Effects of New Financial Reporting Standards

Financial reporting standards applied for the first time in 2018

Details of the new standards whose first-time application has a material impact on the Group’s financial position and results of operations are given below.

IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) were applied for the first time as of January 1, 2018. The effects resulting from their first-time application are described in this section.

IFRS 9 is the new standard for accounting for financial instruments. It replaces IAS 39 (Financial Instruments: Recognition and Measurement). Bayer applied IFRS 9 in modified form retrospectively for the first time as of January 1, 2018, without restating the prior-year figures, accounting for the aggregate amount of any transition effects by way of an adjustment to equity and presenting the comparative period in line with previous rules. It replaces the previous rules under IAS 39 (Financial Instruments: Recognition and Measurement).

The effects that the first-time application of IFRS 9 and IFRS 15 had on retained earnings and the fair value measurement of securities / equity instruments are detailed in the following tables:

Retained Earnings Reconciliation: IFRS 9 and IFRS 15

 

 

€ million

Retained earnings incl. net income as of December 31, 2017

 

26,851

Effects of IFRS 9

 

(43)

Effects of IFRS 15

 

86

Retained earnings incl. net income as of January 1, 2018

 

26,894

Reconciliation of Fair-Value Measurement of Equity Instruments

 

 

€ million

Fair-value measurement of securities as of December 31, 2017

 

98

Reclassifications to retained earnings

 

(37)

Remeasurement due to change in measurement category

 

11

Deferred taxes

 

9

Fair-value measurement of equity instruments as of January 1, 2018

 

81

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 are 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. In the case of equity instruments held as of January 1, 2018, that are not held for trading, Bayer has uniformly opted 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. As for new instruments, Bayer can opt to make use of this option on an instrument-by-instrument basis upon recognition, but it must continue to do so thereafter. The 6.8% interest in Covestro acquired from Bayer Pension Trust at the beginning of May 2018 to service the exchangeable bond maturing in 2020 is recognized at fair value through profit or loss.

As of the date of first-time application, reclassifications primarily resulted from the characteristics of the cash flows from fund shares, investments in limited partnerships, and the loan capital and jouissance right capital (Genussrechtkapital) provided to Bayer Pensionskasse VVaG. These financial instruments were previously reported in the category “available for sale,” with changes in their fair value recognized in other comprehensive income in the statement of comprehensive income. They are now classified as debt instruments, and changes in their fair values are recognized through profit or loss.

Changes in the classification and measurement of financial assets led to the following effects as of the date of first-time application:

Financial Assets Reconciliation from IAS 39 to IFRS 9

 

 

Carrying amount Dec. 31, 2017 (IAS 39)

 

Reclassi-fication

 

Effect due to change in measurement category

 

Effect of the expected loss model

 

Carrying amount Jan. 1, 2018 (IFRS 9)

 

Measurement category (IFRS 9)2

Measurement category (IAS 39)1

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

 

 

1

AfS: available for sale; at fair value through other comprehensive income
HtM: held to maturity; at amortized cost
LaR: loans and receivables; at amortized cost

2

AC: at amortized cost
FVTOCI: at fair value through other comprehensive income
FVTPL: at fair value through profit or loss

Trade accounts receivable

 

 

 

 

 

 

 

 

 

 

 

 

LaR

 

8,582

 

 

 

 

 

(93)

 

8,489

 

AC

Other financial assets

 

 

 

 

 

 

 

 

 

 

 

 

LaR

 

1,731

 

 

 

 

 

 

 

1,731

 

AC

AfS – debt instruments

 

34

 

 

 

 

 

 

 

34

 

AC

HtM

 

57

 

 

 

 

 

 

 

57

 

AC

AfS – equity instruments at amortized cost

 

35

 

 

 

11

 

 

 

46

 

FVTOCI (no recycling)

AfS – equity instruments

 

191

 

 

 

 

 

 

 

191

 

FVTOCI (no recycling)

AfS – equity instruments

 

39

 

 

 

 

 

 

 

39

 

FVTPL (debt instruments)

AfS – debt instruments

 

2,429

 

145

 

 

 

 

 

2,574

 

FVTPL

Derivatives

 

647

 

 

 

 

 

 

 

647

 

Derivatives

Other receivables

 

 

 

 

 

 

 

 

 

 

 

 

LaR

 

380

 

 

 

 

 

(4)

 

376

 

AC

AfS – debt instruments

 

46

 

 

 

 

 

 

 

46

 

FVTPL

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

LaR

 

7,581

 

(145)

 

 

 

(1)

 

7,435

 

AC

Total financial assets

 

21,752

 

0

 

11

 

(98)

 

21,665

 

 

There were no effects on financial liabilities.

