Effects of New Financial Reporting Standards

Financial reporting standards applied for the first time in 2017

The first-time application of the following amended financial reporting standards had no impact, or no material impact, on the presentation of Bayer’s financial position or results of operations, or on earnings per share.

In January 2016, the IASB published amendments to IAS 7 (Statement of Cash Flows) under the title “Amendments to IAS 7: Disclosure Initiative.” The following changes in liabilities arising from financing activities must be disclosed: (a) changes from financing cash flows; (b) changes arising from obtaining or losing control of subsidiaries or other businesses; (c) the effect of changes in Foreign exchange Claims for payments in foreign currencies traded on foreign exchanges, usually in the form of balances with foreign banks or bills of exchange or checks payable abroad; banknotes and coins denominated in foreign currencies are not considered to be foreign exchange. rates; (d) changes in fair values; (e) other changes.

In January 2016, the IASB also published amendments to IAS 12 (Income Taxes) under the title “Recognition of Deferred Assets for Unrealised Losses.” These amendments basically clarify that in the case of assets recognized at fair value (e.g. fixed-rate debt instruments) where the taxable value is the cost of acquisition, unrealized losses result in deductible temporary differences, irrespective of the future use of the asset. Further, when estimating future taxable profits for the purpose of recognizing deferred tax assets, the tax deductions resulting from the reversal of other deductible temporary differences must be eliminated.

In December 2016, the IASB published “Annual Improvements to IFRS Standards 2014 ‑ 2016 Cycle” as part of its annual improvements project. The changes relating to IFRS 12 (Disclosure of Interest in Other Entities) primarily pertain to clarifications.

Published financial reporting standards that have not yet been applied

The IASB and the IFRS Interpretations Committee have issued the following standards, amendments to standards, and interpretations whose application was not yet mandatory for the 2017 fiscal year, or for which the European Union had not yet completed the endorsement process. The application of these standards and amendments is conditional upon their endorsement by the European Union.

IFRS 9 (Financial Instruments) is the new standard for accounting for financial instruments that is to be applied for annual reporting periods beginning on or after January 1, 2018. It was endorsed by the European Union in November 2016.

Bayer will apply IFRS 9 retrospectively, accounting for the aggregate amount of any transition effects by way of an adjustment to equity as of January 1, 2018, and presenting the comparative period in line with previous rules. IFRS 9 introduces new provisions for the classification and measurement of financial assets and replaces the current rules on the impairment of financial assets. The new standard requires a change in accounting methods for the effects resulting from a change in the company’s own credit risk for financial liabilities classified at fair value and modifies the requirements for hedge accounting. The classification and measurement of financial liabilities is otherwise largely unchanged from the existing regulations.

Under IFRS 9, the classification and measurement of financial assets is determined by the company’s business model and the characteristics of the cash flows of each financial asset. As at the transition date, these changes in the classification of financial assets will not have any material impact on the presentation of the Group’s financial position and results of operations. In the case of equity instruments held as of January 1, 2018, that are not held for trading, Bayer will uniformly opt to recognize future changes in their fair value through other comprehensive income in the statement of comprehensive income and to continue to classify these as equity upon the derecognition of the financial instrument.

Furthermore, IFRS 9 will lead to an increase in the loss allowance for expected credit losses on financial assets, including trade accounts receivable. Loss allowances for expected credit losses on trade accounts receivable will increase by an amount in the region of approximately €95 million. As at the transition date, the measurement effects for other financial assets will be immaterial.

In the future, changes in the fair values of financial liabilities measured at fair value through profit or loss resulting from Bayer’s own credit risk will be recognized through other comprehensive income in the statement of comprehensive income rather than in the income statement. At Bayer, this change principally affects the debt instruments (exchangeable bond) issued in June 2017, which also can be exchanged into Covestro shares. As at the transition date, this change will not have any material effects on these items.

For hedge accounting, Bayer is opting to prospectively apply IFRS 9 from January 1, 2018. If only the intrinsic value of an option is designated as a hedging instrument in a hedging relationship, IFRS 9 requires that changes in the fair value of the time value of the options during the hedging period initially be recognized as other comprehensive income in the statement of comprehensive income. Subsequent measurement depends on the type of hedged transaction. In contrast to the other rules on hedge accounting, the revised accounting method is to be applied retrospectively. As at the transition date, these changes will not have any material impact on the presentation of the Group’s financial position and results of operations.

The IASB issued IFRS 15 (Revenues from Contracts with Customers) in May 2014 and provided clarifications to the standard in April 2016. Both the standard and the clarifications have been endorsed by the European Union. IFRS 15 replaces the current IAS 18 (Revenue) and IAS 11 (Construction Contracts) revenue recognition standards and the related interpretations, and is applicable for annual reporting periods beginning on or after January 1, 2018. The new standard establishes a five-step model related to revenue recognition from contracts with customers. Under IFRS 15, revenue is recognized at amounts that reflect the consideration that an entity expects to be entitled to in exchange for transferring goods or services to a customer. Revenue is recognized when (or as) the entity transfers control of goods or services to a customer either over time or at a point in time. In addition, IFRS 15 clarifies the allocation of individual topics to (new) line items in the statement of financial position and to functional cost items in the income statement, and whether gross or net amounts are to be presented.

