(21) Leasing
Accounting and measurement policies
IFRS 16 scope
The Group exercises the option of not recognizing leases of intangible and low-value underlying assets in the context of IFRS 16. Right-of-use assets under leases are reported in the balance sheet item “Property, plant and equipment” (see Note (20) “Property, plant and equipment”).
If the provision of company cars to employees qualifies as an employee benefit within the meaning of IAS 19, IFRS 16 is not applied. In this case, its balance-sheet treatment is governed solely by IAS 19.
Separation of lease and non-lease components
Leases for land, land rights, and buildings are separated into lease and non-lease components. The Group otherwise elects to exercise the option not to separate non-lease components from lease components.
Depreciation of the right-of-use assets arising from leases
Basically, right-of-use assets are depreciated over the lease term. If it is considered sufficiently probable that an existing purchase option will be exercised or ownership will be automatically transferred at the end of the lease term, however, depreciation is applicable over the same period to corresponding assets under property, plant and equipment (see Note (20) “Property, plant and equipment”).
Determining the incremental borrowing rate
If the interest rate for the lease can not be reliably determined, the incremental borrowing rate is applied in measuring the lease liability. At Merck KGaA, Darmstadt, Germany, the incremental borrowing rate is determined on the basis of the risk-free interest rate of the respective Group company over a similar term and in the same currency. This interest rate is adjusted using a risk surcharge specific to the Group. The Group applies the repayment model to determine the current portion of the lease. The current portion of the lease corresponds to the repayment share of the next 12 months.
Determining the lease term
Where renewal or termination options are available, their exercise is assessed on a case-by-case basis, considering factors such as location strategies, leasehold improvements, and the degree of specificity.
Significant discretionary decisions and sources of estimation uncertainty
Identification of a lease
Discretionary decisions can arise during the identification of leases in answering the question of whether a lessor’s right of substitution is substantive. The Group classifies rights of substitution as not substantive if the facts and circumstances of the case do not support a different assessment.
Measurement of lease and non-lease components
In the case of leases for land, land rights, and buildings, separating the lease into lease and non-lease components is subject to discretion and estimation uncertainty if observable prices are not available from the contract partner or other potential lessors.
Determining the lease term
When determining the lease term, existing renewal and termination options must be evaluated to determine the probability that such options will be exercised.
These assessments may be discretionary even though they rely on existing and material information on the general economic context, such as location strategies, leasehold improvements, or the degree of specificity. If the available information does not allow a reliable assessment, the Group uses historical experience for comparable situations.
The 30 largest leases accounted for around 50% of total lease liabilities. The subject matter of the leases essentially comprised right-of-use assets for office, warehouse, and laboratory buildings. If options to renew these leases were exercised in future, which is not yet considered likely, this would result in additional potential cash outflows of up to € 200 million (2019: € 279 million).
Where individual contracts include termination options, it was considered unlikely that these would be exercised so that additional lease payments were already considered in the corresponding lease liability.
Determining the incremental borrowing rate
Determining the risk-free interest rate and determining the risk surcharge are both discretionary.
Initial measurement of the lease liability and the right-of-use asset
In measuring the lease liability, there is discretionary scope and significant estimation uncertainty regarding:
- measuring any payments in the course of promised residual value guarantees and
- assessing the probability that existing purchase and termination options and renewal options will be exercised.
In measuring right-of-use assets under leases, the Group is subject to estimation uncertainty regarding any demolition obligations and their resulting payments.
