Financial Statements

Explanatory Notes

Accounting policies

Pursuant to Section 37x Paragraph 3 of the German Securities Trading Act, the consolidated interim financial statements as of March 31, 2015, were prepared in condensed form according to the International Financial Reporting Standards (IFRS) – including ias 34 – of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the ifrs Interpretations Committee in effect at the closing date.

Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2014 fiscal year, particularly with regard to the main recognition and measurement principles, except where financial reporting standards have been applied for the first time in 2015 or accounting policies have changed.

Financial reporting standards applied for the first time in 2015

The first-time application of the following amended financial reporting standards had no impact, or no material impact, on the presentation of the Group financial position or results of operations, or on earnings per share.

In December 2013, the iasb published the fifth and sixth sets of “Annual Improvements to ifrss.” The amendments address details of the recognition, measurement and disclosure of business transactions and serve to standardize terminology. They consist mainly of editorial changes to existing standards. They are to be applied for annual periods beginning on or after July 1, 2014.

Changes in underlying parameters

Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations.

The exchange rates for major currencies against the euro varied as follows:

Exchange Rates for Major Currencies    [Table 29]
    Closing Rate Average Rate

€1
  Dec. 31,
2014
March 31,
2014
March 31,
2015
1st Quarter
2014
1st Quarter
2015
BRL Brazil 3.22 3.13 3.50 3.24 3.21
CAD Canada 1.41 1.52 1.37 1.51 1.40
CHF Switzerland 1.20 1.22 1.05 1.22 1.07
CNY China 7.54 8.58 6.67 8.35 7.04
GBP United Kingdom 0.78 0.83 0.73 0.83 0.74
JPY Japan 145.23 142.42 128.95 140.87 134.42
MXN Mexico 17.87 18.01 16.51 18.13 16.86
RUB Russia 72.34 48.78 62.44 47.87 70.80
USD United States 1.21 1.38 1.08 1.37 1.13

The most important interest rates used to calculate the present value of pension obligations are given below:

Discount Rate for Pension Obligations  [Table 30]
  Dec. 31,
2014
March 31,
2015
  % %
Germany 2.00 1.60
United Kingdom 3.60 3.30
United States 3.70 3.50

The data selection criteria used to determine the discount rate in the eurozone were modified at the beginning of 2015. The item “Remeasurements of the net defined benefit liability for post-employment benefit plans” contains losses resulting from the fall in market interest rates. The modification of the data selection criteria had an offsetting effect of €1.3 billion. The discount rate obtained by applying the previous data selection criteria would have been lower by 30 basis points as of March 31, 2015. The change in the way the discount rate is determined reduces the net pension expense for the 2015 fiscal year by €17 million. As before, the underlying bond portfolio consists entirely of high-quality corporate bonds with a minimum aa or aaa rating. It does not include government-guaranteed or covered bonds.

Segment reporting

The following table shows the reconciliation of ebitda before special items of the segments to income before income taxes of the Group.

Reconciliation of Segments’ EBITDA Before Special Items to Group Income
Before Income Taxes [Table 31]
  1st Quarter
2014
1st Quarter
2015
  € million € million
EBITDA before special items of segments 2,834 3,149
EBITDA before special items of Corporate Center (96) (149)
EBITDA before special items 2,738 3,000
Depreciation, amortization and impairment losses before special items of segments (648) (757)
Depreciation, amortization and impairment losses before special items of Corporate Center (1) (1)
Depreciation, amortization and impairment losses before special items (649) (758)
EBIT before special items of segments 2,186 2,392
EBIT before special items of Corporate Center (97) (150)
EBIT before special items 2,089 2,242
Special items of segments 7 (240)
Special items of Corporate Center (4)
Special items 7 (244)
EBIT of segments 2,193 2,152
EBIT of Corporate Center (97) (154)
EBIT 2,096 1,998
Financial result (159) (274)
Income before income taxes 1,937 1,724

Companies consolidated

Changes in the scope of consolidation

The consolidated financial statements as of March 31, 2015, included 301 companies (December 31, 2014: 302 companies). As in the statements as of December 31, 2014, one of these companies was accounted for as a joint operation in line with Bayer’s interest in its assets, liabilities, revenues and expenses in accordance with ifrs 11 (Joint Arrangements). Two (December 31, 2014: three) joint ventures and four (December 31, 2014: three) associates were accounted for in the consolidated financial statements using the equity method according to ias 28 (Investments in Associates and Joint Ventures).