The following table shows the effects of the first-time application of IFRS 9 on retained earnings and other comprehensive income in the statement of comprehensive income, broken down by measurement category:

Effects of First-Time Application of IFRS 9 on Retained Earnings and Other Comprehensive Income

 

 

Measurement category (IFRS 9)1

 

Retained earnings effect as of Jan. 1, 2018

 

OCI effect as of Jan. 1, 2018

Measurement category (IAS 39)1

 

 

 

€ million

 

€ million

1

See Chapter “Effects of New Financial Reporting Standards”, Table “Financial Assets Reconciliation from IAS 39 to IFRS 9” for definition of measurement categories.

Trade accounts receivable

 

 

 

 

 

 

LaR

 

AC

 

(93)

 

 

Other financial assets

 

 

 

 

 

 

AfS – equity instruments at amortized cost

 

FVTOCI (no recycling)

 

 

 

11

AfS – equity instruments

 

FVTPL (debt instruments)

 

10

 

(10)

AfS – debt instruments

 

FVTPL

 

36

 

(36)

Other receivables

 

 

 

 

 

 

LaR

 

AC

 

(4)

 

 

AfS – debt instruments

 

FVTPL

 

(9)

 

9

Cash and cash equivalents

 

 

 

 

 

 

LaR

 

AC

 

(1)

 

 

Total financial assets

 

 

 

(61)

 

(26)

The following table shows the effects of the first-time application of IFRS 9 on financial assets and liabilities measured at fair value using unobservable inputs (Level 3). The development of these assets and liabilities in 2018 is presented in Table “Development of Financial Assets and Liabilities (Level 3)”.

Reconciliation of Financial Assets Measured at Fair Value (Level 3) from IAS 39 to IFRS 9

 

 

Carrying amount Dec. 31, 2017
(IAS 39)

 

Reclassi-fication due to change in fair value hierarchy

 

Remeasure-ment due to change in measurement category

 

Carrying amount Jan. 1, 2018 (IFRS 9)

 

Measurement category (IFRS 9)1

Measurement category (IAS 39)1

 

€ million

 

€ million

 

€ million

 

€ million

 

 

1

See Chapter “Effects of New Financial Reporting Standards”, Table “Financial Assets Reconciliation from IAS 39 to IFRS 9” for definition of measurement categories.

Other financial assets

 

 

 

 

 

 

 

 

 

 

AfS – equity instruments at amortized cost

 

 

 

35

 

11

 

46

 

FVTOCI (no recycling)

AfS – equity instruments

 

18

 

4

 

 

 

22

 

FVTOCI (no recycling)

AfS – equity instruments

 

18

 

 

 

 

 

18

 

FVTPL (debt instruments)

AfS – debt instruments

 

757

 

 

 

 

 

757

 

FVTPL

Derivatives

 

10

 

 

 

 

 

10

 

Derivatives

Other receivables

 

 

 

 

 

 

 

 

 

 

AfS – debt instruments

 

46

 

 

 

 

 

46

 

FVTPL

Total financial assets

 

849

 

39

 

11

 

899

 

 

The effects of the increase in loss allowances resulting from the first-time application of the new impairment model are presented in the following table1:

1 For the calculation of impairments see “Financial assets.”

Reconciliation of Loss Allowances

 

 

Closing loss allowances Dec. 31, 2017 (IAS 39)

 

Effect of the expected credit loss model (IFRS 9)

 

Opening loss allowances Jan 1, 2018 (IFRS 9)

 

Measurement category (IFRS 9)1

Measurement category (IAS 39)1

 

€ million

 

€ million

 

€ million

 

 

1

See Chapter “Effects of New Financial Reporting Standards”, Table “Financial Assets Reconciliation from IAS 39 to IFRS 9” for definition of measurement categories.

