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Annual Report 2020

TAG overview

Results

(43) Information on fair value measurement

Capital structure Investments and Financing Activities

(43) Information on fair value measurement

Accounting and Measurements Policies

Information on fair value measurement

The measurement techniques and main input factors used to determine the fair value of financial instruments are as follows:

 

Fair value determined by official prices and quoted market values (Level 1)

 

 

Financial instruments concerned

 

Description of the measurement technique

 

Main input factors used to determine fair values

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

Subsequent measurement at fair value through other comprehensive income

 

 

 

 

 

 

Equity instruments

 

Shares

 

Derived from active market

 

Quoted prices in an active market

Other debt instruments

 

Bonds

 

 

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

Other debt instruments

 

Publicly-traded funds

 

Derived from active market

 

Quoted prices in an active market

 

other short-term cash investments

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

Subsequent measurement at amortized cost

 

 

 

 

 

 

Financial debt

 

Bonds

 

Derived from active market

 

Quoted prices in an active market

 

Fair value determined using input factors observable in the market (Level 2)

 

 

Financial instruments concerned

 

Description of the measurement technique

 

Main input factors used to determine fair values

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

Subsequent measurement at fair value through other comprehensive income

 

 

 

 

 

 

Equity instruments

 

Shares

 

Derived from active market including a liquidity discount

 

Quoted prices in an active market and volatilities observable on the market

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

Other debt instruments

 

Convertible note/bond with embedded settlement option for equity in companies

 

Nominal value considering a liquidity discount

 

Volatilities observable on the market

Derivatives (without a hedging relationship)

 

Forward exchange contracts and currency options

 

Use of recognized actuarial methods

 

Spot and forward rates observable on the market as well as exchange rate volatilities

 

Interest rate swaps

 

 

Interest rate curves available on the market

Derivatives (with a hedging relationship)

 

 

 

 

 

 

 

 

Forward exchange contracts and currency options

 

Use of recognized actuarial methods

 

Spot and forward rates observable on the market as well as exchange rate volatilities

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

Derivatives (without a hedging relationship)

 

Forward exchange contracts and currency options

 

Use of recognized actuarial methods

 

Spot and forward rates observable on the market as well as exchange rate volatilities

 

Interest rate swaps

 

 

Interest rate curves available on the market

Derivatives (with a hedging relationship)

 

 

 

 

 

 

 

 

Forward exchange contracts and currency options

 

Use of recognized actuarial methods

 

Spot and forward rates observable on the market as well as exchange rate volatilities

Subsequent measurement at amortized cost

 

 

 

 

 

 

Financial liabilities

 

Liabilities to banks and other loan liabilities

 

Discounting of future cash flows

 

Interest rates observable on the market

 

Fair value determined using input factors unobservable in the market (Level 3)

 

 

Financial instruments concerned

 

Description of the measurement technique

 

Main input factors used to determine fair values

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

Subsequent measurement at fair value through other comprehensive income

 

 

 

 

 

 

Equity instruments

 

Equity investments in unlisted companies

 

Discounting of expected future cash flows

 

Expected cash flows from recent business planning, average cost of capital, expected Long-Term growth rate

 

 

Derived from observable prices within the scope of equity refinancing sufficiently close to the balance sheet date, considered risk allowances

 

Observable prices derived from equity refinancing

 

 

Cost-based determination

 

Acquisition cost

Trade and other receivables

 

Trade accounts receivable that are intended for sale due to a factoring agreement

 

Nominal value less factoring fees

 

Nominal value of potentially sold trade accounts receivable, average fees for sales of trade accounts receivable

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

Derivatives (without a hedging relationship)

 

Virtual power purchase agreement

 

Discounting of expected future cash flows

 

Electricity future price curves, expected electricity production volumes, discount factors

Contingent consideration

 

Contingent considerations from the sale of businesses or shares in corporations

 

Discounting of probability-weighted future milestone payments and license fees

 

Sales planning, milestone payments, probabilities of regulatory and commercial events, discount rates

Other debt instruments

 

Interests in unlisted funds

 

Consideration of the fair value of companies in which the funds are invested

 

Net asset values of the fund interests

 

