Annual Report 2021

Capital Structure, Investments, and Financing Activities

(43) Information on fair value measurement

Accounting and Measurement 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:

empty
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

 

 

 

other short-term cash investments

 

 

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

empty
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

 

 

 

 

 

 

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

empty
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

 

 

Observable prices derived from equity refinancing

 

 

 

 

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 (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 three to eight years (December 31, 2020: three to nine 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 9.0% (December 31, 2020: 1.0% and 2.0%). The applied average cost of capital (after tax) was 7.0% on December 31, 2021 (December 31, 2020: 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) of between 5.4% and 6.5% as of December 31, 2021 (December 31, 2020: 5.4% to 6.5%) 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, Germany, 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, 2021, the carrying amount was € 206 million (December 31, 2020: € 208 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:

December 31, 2021

 

 

 

 

Change in probability of regulatory approval

€ million

 

 

 

-10%

 

unchanged

 

10%

Change of discount rate

 

4.9%

 

-21

 

4

 

30

 

5.4% (unchanged)

 

-25

 

 

25

 

5.9%

 

-29

 

-4

 

20

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

The following table presents the carrying amounts and the fair values of the individual financial assets and liabilities as of December 31, 2021, for each individual financial instrument class pursuant to IFRS 9:

December 31, 2021

 

 

 

 

Carrying amount

 

Fair value1

€ million

 

Consoli- dated 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 

 

1,899

 

 

1,899

 

 

 

 

 

 

 

 

Trade and other receivables (excluding leasing receivables)

 

25 

 

3,622

 

24

 

3,646

 

 

 

 

 

 

 

 

Other debt instruments

 

36 

 

57

 

4

 

61

 

 

 

 

 

 

 

 

Subsequent measurement at fair value through other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity instruments

 

36 

 

 

462

 

462

 

117

 

 

345

 

462

Trade and other receivables

 

25 

 

20

 

 

20

 

 

 

20

 

20

Other debt instruments

 

36 

 

43

 

1

 

44

 

44

 

 

 

44

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations

 

36 

 

 

271

 

271

 

 

 

271

 

271

Other debt instruments

 

36 

 

12

 

149

 

161

 

83

 

 

78

 

161

Derivatives without a hedging relationship

 

36 , 39 

 

37

 

24

 

61

 

 

37

 

24

 

61

Derivatives with a hedging relationship

 

36 , 39 

 

25

 

 

25

 

 

25

 

 

25

Lease receivables (measured in accordance with IFRS 16)2

 

25 

 

4

 

1

 

6

 

 

 

 

 

 

 

 

Total

 

 

 

5,719

 

937

 

6,656

 

244

 

62

 

738

 

1,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsequent measurement at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade payables and other liabilities

 

30 

 

2,380

 

 

2,380

 

 

 

 

 

 

 

 

Financial debt

 

37 

 

2,379

 

7,928

 

10,307

 

9,655

 

1,213

 

 

10,868

Other financial liabilities

 

38 

 

1,110

 

56

 

1,166

 

 

 

 

 

 

 

 

Subsequent measurement at fair value through profit or loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent considerations

 

38 

 

 

39

 

39

 

 

 

39

 

39

Derivatives without a hedging relationship

 

37 , 38 , 39 

 

35

 

10

 

45

 

 

35

 

10

 

45

Derivatives with a hedging relationship

 

38 , 39 

 

82

 

 

82

 

 

82

 

 

82

Refund liabilities

 

9 

 

839

 

 

839

 

 

 

 

 

 

 

 

Lease liabilities (measured in accordance with IFRS 16)2

 

37 

 

117

 

342

 

459

 

 

 

 

 

 

 

 

Total

 

 

 

6,942

 

8,375

 

15,318

 

9,655

 

1,330

 

49

 

11,034

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 reduction in Level 2 equity instruments measured at fair value through other comprehensive income resulted from the reclassification of the shares in Precigen Inc., United States, to Level 1.

