GmbH, Darmstadt
Merck Versicherungsvermittlung GmbH, Darmstadt
Related parties in respect of the Merck Group are E. Merck KG, Emanuel-Merck-Vermögens-KG and E. Merck Beteiligungen KG. In principle, direct or indirect subsidiaries of Merck KGaA, associates of the Merck Group, jointly controlled companies where the Merck Group is involved, as well as pension funds that are classified as funded 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, the Executive Board and the Board of Partners of E. Merck KG as well as close members of their families are also related parties.
As of December 31, 2015, there were liabilities by Merck Financial Services GmbH, Merck KGaA and Merck & Cie, Switzerland, to E. Merck KG in the amount of € 1,031.2 million (2014: € 926.9 million). Merck Financial Services GmbH had liabilities vis-à-vis Merck Capital Asset Management, Malta, amounting to € 0.1 million (2014: € 0.1 million). Moreover, as of December 31, 2015, Merck KGaA had receivables from E. Merck Beteiligungen KG in the amount of € 35.4 million (2014: € 76.5 million). The balances result mainly from the profit transfers by Merck & Cie, Switzerland, to E. Merck KG as well as the reciprocal profit transfers between Merck KGaA and E. Merck KG. They included financial payables of € 577.8 million (2014: € 501.4 million) which were subject to standard market interest rates. Neither collateral nor guarantees existed for any of the balances either in favor or to the disadvantage of Merck.
Moreover, as of December 31, 2015 Merck Serono SA, Switzerland, had a receivable from Calypso Biotech SA, Switzerland, amounting to € 1.2 million (2014: € 0.0 million) stemming from a convertible bond with a volume of CHF 1,350,000 and an annual coupon of 8% maturing on December 31, 2016.
From January to December 2015, Merck KGaA performed services for E. Merck KG with a value of € 0.9 million (2014: € 1.2 million), for E. Merck Beteiligungen KG with a value of € 0.3 million (2014: € 0.3 million), and for Emanuel-Merck-Vermögens-KG with a value of € 0.2 million (2014: € 0.3 million). During the same period, E. Merck KG performed services for Merck KGaA with a value of € 0.5 million (2014: € 0.5 million).
Business transactions with major subsidiaries were eliminated during consolidation. Information on pension funds that are classified as funded defined benefit plans in accordance with IAS 19 can be found in Note [26]. There were no further material transactions with these pension funds.
As was the case in 2014, there were no transactions between companies of the Merck Group and associates from January to December 2015. As in the previous year, companies of the Merck Group had no receivables or liabilities vis-à-vis associates as of December 31, 2015.
There were no material transactions such as, for example, the provision of services or the granting of loans, between companies of the Merck Group and members of the Executive Board or the Supervisory Board of Merck KGaA, the Executive Board or the Board of Partners of E. Merck KG or members of their immediate families.
The compensation of the Executive Board of Merck KGaA is paid by the general partner, E. Merck KG, and recorded as an expense in its income statement. For the period from January to December 2015, fixed salaries of € 6.5 million (2014: € 5.3 million), variable compensation of € 22.3 million (2014: € 18.3 million), and additional benefits of € 0.3 million (2014: € 0.2 million) were recorded for members of the Executive Board. Furthermore, additions to the provisions of E. Merck KG for the Long-Term Incentive Plan totaled € 9.9 million (2014: € 12.7 million), and additions to the pension provisions of E. Merck KG include current service costs of € 4.2 million (2014: € 2.1 million) for members of the Executive Board of Merck KGaA.
The compensation of the Supervisory Board amounting to € 881.0 thousand (2014: € 882.1 thousand) consisted of a fixed portion of € 822.5 thousand (2014: € 823.6 thousand) and meeting attendance compensation of € 58.5 thousand (2014: € 58.5 thousand).
Further individualized information and details can be found in the Compensation Report.
The Executive Board of Merck KGaA prepared the consolidated financial statements on February 18, 2016 and approved them for forwarding to the Supervisory Board. The Supervisory Board has the responsibility to examine the consolidated financial statements and to declare whether it approves them.
At the beginning of January, two contracts entered into with BioMarin Pharmaceutical Inc., USA (BioMarin), became effective. Firstly, the sale of the rights to Kuvan®, a drug used to treat the metabolic disorder known as phenylketonuria (PKU) was agreed. And secondly, Merck returned its option to develop and commercialize Peg-Pal to BioMarin. Based on these two agreements, in January 2016 Merck received an upfront payment of € 340 million for the sale of the rights to Kuvan® as well as an entitlement to milestone payments of up to € 185 million. More information can be found in Note [4] “Acquisitions, assets held for sale and disposal groups”.
Subsequent to the balance sheet date, no further events of special importance occurred that could have a material impact on the net assets, financial position and results of operations of the Merck Group.