Bonds with embedded settlement option for equity in an unlisted company

 

Use of recognized actuarial methods

 

Interest rates observable on the market

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

Derivatives (without a hedging relationship)

 

Hedging instrument for the virtual power purchase agreement

 

Use of recognized actuarial methods

 

Electricity future price curves, expected electricity production volumes, discount factors

Contingent consideration

 

Contingent considerations from the purchase of businesses

 

Discounting of probability-weighted future milestone payments and license fees

 

Sales planning, milestone payments, probabilities of regulatory and commercial events, discount rates

Counterparty credit risk was taken into consideration for measurements of financial instruments at fair value. In the case of non-derivative financial instruments, such as other liabilities or interest-bearing securities, this was reflected using risk premiums on the discount rate, while discounts on market value (so-called credit valuation adjustments and debit valuation adjustments) were used for derivatives.

Equity investments in unlisted companies (Level 3)

The planning periods used to determine the fair value of equity investments in unlisted companies ranged from 3 to 9 years (December 31, 2019: 1 to 9 years). Cash flows for periods in excess of this are included in the terminal value calculation using long-term growth rates of between 1.0% and 2.0% (December 31, 2019: 1.0% and 2.0%). The applied average cost of capital (after tax) was 7.0% on December 31, 2020 (December 31, 2019: 7.0%).

Assets from contingent considerations (Level 3)

The fair values of assets from contingent considerations are calculated by weighting the expected future milestone payments and royalties using their probability of occurrence and discounting them. The main parameters when determining contingent considerations are

  • the estimated probability of reaching the individual milestone events,
  • the underlying sales planning used to derive royalties,
  • and the discount factor used.

When determining the probability of occurrence of the individual milestones events in connection with the development of drug candidates, the focus is on empirically available probabilities of success of development programs in comparable phases of clinical development in the relevant therapeutic areas. To determine the sales planning, internal sales plans and sales plans of external industry services are used. The discount rate (after tax) as of December 31, 2020, of between 5.4% and 6.5% (December 31, 2019: 5.9% to 6.9%) was calculated using the weighted average cost of capital.

Significant discretionary decisions and sources of estimation uncertainty

Equity investments in unlisted companies

Determining the parameters that are to be included in discounted cash-flow-methods and deriving the fair value from observable prices within the scope of equity refinancing are both subject to discretionary decisions and estimation uncertainty.

Assets from contingent consideration

The calculation of the fair value of assets from contingent considerations is subject to significant discretionary judgment.

The most significant contingent consideration was the future purchase price claim from the disposal of the Biosimilars business to a subsidiary of Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, on August 31, 2017. It was calculated by an external valuation expert on initial recognition in 2017 and continued on this basis. As of December 31, 2020, the carrying amount was € 208 million (December 31, 2019: € 198 million).

If, in the context of determining the fair value of this contingent consideration at the date of transaction, the probability of approval as well as the discount factor of the three major development programs had been estimated to be lower or higher, this would have led to the following changes in the measurement and the corresponding effects on the profit before income tax:

Download

December 31, 2020

 

 

 

 

Change in probability of regulatory approval

€ million

 

 

 

-10%

 

unchanged

 

10%

Change of discount rate

 

5.0%

 

-22

 

6

 

33

 

5.5% (unchanged)

 

-27

 

–

 

27

 

6.0%

 

-32

 

-5

 

21

Download

December 31, 2019

 

 

 

 

Change in probability of regulatory approval

€ million

 

 

 

-10%

 

unchanged

 

10%

Change of discount rate

 

5.4%

 

-28

 

6

 

40

 

5.9% (unchanged)

 

-33

 

–

 

33

 

6.4%

 

-37

 

-6

 

26

The following table presents the carrying amounts and the fair values of the individual financial assets and liabilities as of December 31, 2020, for each individual financial instrument class pursuant to IFRS 9:

Download

 

 

 

 

Carrying amount

 

Fair value1

€ million

 

Consoli­dated notes

 

Current

 

Non-current

 

Total

 

Fair value determined by official prices and quoted market values (Level 1)

 

Fair value determined using input factors observable in the market (Level 2)