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:

December 31, 2020

 

 

 

 

Carrying amount

 

Fair value1

€ million

 

Consoli- dated 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 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 the previous year:

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

 

Other debt instruments

 

Contingent consideration

 

Derivatives without a hedging relationship

 

Equity instruments

 

Trade and other receivables

 

Contingent consideration

 

Derivatives without a hedging relationship

 

Total

Net carrying amounts, Jan. 1, 2020

 

26

 

258

 

 

190

 

24

 

-16

 

 

483

Additions

 

19

 

 

8

 

51

 

25

 

-9

 

 

94

Transfers into Level 3 from Level 1/Level 2

 

 

 

 

 

 

 

 

Fair value changes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

2

 

 

 

 

 

-1

 

-2

 

-1

thereof: other operating result

 

-1

 

-18

 

 

 

 

 

1

 

-2

 

-20

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

 

-1

 

-18

 

 

 

 

 

1

 

-2

 

-20

thereof: financial income and expenses

 

2

 

20

 

 

 

 

 

-2

 

 

19

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

 

2

 

20

 

 

 

 

 

-2

 

 

19

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

 

 

 

 

 

 

 

22

 

 

 

 

 

 

22

Currency translation difference

 

-2

 

 

 

 

 

 

 

-1

Disposals

 

-3

 

 

 

 

-31

 

 

 

-33

Transfers out of Level 3 into Level 1/Level 2

 

 

 

 

-16

 

 

 

 

-16

Other

 

-9

 

 

 

9

 

 

 

 

Net carrying amounts as of Dec. 31, 2020

 

33

 

260

 

8

 

255

 

19

 

-26

 

-2

 

547

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 fiscal 2021:

2021

 

 

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

 

Other debt instruments

 

Contingent consideration

 

Derivatives without a hedging relationship

 

Equity instruments

 

Trade and other receivables

 

Contingent consideration

 

Derivatives without a hedging relationship

 

Total

Net carrying amounts, Jan. 1, 2021

 

33

 

260

 

8

 

255

 

19

 

-26

 

-2

 

547

Additions

 

46

 

5

 

4

 

48

 

38

 

 

 

141

Transfers into Level 3 from Level 1/Level 2

 

 

 

 

 

 

 

 

Fair value changes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

7

 

6

 

12

 

 

 

 

-12

 

-7

 

5

thereof: other operating result

 

-8

 

-12

 

10

 

 

 

 

-10

 

-7

 

-27

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

 

-8

 

-12

 

10

 

 

 

 

-10

 

-7

 

-27

thereof: financial income and expenses

 

15

 

18

 

1

 

 

 

 

-2

 

 

32

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

 

15

 

18

 

1

 

 

 

 

-2

 

 

32

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

 

 

 

 

 

 

 

91

 

 

 

 

 

 

91

Currency translation difference

 

2

 

 

1

 

 

 

-2

 

 

1

Disposals

 

-1

 

 

 

-13

 

-37

 

 

 

-50

Transfers out of Level 3 into Level 1/Level 2

 

 

 

 

-45

 

 

 

 

-45

Other

 

-8

 

 

 

8

 

 

 

 

Net carrying amounts as of Dec. 31, 2021

 

78

 

271

 

24

 

345

 

20

 

-39

 

-10

 

689

In particular, the additions in the reporting period included acquisitions of equity investments, acquisitions of other debt instruments, and trade receivables essentially intended for sale on the basis of a factoring agreement. 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 Vera Therapeutics, Inc., United States, which has since been 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 following equity instruments measured at fair value through other comprehensive income were disposed of in 2021 and 2020:

€ 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

20211

 

 

 

 

 

 

 

 

M Ventures portfolio companies

 

Portfolio adjustment/restructuring and full acquisition by third parties

 

16

 

7

 

7

Precigen, Inc., USA

 

Portfolio adjustment/restructuring

 

36

 

 

20201

 

 

 

 

 

 

 

 

M Ventures portfolio companies

 

Portfolio adjustment/restructuring and full acquisition by third parties

 

100

 

91

 

91

1

Disposals due to liquidations are not included.

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.

The M Ventures portfolio companies disposed of in fiscal 2021 were Forendo Pharma OY, Finland, Progyny, Inc., United States, and shares in F-star Therapeutics, Inc., United States (2020: ObsEva SA, Switzerland and shares in Progyny, Inc., United States).

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