Trade accounts receivable

 

 

 

 

 

 

 

 

LaR

 

(425)

 

(93)

 

(518)

 

AC

Other receivables

 

 

 

 

 

 

 

 

LaR

 

(3)

 

(4)

 

(7)

 

AC

Cash and cash equivalents

 

 

 

 

 

 

 

 

LaR

 

 

 

(1)

 

(1)

 

AC

Total

 

(428)

 

(98)

 

(526)

 

 

Changes in the fair values of financial liabilities measured at fair value through profit or loss resulting from Bayer’s own credit risk are now 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 bonds) issued in June 2017, which also can be exchanged into Covestro shares. As of the transition date, this accounting change did not have any material effects.

For hedge accounting, Bayer has opted 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 options during the hedging period initially be recognized as other comprehensive income in the statement of comprehensive income. The release of the accumulated amounts, either in the form of a basis adjustment or directly through profit or loss, 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 of the transition date, these changes did not have any material impact on the presentation of the Group’s 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.” It also published a clarification regarding the accounting for a modification of a financial liability that does not result in its derecognition. For these non-substantial modifications, modification gains or losses – including the costs of the modification – must be immediately recognized in profit or loss. This amendment to IFRS 9 is to be applied for annual periods beginning on or after January 1, 2018. As there were no past nonsubstantial modifications of liabilities, this amendment did not have any impact on the presentation of the Group’s financial position and results of operations. A bond exchange program constituting a nonsubstantial modification was initiated in June 2018 for the Monsanto bonds acquired as part of the Monsanto acquisition. In this connection, expenses of €13 million were recognized in profit or loss in the second quarter of 2018.

IFRS 15 has led to the introduction of a five-step model for revenue recognition from contracts with customers. Under the standard, 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) control of goods or services has been transferred 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.

As of January 1, 2018, Bayer transitioned to IFRS 15 on the basis of the modified retrospective method, accounting for the aggregate amount of the 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. Bayer has elected to retrospectively apply the standard only to contracts that are not completed contracts at the date of first-time application and has opted to reflect the aggregate effect of all contract modifications that occurred prior to the date of first-time application in accordance with IFRS 15.C7A(b).

The adoption of IFRS 15 has led to the following effects:

Changes in the timing of recognition

  • 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 resulted in an increase in retained earnings by €64 million after deferred taxes and a decrease in contract liabilities (under IAS 18, amounts were presented as deferred income in other liabilities) by €86 million as of January 1, 2018. For the Pharmaceuticals segment, the introduction of IFRS 15 translates into a €10 million decrease in net sales in 2018, resulting in a €4 million decrease in deferred tax expense in 2018 compared with IAS 18.
  • 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 transfer of control. Some cases were 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 a €21 million increase in retained earnings after deferred taxes and a €27 million decrease in contract liabilities (under IAS 18, amounts were presented as deferred income in other liabilities) on the date of transition. For the Pharmaceuticals and Animal Health segments, the introduction of IFRS 15 translates into a combined €40 million decrease in net sales in 2018, resulting in a €7 million decrease in deferred tax expense in 2018 compared with IAS 18.
  • Including the effects described individually, the change in the timing of revenue recognition led to a €28 million decrease in net income in 2018 as compared to revenue recognition under IAS 18. These earnings effects pertain to the Bayer Group prior to the first-time consolidation of the former Monsanto Group, whose financial information for the reference periods was prepared according to U.S. accounting standards and therefore does not permit an appropriate comparison with net sales as determined according to IAS 18.

Presentational changes

Bayer has also changed the presentation of certain items in the statement of financial position and the income statement to reflect the methodology of IFRS 15.

  • IFRS 15 changes the presentation of expected product returns within the statement of financial position from net to gross in cases where returns are expected to be resalable and Bayer will refund the purchase price. The right-of-return asset is reflected in inventories at the former carrying amount less expected costs to recover and potential impairment. The refund liabilities resulting from the gross presentation include amounts expected to be refunded upon product return. Prior to the adoption of IFRS 15, Bayer presented the margin of expected returns on a net basis in “other provisions.” In the statement of cash flows, the increase in inventories to be recorded under IFRS 15 is set against a decline in “other working capital, other noncash items.”
  • Amounts already received (or receivable) but expected to be refunded to the customer are presented as “refund liabilities” under IFRS 15. These amounts typically relate to expected volume rebates and expected product returns and were previously presented as “other provisions.”
  • Advance payments received (or receivable) in connection with product deliveries were previously recognized in trade accounts payable. Advance payments received (or receivable) relating to right-to-access licenses and service contracts recognized over time were previously presented under “deferred income” in “other liabilities.” With the introduction of IFRS 15, both are presented as contract liabilities. Within the statement of cash flows, the decline in trade accounts payable resulting from the presentational change is set against a corresponding change in “other working capital, other noncash items.”