 

Fair value determined using input factors not observable in the market (Level 3)

 

Total

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsequent measurement at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

35

 

1,355

 

–

 

1,355

 

 

 

 

 

 

 

 

Trade and other receivables (excluding leasing receivables)

 

25

 

3,199

 

24

 

3,223

 

 

 

 

 

 

 

 

Other debt instruments

 

36

 

1

 

7

 

7

 

 

 

 

 

 

 

 

Subsequent measurement at fair value through other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity instruments

 

36

 

–

 

499

 

499

 

18

 

226

 

255

 

499

Trade and other receivables

 

25

 

19

 

–

 

19

 

–

 

–

 

19

 

19

Other debt instruments

 

36

 

5

 

4

 

9

 

9

 

–

 

–

 

9

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

–

Equity instruments

 

36

 

–

 

–

 

–

 

–

 

–

 

–

 

–

Contingent considerations

 

36

 

–

 

260

 

260

 

–

 

–

 

260

 

260

Other debt instruments

 

36

 

7

 

34

 

41

 

8

 

–

 

33

 

41

Derivatives without a hedging relationship

 

36, 39

 

16

 

18

 

34

 

–

 

26

 

8

 

34

Derivatives with a hedging relationship

 

36, 39

 

96

 

–

 

96

 

–

 

96

 

–

 

96

Lease receivables (measured in accordance with IFRS 16)2

 

25

 

3

 

1

 

4

 

 

 

 

 

 

 

 

Total

 

 

 

4,701

 

848

 

5,548

 

36

 

348

 

575

 

958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsequent measurement at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade payables and other liabilities

 

30

 

1,768

 

–

 

1,768

 

 

 

 

 

 

 

 

Financial debt

 

37

 

2,183

 

9,419

 

11,602

 

9,970

 

2,180

 

–

 

12,150

Other financial liabilities

 

38

 

963

 

34

 

997

 

 

 

 

 

 

 

 

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

–

Contingent considerations

 

38

 

–

 

26

 

26

 

–

 

–

 

26

 

26

Derivatives without a hedging relationship

 

37, 38, 39

 

62

 

42

 

104

 

–

 

102

 

2

 

104

Derivatives with a hedging relationship

 

38, 39

 

45

 

–

 

45

 

–

 

45

 

–

 

45

Refund liabilities

 

9

 

666

 

–

 

666

 

 

 

 

 

 

 

 

Lease liabilities (measured in accordance with IFRS 16)2

 

37

 

112

 

327

 

438

 

 

 

 

 

 

 

 

Total

 

 

 

5,799

 

9,847

 

15,646

 

9,970

 

2,327

 

28

 

12,325

1

The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.

2

Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).

The following table presents the carrying amounts and the fair values of the individual financial assets and liabilities as of December 31, 2019, for each individual financial instrument class pursuant to IFRS 9:

Download

 

 

 

 

Carrying amount

 

Fair value1

€ million

 

Consoli­dated notes

 

Current

 

Non-current

 

Total

 

Fair value determined by official prices and quoted market values (Level 1)

 

Fair value determined using input factors observable in the market (Level 2)

 

Fair value determined using input factors not observable in the market (Level 3)

 

Total

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsequent measurement at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

35

 

781

 

–

 

781

 

 

 

 

 

 

 

 

Trade and other receivables (excluding leasing receivables)

 

25

 

3,458

 

22

 

3,480

 

 

 

 

 

 

 

 

Other debt instruments

 

36

 

1

 

8

 

9

 

 

 

 

 

 

 

 

Subsequent measurement at fair value through other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity instruments

 

36

 

–

 

399

 

399

 

209

 

–

 

190

 

399

Trade and other receivables

 

25

 

24

 

–

 

24

 

–

 

–

 

24

 

24

Other debt instruments

 

36

 

29

 

9

 

39

 

39

 

–

 

–

 

39

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity instruments

 

36

 

–

 

–

 

–

 

–

 

–

 

–

 

–

Contingent considerations

 

36

 

–

 

258

 

258

 

–

 

–

 

258

 

258

Other debt instruments

 

36

 

–

 

50

 

