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Notes to the Consolidated Financial Statements

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Notes to the Consolidated Financial Statements 206 Consolidated Financial Statements Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements General Disclosures (1) Company information • Amendment to IAS 40 ‟Investment Property” • Amendment to IFRS 2 ‟Share-based payment” The accompanying consolidated financial statements as of Decem- • Amendment to IFRS 4 ‟Insurance Contracts” ber 31, 2018, have been prepared with MERCK Kommanditgesellschaft • Amendments to IFRS 15 ”Revenue from Contracts with Customers” auf Aktien (Merck KGaA, Darmstadt, Germany), Frankfurter Strasse • Annual Improvements to IFRS 2014 – 2016 Cycle: Amendments to 250, 64293 Darmstadt, Germany, as parent company. Merck KGaA, IFRS 1 ‟First-time Adoption of International Financial Reporting Darmstadt, Germany, is registered under HRB 6164 with the Commer- Standards” and to IAS 28 ‟Investments in Associates and Joint cial Register of Darmstadt. In accordance with the provisions of the Ventures” German financial reporting disclosure law (Publizitätsgesetz), con- solidated financial statements are also prepared for E. Merck Kom- Please refer to Note (49) ‟Effects from new accounting standards manditgesellschaft (E. Merck KG, Darmstadt, Germany), Darmstadt, and other presentation and measurement changes” for further details Germany, the ultimate parent company and general partner of on first-time application effects of IFRS 9 and IFRS 15. Note (49) Merck KGaA, Darmstadt, Germany, with an equity interest of 70.274% also comprises details on the following effects: adjustments of the as of December 31, 2018 (December 31, 2017: 70.274%). These consolidated balance sheet as of January 1, 2018, resulting from the consolidated financial statements include Merck KGaA, Darmstadt, application of IAS 29 ‟Financial Reporting in Hyperinflationary Econ- Germany, and its subsidiaries. The authoritative German versions of omies” regarding Argentina, disclosure adjustments for interest and these financial statements are filed with the German Federal Gazette penalties related to income taxes, and adjustments of the consolidated (Bundesanzeiger) and can be accessed at www.bundesanzeiger.de. income statement according to IFRS 5, effective for 2017, in connec- tion with the disposal of the Consumer Health business. The other new regulations applicable for the first time in fiscal (2) Reporting principles 2018 did not have a material impact on the consolidated financial statements. These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards in Regulations applicable as of fiscal 2019 force on the reporting date as issued by the International Accounting The following standards will take effect as of fiscal 2019: Standards Board (IFRS and IAS) and the IFRS Interpretations Com- • IFRS 16 ‟Leases” mittee (IFRIC and SIC) and as adopted by the European Union as • IFRIC 23 ‟Uncertainty over Income Tax Treatments” well as the additionally applicable provisions of section 315e of the • Amendment to IAS 28 ‟Investments in Associates and Joint Ventures” German Commercial Code (HGB). The fiscal year corresponds to the • Amendment to IFRS 9 ‟Financial Instruments” calendar year. These financial statements have been prepared in euros, the reporting currency. The figures reported in the consoli- We did not opt for early application of any of these standards. With dated financial statements have been rounded, which may lead to the exception of IFRS 16, none of these rules is expected to have a individual values not adding up to the totals presented. significant effect on the consolidated financial statements. The accounting and measurement policies used in the consolidated financial statements are presented in Notes (50) ‟Measurement pol- IFRS 16 ‟Leases” replaces IAS 17 ‟Leases” and the corresponding icies” to (69) ‟Share-based compensation programs”. interpretations. The Group applies the modified retrospective method to implement IFRS 16. The cumulative transition effects will be rec- Regulations applicable as of fiscal 2018 and other presentation ognized as at the date of first-time application (January 1, 2019). and measurement changes Previous-year figures will not be restated. The following regulations take effect as of fiscal 2018: • IFRS 9 ‟Financial Instruments” • IFRS 15 ‟Revenue from Contracts with Customers” • IFRIC 22 ‟Foreign Currency Transactions and Advance Consideration” Consolidated Financial Statements Notes to the Consolidated Financial Statements 207 IFRS 16 introduces a uniform lessee accounting model that requires relating to fiscal 2018 are taken into account. When remaining lease lessees to recognize all leases in the consolidated balance sheet. This terms are determined at first-time