Acquisitions and divestitures

Acquisitions

On March 2, 2015, MaterialScience successfully completed the acquisition of Thermoplast Composite GmbH, Germany, a technology leader specializing in the production of thermoplastic fiber composites. The aim of the acquisition is to expand the range of polycarbonate materials for major industries to include composites made from continuous fiber-reinforced thermoplastics. A purchase price of €18 million was agreed. This includes a variable component of €4 million. The purchase price pertained mainly to patents and goodwill.

The effects of this transaction and other, smaller transactions made in the first quarter of 2015 – along with adjustments to purchase prices and purchase price allocations made in the first quarter of 2015 relating to previous years’ transactions – on the Group’s assets and liabilities as of the respective acquisition or adjustment dates are shown in the table. Net of acquired cash and cash equivalents, the transactions resulted in the following cash outflow:

Acquired Assets, Assumed Liabilities and Adjustments
(Fair Values at the Respective Acquisition Dates) [Table 32]
  1st Quarter
2015
  € million
Goodwill (2)
Patents and technologies 21
Other intangible assets 42
Property, plant and equipment 10
Inventories (20)
Other current assets 13
Cash and cash equivalents
Deferred tax assets (2)
Other provisions (38)
Financial liabilities
Other liabilities 17
Deferred tax liabilities (3)
Net assets 38
Changes in non-controlling interest
Purchase price 38
Acquired cash and cash equivalents
Settlement gain from pre-existing relationship
Liabilities for future payments (5)
Payments for previous years' acquisitions
Net cash outflow for acquisitions 33



Divestitures

On March 2, 2015, Consumer Health completed the sale of two equine products, Legend/Hyonate and Marquis, to the u.s. company Merial, Inc., Duluth, Georgia. A sale price of us$135 million was agreed. The one-time payment is accounted for as deferred income. The purchase prices for Legend/Hyonate and Marquis will be reflected in sales and earnings over a four-year and a three-year period, respectively.

Financial instruments

Table 33

Carrying Amounts and Fair Values of Financial Instruments

Click on the table to enlarge.

The table above shows the carrying amounts and fair values of financial assets and liabilities by category of financial instrument and a reconciliation to the corresponding line item in the statements of financial position. Since the line items “Other receivables,” “Trade accounts payable” and “Other liabilities” contain both financial instruments and non-financial assets or liabilities (such as other tax receivables or advance payments for services to be received in the future), the reconciliation is shown in the column headed “Non-financial assets/liabilities.”

The loans and receivables reflected in other financial assets and the liabilities measured at amortized cost also include receivables and liabilities under finance leases in which Bayer is the lessor or lessee and which are therefore measured in accordance with ias 17.

Because of the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date did not significantly differ from the fair values.

The fair value stated for noncurrent receivables, loans, held-to-maturity financial investments and non-derivative financial liabilities is the present value of the respective future cash flows. This was determined by discounting the cash flows at a closing-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. Where a market price was available, however, this was deemed to be the fair value.

The fair values of available-for-sale financial assets correspond to quoted prices in active markets for identical assets (Level 1).

The fair values of derivatives for which no publicly quoted prices existed in active markets (Level 1) were determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit value adjustments were determined to allow for the contracting party’s credit risk. The respective currency and commodity forward contracts were measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by discounting future cash flows over the remaining terms of the instruments at market rates of interest, taking into account any foreign currency translation as of the closing date.

Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This applies in some cases to the fair values of embedded derivatives or to obligations for contingent consideration in business combinations.