Bayer will implement IFRS 15 on the basis of the modified retrospective method, accounting for the aggregate amount of any transition effects by way of an adjustment to retained earnings as of January 1, 2018, and presenting the comparative period in line with previous rules. All of the established business models for the Bayer Group were examined in the course of the implementation project. The previous assessment that the new standard is not expected to materially affect the timing of revenue recognition for the transactions concerned or their components was confirmed. With regard to total Group sales, there are indications of immaterial transition effects specifically due to the different accounting for milestone payments in connection with right-to-access licenses and the recognition of revenues from trademark rights divested in the past. This is likely to result in an immaterial increase in retained earnings on the transition date as explained in greater detail below:

  • IFRS 15 requires catch-up adjustments to revenue when milestone payments for right-to-access licenses become unconstrained leading to earlier revenue recognition. This change is expected to result in an increase in retained earnings and a decrease in contract liabilities (currently presented as deferred income in other liabilities) by roughly €100 million on January 1, 2018. This would translate into a decrease of less than 0.1% in annual net sales and less than 0.3% in annual EBIT through 2027 in the Pharmaceuticals segment as measured in relation to the segment’s current figures. These effects are presented before deferred taxes.
  • IFRS 15 in conjunction with IAS 38 (Intangible Assets) generally requires the recognition of the purchase price related to a brand divestment net of associated carrying amounts in other operating income or expenses upon control transfer. Some cases have been identified where the purchase price was deferred under former policy in line with IAS 18, but would have been recognized in income earlier under IFRS 15, leading to an expected increase in retained earnings and an expected decrease in contract liabilities (currently presented as deferred income in other liabilities) by roughly €30 million on the date of transition. This would translate into a decrease of less than 1.2% and 0.2% in annual net sales and less than 6.2% and 1% in annual EBIT in 2018 and 2019, respectively, for the Animal Health segment as measured in relation to the segment’s current figures. For the Pharmaceuticals segment, this would lead to a decrease of less than 0.04% in annual net sales and less than 0.2% in annual EBIT in 2018 as measured in relation to the segment’s current figures. These effects are presented before deferred taxes.

At the time these consolidated financial statements were finalized, Bayer had not fully concluded its analysis of the impact IFRS 15 will have on the sale of goods for which it also organizes transportation services. However, preliminary analyses have not revealed any material effects. Line items added to the statement of financial position through IFRS 15, and the corresponding allocation rules, will give rise to presentational changes within the statement of financial position. Overall, based on current knowledge, we do not anticipate any material effects on the results of operations or on earnings per share.

In January 2016, the IASB issued IFRS 16 (Leases), the new standard for lease accounting, which will replace IAS 17. IFRS 16 introduces a uniform lease accounting model for lessees, requiring recognition of a right-of-use asset and a liability for all leases with a term of more than 12 months unless such leases are immaterial. It will eliminate the current requirement for lessees to classify lease contracts as either operating leases – without recognizing the respective assets or liabilities – or as finance leases. As in the previous standard, IAS 17, lessors still have to differentiate between finance and operating leases. Companies in the Bayer Group mainly act as lessees. The application of IFRS 16 is expected to impact Bayer’s financial position and results of operations as follows: Instead of the minimum lease payments arising from operating leases currently recognized under other financial commitments, application of IFRS 16 will increase noncurrent assets by requiring the recognition of rights of use. Similarly, financial liabilities will be increased by recognition of the corresponding lease liabilities. In the statement of comprehensive income, the amortization of rights of use and the interest expense for the liabilities will be recognized in place of the expenses for operating leases. In the statement of cash flows, IFRS 16 will probably result in an improvement in the operating cash flow by reducing cash flows for operating activities, while the repayment component of lease payments and the interest expense will be recognized in the financing cash flow. The new standard is to be applied for annual periods beginning on or after January 1, 2019. It was endorsed by the European Union in October 2017. A Group-wide project is steering the implementation of this new standard. Bayer is currently evaluating the quantitative impacts the amendments will have on the presentation of its financial position and results of operations. In this connection, we refer to the other financial commitments from operating leases reported in Note “Contingent liabilities and other financial commitments”.

In June 2016, the IASB published an amendment to IFRS 2 (Share-based Payment) under the title “Classification and Measurement of Share-based Payment Transactions.” This amendment provides guidance on certain accounting issues relating to cash-settled share-based payments. For example, the fair value of the equity instruments is not to be adjusted for service conditions or non-market-based performance conditions. Instead, these are to be taken into account by adjusting the number of equity instruments expected to vest. The amendment is to be applied for annual periods beginning on or after January 1, 2018. It has not yet been endorsed by the European Union. The changes are not expected to have a material impact on the presentation of Bayer’s financial position or results of operations.

