Annual Report 2021

Operating Assets, Liabilities, and Contingent Liabilities

(24) Inventories

Accounting and measurement policies

Inventories

In addition to directly attributable unit costs, the cost of sales also includes overheads attributable to the production process, which are determined on the basis of normal capacity utilization of the production facilities. Goods for resale are recognized at cost. When determining amortized cost, the “first-in, first-out” (FIFO) and weighted average cost formulas are used.

Inventories are tested for impairment using a business sector-specific method. Under this method, cost is compared to the net realizable values. If the net realizable value is lower than the amortized cost, the asset is written down by a corresponding amount, which is recognized as an expense in the cost of sales.

In addition to the impairment derived from the sales market, impairment losses may also be necessary for quality reasons or due to a lack of usability of the items or their remaining shelf life. If the reason for impairment no longer applies, the carrying amount is adjusted to the lower of cost or the new net realizable value.

Since inventories are, for the most part, not manufactured within the scope of long-term production processes, borrowing costs are not included.

Inventory prepayments are reported under other non-financial assets.

Significant discretionary decisions and sources of estimation uncertainty

Identification of impairments or reversal of impairments

Discretionary decisions are required in the identification of impairment as well as in identifying the need to reverse impairment of inventories. There are estimation uncertainties with respect to the calculation of the net realizable value. In particular, changes in selling prices and expected costs of completion are considered in calculating this value.

Inventories consisted of the following:

€ million

 

Dec. 31, 2021

 

Dec. 31, 2020

Raw materials and supplies

 

814

 

633

Work in progress

 

990

 

905

Finished goods/goods for resale

 

2,096

 

1,756

Inventories

 

3,900

 

3,294

The increase in inventories in fiscal 2021 was driven by all three business sectors. Whereas the upturn in the Healthcare business sector was minor, the Life Science and Electronics business sectors saw significant growth in inventories as stocks of raw materials were built up in order to secure production, as well as due to delays in logistics processes.

Impairment losses on inventories amounted to € 592 million in the reporting period (2020: € 545 million). Impairment losses that are included in the cost of sales are shown in Note (10) “Cost of sales”.

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