Embedded derivatives were separated from their respective host contracts. Such host contracts are generally sales or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with fluctuations in exchange rates, commodity prices or other prices, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs (Level 3). These included planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting.

The changes in the net amount of financial assets and liabilities recognized at fair value based on unobservable inputs (Level 3) were as follows:

Changes in the Net Amount of Financial Assets and Liabilities
Recognized at Fair Value Based on Unobservable Inputs [Table 34]
  2015
  € million
Net carrying amounts, Jan. 1 (25)
Gains (losses) recognized in profit or loss 16
of which related to assets/liabilities recognized in the statements of financial position 16
Gains (losses) recognized outside profit or loss
Additions of assets/(liabilities) (1)
Settlements of (assets)/liabilities
Reclassifications
Net carrying amounts, March 31 (10)

The changes recognized in profit or loss were included in other operating income or expenses.

Legal risks

To find out more about the Bayer Group’s legal risks, please see Note 32 to the consolidated financial statements in the Bayer Annual Report 2014, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2014, the following significant changes have occurred in respect of the legal risks:

HealthCare

YasminTM/yazTM: As of April 20, 2015, the number of claimants in the pending lawsuits and claims in the United States totaled about 4,600 (excluding claims already settled). Claimants allege that they have suffered personal injuries, some of them fatal, from the use of Bayer’s drospirenone-containing oral contraceptive products such as YasminTM and/or yazTM or from the use of OcellaTM and/or GianviTM, generic versions of YasminTM and yazTM, respectively, marketed by Barr Laboratories, Inc. in the United States.

As of April 20, 2015, Bayer had reached agreements, without admission of liability, to settle approximately 9,600 claims in the u.s. for venous clot injuries (deep vein thrombosis or pulmonary embolism) for a total amount of about us$1.92 billion. Bayer will continue to consider the option of settling such claims after a case-specific analysis of medical records. At present, about 1,000 such claims are under review.

MirenaTM: As of April 20, 2015, lawsuits from approximately 3,300 users of MirenaTM, an intrauterine system providing long-term contraception, had been served upon Bayer in the u.s. Additional lawsuits are anticipated. Plaintiffs allege personal injuries resulting from the use of MirenaTM, including perforation of the uterus, ectopic pregnancy, or idiopathic intracranial hypertension, and seek compensatory and punitive damages.

XareltoTM: As of April 20, 2015, lawsuits of approximately 500 recipients of XareltoTM, an oral anticoagulant for the treatment and prevention of blood clots, had been served upon Bayer in the u.s. Plaintiffs allege personal injuries from the use of XareltoTM, including cerebral, gastrointestinal or other bleeding and death, and seek compensatory and punitive damages. Additional lawsuits are anticipated. As of April 20, 2015, five lawsuits relating to XareltoTM seeking class action certification had been served upon Bayer in Canada.

StaxynTM: In Bayer’s patent infringement suit in a u.s. federal court against Watson Laboratories, Inc., the court ruled in April 2015 that both of Bayer’s compound patents are valid and infringed. Watson may appeal. Bayer’s erectile dysfunction treatment StaxynTM is an orodispersible (orally disintegrating) formulation of LevitraTM. Both drug products contain the same active ingredient, which is protected in the u.s. by the compound patents upheld by the court.

Related parties

Related parties as defined in ias 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its subsidiaries exercise control or have a significant influence. They include, in particular, non-consolidated subsidiaries, joint ventures, associates, post-employment benefit plans and the corporate officers of Bayer AG. Sales to related parties were not material from the viewpoint of the Bayer Group. Goods and services to the value of €0.2 billion were procured from the associated company po jv, lp, Wilmington, Delaware, United States, mainly in the course of normal business operations. There was no significant change in receivables or payables vis-à-vis related parties compared with December 31, 2014.

Leverkusen, April 27, 2015
Bayer Aktiengesellschaft

The Board of Management

Dr. Marijn Dekkers    Werner Baumann    Johannes Dietsch    Michael König    Kemal Malik

Last updated: April 30, 2015  Copyright © Bayer AG
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