50

 

2

 

22

 

26

 

50

Derivatives without a hedging relationship

 

36, 39

 

20

 

14

 

33

 

–

 

33

 

–

 

33

Derivatives with a hedging relationship

 

36, 39

 

7

 

–

 

7

 

–

 

7

 

–

 

7

Lease receivables (measured in accordance with IFRS 16)2

 

25

 

5

 

–

 

5

 

 

 

 

 

 

 

 

Total

 

 

 

4,325

 

761

 

5,086

 

250

 

62

 

499

 

810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsequent measurement at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade payables and other liabilities

 

30

 

2,054

 

–

 

2,054

 

 

 

 

 

 

 

 

Financial debt

 

37

 

4,422

 

8,129

 

12,551

 

10,183

 

2,706

 

–

 

12,889

Other financial liabilities

 

38

 

1,081

 

27

 

1,108

 

 

 

 

 

 

 

 

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations

 

38

 

–

 

16

 

16

 

–

 

–

 

16

 

16

Derivatives without a hedging relationship

 

37, 39

 

19

 

56

 

76

 

–

 

76

 

–

 

76

Derivatives with a hedging relationship

 

38, 39

 

46

 

–

 

46

 

–

 

46

 

–

 

46

Refund liabilities

 

9

 

565

 

–

 

565

 

 

 

 

 

 

 

 

Lease liabilities (measured in accordance with IFRS 16)2

 

37

 

109

 

458

 

567

 

 

 

 

 

 

 

 

Total

 

 

 

8,295

 

8,687

 

16,982

 

10,183

 

2,828

 

16

 

13,027

1

The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.

2

Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).

The changes in financial assets and liabilities for each of the individual classes of financial instruments allocated to Level 3 and measured at fair value were as follows:

Download

2020

 

 

 

 

Financial assets

 

Financial liabilities

 

 

 

 

Subsequent measurement at fair value through profit or loss

 

Subsequent measurement at fair value through other comprehensive income

 

Subsequent measurement at fair value through profit or loss

€ million

 

Total

 

Other debt instru­ments

 

Contingent consider­ation

 

Derivatives without a hedging relation­ship

 

Equity instruments

 

Trade and other receivables

 

Contingent consideration

 

Derivatives without a hedging relationship

Net carrying amounts, Jan. 1, 2020

 

483

 

26

 

258

 

–

 

190

 

24

 

-16

 

–

Additions due to acquisitions/divestments/ conclusion of factoring agreements

 

94

 

19

 

–

 

8

 

51

 

25

 

-9

 

–

Transfers into Level 3 from Level 1/Level 2

 

–

 

–

 

–

 

–

 

–

 

–

 

–

 

–

Fair value changes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (+)/losses (–) recognized in the consolidated income statement

 

-1

 

–

 

2

 

–

 

 

 

–

 

-1

 

-2

thereof: other operating result

 

-20

 

-1

 

-18

 

–

 

 

 

–

 

1

 

-2

thereof: attributable to assets/liabilities held as of the balance sheet date

 

-20

 

-1

 

-18

 

–

 

 

 

–

 

1

 

-2

thereof: financial income and expenses

 

19

 

2

 

20

 

–

 

 

 

–

 

-2

 

–

thereof: attributable to assets/liabilities held as of the balance sheet date

 

19

 

2

 

20

 

–

 

 

 

–

 

-2

 

–

Gains (+)/losses (–) recognized in other comprehensive income

 

22

 

 

 

 

 

 

 

22

 

–

 

 

 

 

Currency translation difference

 

-1

 

-2

 

–

 

–

 

–

 

–

 

–

 

–

Disposals due to divestments/payments received/payments made

 

-33

 

-3

 

–

 

–

 

–

 

-31

 

–

 

–

Transfers out of Level 3 into Level 1/Level 2

 

-16

 

–

 

–

 

–

 

-16

 

–

 

–

 

–

Other

 

–

 

-9

 

–

 

–

 

9

 

–

 

–

 

–

Net carrying amounts as of Dec. 31, 2020

 

547

 

33

 

260

 

8

 

255

 

19

 

-26

 

-2

Additions during the reporting period primarily comprised acquisitions of equity instruments and trade accounts receivable that are designated to be sold on account of a factoring agreement, as well as acquisitions of convertible notes. Disposals during the reporting period related in particular to advance payments received in connection with trade accounts receivable under factoring agreements. The transfers from Level 3 to Level 1 related to the M Ventures portfolio companies F-star Therapeutics, Inc., United States, and Galecto, Inc., United States, which are now listed. The gains and losses from Level 3 assets recognized in other comprehensive income were reported in the consolidated statement of comprehensive income under the item “fair value adjustments”.