application, the probability that model mandates that right-of-use assets be recognized for identified purchase, extension, or termination options will be exercised is assets and lease liabilities recognized for entered payment obliga- assessed based on the latest insights. These assessments were dis- tions. The new lease accounting regulations affect the Group as a cretionary. lessee, in particular regarding leased real estate and vehicles. The According to IFRS 16, right-of-use assets are recognized within lessor accounting regulations remain largely unchanged; this business property, plant and equipment, using the same line item that would has no material relevance for the Group. have been used if the underlying asset had been purchased by the Furthermore, the Groups’s consolidated financial statements will Group. Going forward, interest expenses from the unwinding of the not be affected by the new sale-and-lease-back regulations intro- discount on lease liabilities are recognized in the financial result; this duced per IFRS 16. differs from the previous accounting method, according to which Lease liabilities – recognized for leases with the Group as a lessee – operating lease expenses were recognized in full in the respective are measured at the present value of the future lease payments, functional costs. discounted using the interest rate implicit in the lease, or the relevant At the time these consolidated financial statements were pre- incremental borrowing rate. The resulting amount is also used to pared, and based on the knowledge and contractual status at that recognize the right-of-use asset, adjusted by directly attributable time, the Group expected the following impact on financial position costs, if applicable. Furthermore, prepayments as well as liabilities and performance from the application of IFRS 16: Consolidated Balance Sheet The Group carried out a Group-wide analysis to establish the projected impact from the first-time ap- plication of IFRS 16. As of January 1, 2019, an increase in lease liabilities and corresponding right-of- use assets in the amount of € 470 million will be recognized. Financial liabilities will increase by 5.3% accordingly. As a result, the Groups’s equity ratio will decline by about one percentage point (0.6%) according to our projections. The right-of-use assets to be recognized as of first-time application ofIFRS 16 affect the following items within property, plant and equipment: € million Non-current assets January 1, 2019 Land, land rights and buildings, including buildings on third-party land € ~ 385 million Plant and machinery € ~ 15 million Other facilities, operating and office equipment € ~ 70 million Consolidated Income Statement Based on the leasing portfolio held at first-time application (January 1, 2019) and the latest contractual status, we expect for fiscal 2019 depreciation of about € 120 million, and corresponding interest expenses of about € 10 million. To date, expenses from operating lease agreements were recognized over the lease term, on a straight-line basis, in operating expenses. These changes in accounting principles will translate into improved KPIs. Based on the current contractual status, the operating result (EBIT) will improve by about € 10 million, and the EBITDA pre by about € 130 million. However, the first-time application of IFRS 16 will have no material impact on the business free cash flow BFCF( ). Consolidated Cash Flow Statement The repayment components of about € 115 million included in the lease payments represent repayments of financial liabilities and are therefore recognized as cash flows from financing activities. To date, such repayment components were recognized within payments from operating lease agreements in cash flows from operating activities. 208 Consolidated Financial Statements Notes to the Consolidated Financial Statements The Group will make use of the following practical expedients of • Amendment to IAS 19 ‟Employee Benefits” IFRS 16: • Amendment to IFRS 3 ‟Business Combinations” • as before, right-of-use assets, including the corresponding liabilities, • Annual Improvements to IFRSs 2015–2017 Cycle from leases of low-value assets will not be recognized in the con- • Amendments to References to the Conceptual Framework in IFRS solidated balance sheet; Standards • leases of intangible assets within the scope of IAS 38 will not be recognized in accordance with IFRS 16; From today’s perspective, the new rules are not expected to have • regarding all right-of-use assets – except land, land rights and any material effects on the consolidated financial statements. buildings, including buildings on third-party land – the Group will not separate non-lease components from lease components; The European Union announced on October 30, 2015,
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