The effects of applying the modified retrospective method on the opening statement of financial position as of January 1, 2018, are shown in the following table.

IFRS 15 Accounting Changes: Consolidated Statement of Financial Position as of January 1, 2018

 

 

Dec. 31, 2017

 

 

 

 

 

Jan. 1, 2018

 

 

Before accounting changes

 

Presentational changes

 

Changes in timing of recognition

 

After accounting changes

 

 

€ million

 

€ million

 

€ million

 

€ million

Deferred taxes

 

4,915

 

 

 

(5)

 

4,910

Inventories

 

6,550

 

76

 

 

 

6,626

 

 

 

 

 

 

 

 

 

Other reserves

 

25,026

 

 

 

86

 

25,112

Other provisions (noncurrent)

 

1,366

 

(152)

 

 

 

1,214

Refund liabilities (noncurrent)

 

 

152

 

 

 

152

Contract liabilities (noncurrent)

 

 

905

 

(78)

 

827

Other liabilities (noncurrent)

 

1,116

 

(905)

 

 

 

211

Deferred taxes

 

1,153

 

 

 

24

 

1,177

Other provisions (current)

 

4,344

 

(2,197)

 

 

 

2,147

Refund liabilities (current)

 

 

2,275

 

 

 

2,275

Contract liabilities (current)

 

 

740

 

(37)

 

703

Trade accounts payable

 

5,129

 

(561)

 

 

 

4,568

Other liabilities (current)

 

1,652

 

(181)

 

 

 

1,471

The impact of the transition from IAS 18 to IFRS 15 on the consolidated statement of financial position as of December 31, 2018, which includes the former Monsanto Group, is presented in the following table.

Reconciliation IFRS 15 to IAS 18 for Presentational Changes: Consolidated Statement of Financial Position as of December 31, 2018

 

 

IFRS 15
Dec. 31, 2018

 

Presentational changes

 

IAS 18
Dec. 31, 2018

 

 

€ million

 

€ million

 

€ million

Inventories

 

10,961

 

(85)

 

10,876

 

 

 

 

 

 

 

Other provisions (noncurrent)

 

3,347

 

167

 

3,514

Refund liabilities (noncurrent)

 

167

 

(167)

 

Contract liabilities (noncurrent)

 

986

 

(986)

 

Other liabilities (noncurrent)

 

349

 

852

 

1,201

Other provisions (current)

 

3,686

 

3,537

 

7,223

Refund liabilities (current)

 

3,622

 

(3,622)

 

Contract liabilities (current)

 

3,235

 

(3,235)

 

Trade accounts payable

 

5,414

 

3,159

 

8,573

Other liabilities (current)

 

2,122

 

210

 

2,332

In addition to IFRS 9 and IFRS 15, the following changes were applied as of January 1, 2018, but did not have any material impact on the Group’s financial position and results of operations.

Amendments to standards with no material impact

Amendments to standards / interpretations

 

Mandatory application

IFRS 2

 

Amendment “Classification and Measurement of Share-based Payment Transactions”

 

Jan. 1, 2018

IFRS 9

 

Amendment “Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts”

 

Jan. 1, 2018

IAS 40

 

Amendment “Transfers of Investment Property”

 

Jan. 1, 2018

IFRIC 22

 

Foreign Currency Transactions and Advance Consideration

 

Jan. 1, 2018

 

 

Annual Improvements to IFRS Standards 2014 – 2016 Cycle

 

Jan. 1, 2018

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 2018 fiscal year or for which the European Union had not yet completed the endorsement process. The following IFRS and interpretations have not yet been applied by Bayer:

Published financial reporting standards that have not yet been applied

Amendments to standards / interpretations

 

Mandatory application

 

Anticipated effects

IFRS 3

 

Amendment to IFRS 3 Business Combinations

 

Jan. 1, 2020

 

Effects currently being evaluated

IFRS 9

 

Prepayment Features with Negative Compensation

 

Jan. 1, 2019

 