The reconciliation of net carrying amounts of right-of-use assets from leases was as follows:
|
|
Right-of-use assets |
||||||
---|---|---|---|---|---|---|---|---|
€ million |
|
Land, land rights and buildings |
|
Plant and machinery |
|
Other facilities, operating and office equipment |
|
Total |
Net carrying amounts as of Jan. 1, 2020 |
|
487 |
|
13 |
|
58 |
|
557 |
Changes in the scope of consolidation |
|
-1 |
|
– |
|
– |
|
-2 |
Additions |
|
130 |
|
2 |
|
55 |
|
187 |
Disposals |
|
-119 |
|
-1 |
|
-9 |
|
-129 |
Depreciation |
|
-107 |
|
-5 |
|
-42 |
|
-153 |
Impairment losses |
|
– |
|
– |
|
– |
|
– |
Reversal of impairment losses |
|
– |
|
– |
|
– |
|
– |
Other |
|
-30 |
|
2 |
|
-3 |
|
-32 |
Net carrying amounts as of Dec. 31, 2020 |
|
360 |
|
11 |
|
58 |
|
429 |
|
|
Right-of-use assets |
||||||
---|---|---|---|---|---|---|---|---|
€ million |
|
Land, land rights and buildings |
|
Plant and machinery |
|
Other facilities, operating and office equipment |
|
Total |
Net carrying amounts as of Jan. 1, 2019 |
|
391 |
|
17 |
|
67 |
|
476 |
Changes in the scope of consolidation |
|
36 |
|
1 |
|
5 |
|
42 |
Additions |
|
175 |
|
2 |
|
24 |
|
200 |
Disposals |
|
-22 |
|
– |
|
-2 |
|
-24 |
Depreciation |
|
-100 |
|
-6 |
|
-39 |
|
-144 |
Impairment losses |
|
-1 |
|
– |
|
– |
|
-1 |
Reversal of impairment losses |
|
– |
|
– |
|
– |
|
– |
Other |
|
9 |
|
-1 |
|
2 |
|
10 |
Net carrying amounts as of Dec. 31, 2019 |
|
487 |
|
13 |
|
58 |
|
557 |
The net carrying amounts of other facilities, operating and office equipment mainly include the right-of-use assets for vehicles.
The disposals under land, land rights, and buildings in fiscal 2020 primarily resulted from the acquisition of the previously leased land and buildings of the Life Science Campus in Burlington, United States.
The expenses and income and the payments under the leases in accordance with IFRS 16 were reported in the consolidated income statement and the consolidated statement of cash flows as follows:
€ million |
|
2020 |
|
2019 |
---|---|---|---|---|
Right-of-use assets |
|
|
|
|
Depreciation |
|
-153 |
|
-144 |
Impairment losses |
|
– |
|
-1 |
Reversals of impairment losses |
|
– |
|
– |
Expenses for leasing low-value assets |
|
-18 |
|
-22 |
Expenses for leases with variable lease payments |
|
– |
|
– |
|
|
|
|
|
Income from subleasing right-of-use assets |
|
– |
|
1 |
Income from sale-and-lease-back transactions |
|
– |
|
21 |
|
|
|
|
|
Interest expenses for lease liabilities |
|
-15 |
|
-14 |
Total |
|
-186 |
|
-160 |
€ million |
|
2020 |
|
2019 |
---|---|---|---|---|
Net cash flows from operating activities |
|
-34 |
|
-33 |
Net cash flows from financing activities |
|
-144 |
|
-136 |
Total |
|
-178 |
|
-169 |
Future lease payments will be incurred in the following periods:
€ million |
|
Within 1 year |
|
1 – 5 years |
|
After more than 5 years |
|
Total |
---|---|---|---|---|---|---|---|---|
Future lease payments |
|
118 |
|
262 |
|
88 |
|
468 |
Interest portion of future payments |
|
-8 |
|
-16 |
|
-7 |
|
-31 |
Present value of future lease payments |
|
110 |
|
246 |
|
81 |
|
436 |
€ million |
|
Within 1 year |
|
1 – 5 years |
|
After more than 5 years |
|
Total |
---|---|---|---|---|---|---|---|---|
Future lease payments |
|
119 |
|
319 |
|
189 |
|
627 |
Interest portion of future payments |
|
-12 |
|
-30 |
|
-20 |
|
-61 |
Present value of future lease payments |
|
107 |
|
289 |
|
169 |
|
565 |
To date, the Group has taken advantage of reduced lease payments only to the extent that these were prescribed as government assistance for lessees. Their amount was immaterial. Accordingly, the amendment to IFRS 16 regarding rent concessions published by the IASB in May 2020 did not have a significant impact for the Group. None of the options provided were exercised.