In September 2016 the IASB published an amendment to IFRS 4 (Insurance Contracts) under the title “Applying IFRS 9 ‘Financial Instruments’ with IFRS 4 ‘Insurance Contracts’.” These amendments aim to mitigate the impact of the different dates of first-time application of IFRS 9 and IFRS 17, the successor to IFRS 4, especially at companies with extensive insurance business. It introduces two optional approaches which insurers can use provided that certain conditions are fulfilled: the overlay approach and temporary exemption. The amendment is to be applied for annual periods beginning on or after January 1, 2018. It was endorsed by the European Union in November 2017. The changes are not expected to have a material impact on the presentation of Bayer’s financial position or results of operations.

In December 2016, the IASB published an amendment to IAS 40 (Investment Property) under the title “Transfers of Investment Property.” This specifies that a property may only be transferred to or from the investment property classification when there has been an actual change in use and not when there is a mere change of intent concerning the property. The amendment is to be applied for annual periods beginning on or after January 1, 2018. It has not yet been endorsed by the European Union. The changes are not expected to have a material impact on the presentation of Bayer’s financial position or results of operations.

In December 2016, the IASB published “Annual Improvements to IFRS Standards 2014‑2016 Cycle” as part of its annual improvements project. The amendments relate to IFRS 1 (First Time Adoption of IFRS), IFRS 12 (Disclosure of Interest in Other Entities) and IAS 28 (Investments in Associates and Joint Ventures). They mainly contain clarifications on the scope of application and other matters. The amendments to IFRS 1 and IAS 28 are to be applied for annual periods beginning on or after January 1, 2018. The amendments were endorsed by the European Union in February 2018. The changes are not expected to have a material impact on the presentation of Bayer’s financial position or results of operations.

In December 2016, the IASB published the IFRIC Interpretation 22 (Foreign Currency Transactions and Advance Consideration) relating to IAS 21 (The Effects of Changes in Foreign Exchange Rates). The Interpretation clarifies that the assets, income and expenses accounted for following a foreign currency transaction are to be translated at the same exchange rate as any related receipts or payments of advance consideration. IFRIC 22 is to be applied for annual periods beginning on or after January 1, 2018. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations.

In May 2017, the IASB published IFRS 17 (Insurance Contracts), which will replace IFRS 4. Its scope comprises insurance contracts, reinsurance contracts and investment contracts with discretionary participation features. IFRS 17 is to be applied for annual periods beginning on or after January 1, 2021. The amendments have not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations.

In June 2017, the IASB published IFRIC Interpretation 23 (Uncertainty over Income Tax Treatments) to clarify uncertainty relating to the accounting treatment of income taxes. IFRIC 23 is to be applied for annual periods beginning on or after January 1, 2019. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations.

In October 2017, the IASB published an amendment to IFRS 9 (Financial Instruments) under the title “Prepayment Features with Negative Compensation.” This addresses the treatment of symmetrical rights to terminate a contract to allow measurement of financial assets at amortized cost or at fair value through comprehensive income. In addition, it contains clarification on the modification of financial liabilities that does not result in derecognition. The amendment to IFRS 9 is to be applied for annual periods beginning on or after January 1, 2019. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations.

In October 2017, the IASB published an amendment to IAS 28 (Investments in Associates and Joint Ventures) under the title “Long-term Interests in Associates and Joint Ventures.” This clarifies that a company is required to apply IFRS 9 (Financial Instruments), including its impairment rules, to long-term interests in associates and joint ventures that, in substance, form part of the net investment in the associate or joint venture and to which the equity method is not applied. The application of IFRS 9 thus takes precedence over IAS 28. The amendment to IAS 28 is to be applied for annual periods beginning on or after January 1, 2019. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations.

In December 2017, the IASB published “Annual Improvements to IFRS Standards 2015‑2017 Cycle” as part of its annual improvements project. The amendments relate to IFRS 3 (Business Combinations), IFRS 11 (Joint Arrangements), IAS 12 (Income Taxes) and IAS 23 (Borrowing Costs). They principally comprise clarifications. The amendments are to be applied for annual periods beginning on or after January 1, 2019. Earlier application is permitted. The amendments have not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations.

In February 2018, the IASB published amendments to IAS 19 (Employee Benefits). These amendments relate to how a company accounts for a defined benefit plan when a change – an amendment, curtailment or settlement – takes place, and require a company to remeasure its net defined benefit liability or asset when said change occurs. They also require a company to use the updated acturial assumptions from this remeasurement to determine current service cost and net interest for the remainder of the reporting period after the change to the plan. The amendments also include clarifications regarding the related effects on determining the asset ceiling. The amendments are to be applied for annual reporting periods beginning on or after January 1, 2019. Early application is permissable. They have not yet been endorsed by the European Union. Bayer will evaluate the impact the amendments will have on the presentation of its financial position and results of operations.

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