No material effects expected

IFRS 16

 

Leases

 

Jan. 1, 2019

 

See following explanations

IFRS 17

 

Insurance Contracts

 

Jan. 1, 2021

 

Effects currently being evaluated

IAS 1, IAS 8

 

Amendments to IAS 1 and IAS 8: Definition of Material

 

Jan.1, 2020

 

Effects currently being evaluated

IAS 19

 

Amendments to IAS 19 (Employee Benefits): Plan Amendments, Curtailments or Settlements

 

Jan. 1, 2019

 

No material effects expected

IAS 28

 

Long-term Interests in Associates and Joint Ventures

 

Jan. 1, 2019

 

No material effects expected

IFRIC 23

 

Uncertainty over Income Tax Treatments

 

Jan. 1, 2019

 

No material effects expected

 

 

Annual Improvements to IFRS Standards 2015 – 2017 Cycle

 

Jan. 1, 2019

 

No material effects expected

 

 

Amendments to References to the Conceptual Framework in IFRS Standards

 

Jan. 1, 2020

 

Effects currently being evaluated

The information below pertains only to future amendments to accounting standards whose foreseeable effects – if any – could be material to the Bayer Group’s financial position or results of operations.

In January 2016, the IASB published the new standard for lease accounting, IFRS 16 (Leases), which replaces the rules contained in IAS 17 (Leases) along with the associated interpretations. The new standard is to be applied for annual periods beginning on or after January 1, 2019. The standard introduces a single lessee accounting model, requiring lessees to recognize right-of-use assets for granted rights of use and corresponding lease liabilities. It eliminates the previous requirement for lessees to differentiate between operating leases – without recognizing the respective assets or liabilities – and finance leases. However, IFRS 16 contains the option of exercising exemptions for the recognition of short-term leases and those pertaining to low-value assets. As under the previous standard, IAS 17, lessors still have to differentiate between operating and finance leases. According to IFRS 16, subleases are classified with reference to the right-of-use asset arising from the sublease in relation to the head lease.

Bayer will apply IFRS 16 for the first time as of January 1, 2019, retrospectively without restating the prior-year figures. In this connection, various options and practical expedients can be applied as of the transition date for lease agreements in which a Bayer company is the lessee. On the date of first-time application, no additional assessment will be undertaken with regard to whether a contract represents or contains a leasing relationship. For contracts previously classified as operating leases, Bayer will measure the lease liabilities as of the date of first-time application of IFRS 16 at the present value of the outstanding lease payments, using as the discount rate the respective incremental borrowing rate as of that date. On the date of first-time application, the right-of-use asset will generally be measured at the amount of the lease liability, adjusted by the amounts of any prepaid or accrued lease payments and / or provisions for onerous leases recognized in the statement of financial position as of December 31, 2018. Initial direct costs will not be taken into account in the measurement of the right-of-use asset as of the date of first-time application. The current state of knowledge as of the date of first-time application will be taken into account when discretionary decisions are made.

Bayer will exercise the option of exempting intangible assets from the scope of application of IFRS 16 and will apply the exemptions for short-term leases to certain leases ending in 2019. It will also apply this exemption for short-term leases beginning after December 31, 2018.

The first-time application of IFRS 16 as of January 1, 2019, is anticipated to result in the recognition of additional lease liabilities of approximately €900 million to €1,200 million. Net financial debt will increase accordingly as a result of the significant increase in lease liabilities. Right-of-use assets will increase in line with the lease liabilities, taking into account adjustments resulting from the first-time application of IFRS 16.

In the statement of comprehensive income, Bayer will cease recognizing expenses for operating leases in operating income and will instead recognize the depreciation of the right-of-use assets and the interest expense for the lease liabilities under IFRS 16. An analogous effect will occur in the statement of cash flows, where IFRS 16 will have a positive effect on the operating cash flow by reducing cash outflows for operating activities, while the repayment component of lease payments and the interest expense will be recognized in the financing cash flow.

Change in accounting methods

In connection with the planned acquisition of Monsanto and in preparation for the future combined business, the structure of the Crop Science segment was adjusted as of January 1, 2018, in line with the internal financial reporting system (management approach). In the new structure, all the strategic business entities are organizationally located directly below the operating and reportable Crop Science segment. Global impairment testing of goodwill will also be carried out at the Crop Science segment level each year in the future.

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