The changes in financial assets and liabilities for each of the individual classes of financial instruments allocated to Level 3 and measured at fair value were as follows in 2019:

Download

2019

 

 

 

 

Financial assets

 

Financial liabilities

 

 

 

 

Subsequent measurement at fair value through profit or loss

 

Subsequent measurement at fair value through other comprehensive income

 

Subsequent measurement at fair value through profit or loss

€ million

 

Total

 

Other debt instru­ments

 

Contingent consider­ation

 

Derivatives without a hedging relation­ship

 

Equity instruments

 

Trade and other receivables

 

Contingent consideration

Net carrying amounts, Jan. 1, 2019

 

487

 

27

 

259

 

45

 

140

 

21

 

-5

Additions due to acquisitions/divestments/ conclusion of factoring agreements

 

73

 

9

 

–

 

–

 

53

 

26

 

-13

Transfers into Level 3 from Level 1/Level 2

 

–

 

–

 

–

 

–

 

–

 

–

 

–

Fair value changes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (+)/losses (–) recognized in the consolidated income statement

 

-22

 

3

 

19

 

-45

 

 

 

–

 

1

thereof: other operating result

 

3

 

2

 

-1

 

–

 

 

 

–

 

2

thereof: attributable to assets/liabilities held as of the balance sheet date

 

-11

 

2

 

-15

 

–

 

 

 

–

 

2

thereof: financial income and expenses

 

-25

 

1

 

20

 

-45

 

 

 

–

 

–

thereof: attributable to assets/liabilities held as of the balance sheet date

 

20

 

1

 

20

 

–

 

 

 

–

 

–

Gains (+)/losses (–) recognized in other comprehensive income

 

98

 

 

 

 

 

 

 

98

 

–

 

 

Currency translation difference

 

–

 

–

 

–

 

–

 

–

 

–

 

–

Disposals due to divestments/payments received/payments made

 

-50

 

-2

 

-20

 

–

 

-6

 

-22

 

1

Transfers out of Level 3 into Level 1/Level 2

 

-104

 

–

 

–

 

–

 

-104

 

–

 

–

Other

 

–

 

-10

 

–

 

–

 

10

 

–

 

–

Net carrying amounts as of Dec. 31, 2019

 

483

 

26

 

258

 

–

 

190

 

24

 

-16

The following equity instruments measured at fair value through other comprehensive income were disposed of in 2020 and 2019:

Download

€ million

 

Reasons for the disposal

 

Fair value on the date of derecognition

 

The cumulative gain (+) or loss (–) on disposal recognized in other comprehensive income

 

Transfer of the cumulative gains (+) or losses (–) within group equity to retained earnings

20201

 

 

 

 

 

 

 

 

M Ventures portfolio companies

 

Portfolio adjustment/ restructuring and full acquisition by third parties

 

100

 

91

 

91

20191

 

 

 

 

 

 

 

 

M Ventures portfolio companies

 

Portfolio adjustment/ restructuring and full acquisition by third parties

 

13

 

5

 

5

1

Disposals due to liquidations are not included.

The M Ventures portfolio companies disposed of in fiscal 2020 related to ObsEva SA, Switzerland (fair value as of December 31, 2019: € 3 million) and shares in Progyny, Inc., United States (2019: Translate Bio, Inc., USA, Canbex Therapeutics Ltd., United Kingdom, and shares in Progyny, Inc., United States).

M Ventures portfolio companies mainly include minority interests in listed and unlisted companies. The mandate of M Ventures is to invest in innovative technologies and products that are related to the Group’s three business sectors.

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