Financial Statements

Explanatory Notes

Accounting policies

Pursuant to Section 37w Paragraph 3 of the German Securities Trading Act, the consolidated interim financial statements as of June 30, 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.

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’s 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 RateAverage Rate
€1 Dec. 31,  2014June 30, 2014June 30, 20151st Half 20141st Half 2015
BRLBrazil3.223.003.473.153.30
CADCanada1.411.461.381.501.38
CHFSwitzerland1.201.221.041.221.06
CNYChina7.548.476.948.456.94
GBPUnited Kingdom0.780.800.710.820.73
JPYJapan145.23138.44137.01140.50134.14
MXNMexico17.8717.7117.5317.9816.88
RUBRussia72.3446.3862.3647.9563.83
USDUnited States1.211.371.121.371.12

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, 2014March 31, 2015June 30, 2015
 %%%
Germany2.001.602.30
United Kingdom3.603.303.80
United States3.703.504.10

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 gains resulting from the rise in market interest rates. The modification of the data selection criteria had an effect of €0.7 billion. The discount rate obtained by applying the previous data selection criteria would have been lower by 20 basis points as of June 30, 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]
 2nd Quarter 20142nd Quarter 20151st Half 20141st Half 2015
 € million€ million€ million€ million
EBITDA before special items of segments2,2812,9985,0806,088
EBITDA before special items of Corporate Center(105)(99)(201)(248)
EBITDA before special items2,1762,8994,8795,840
Depreciation, amortization and impairment losses before special items of segments(692)(809)(1,336)(1,561)
Depreciation, amortization and impairment losses before special items of Corporate Center(1)(2)(2)(3)
Depreciation, amortization and impairment losses before special items(693)(811)(1,338)(1,564)
EBIT before special items of segments1,5892,1893,7444,527
EBIT before special items of Corporate Center(106)(101)(203)(251)
EBIT before special items1,4832,0883,5414,276
Special items of segments(48)(248)(41)(488)
Special items of Corporate Center(7)(11)
Special items(48)(255)(41)(499)
EBIT of segments1,5411,9413,7034,039
EBIT of Corporate Center(106)(108)(203)(262)
EBIT1,4351,8333,5003,777
Financial result(173)(287)(332)(561)
Income before income taxes1,2621,5463,1683,216
2014 figures restated

Companies consolidated

Changes in the scope of consolidation

The consolidated financial statements as of June 30, 2015, included 295 companies (December 31, 2014302 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, divestitures and discontinued operations

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 half of 2015 – along with adjustments to purchase prices and purchase price allocations made in the first half of 2015 relating to previous years’/quarters’ 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 Half 2015
 € million
Goodwill(8)
Patents and technologies21
Other intangible assets33
Property, plant and equipment22
Inventories(24)
Other current assets8
Cash and cash equivalents
Deferred tax assets(2)
Other provisions(34)
Financial liabilities
Other liabilities7
Deferred tax liabilities(3)
Net assets20
Changes in non-controlling interest
Purchase price20
Acquired cash and cash equivalents
Liabilities for future payments(5)
Purchase price adjustment(18)
Payments for previous years’/quarters’ acquisitions
Net cash outflow for acquisitions(3)

On July 1, 2015, CropScience closed the acquisition of SeedWorks India Pvt. Ltd., based in Hyderabad, India. The company is specialized in the breeding, production and marketing of hybrid seeds of tomato, hot pepper, okra and gourds. It has research and seed processing locations in Bangalore and Hyderabad, respectively. The purchase of SeedWorks India is intended to further strengthen CropScience’s vegetable seed business in India. A basic purchase price of €78 million was agreed.

As part of the acquisition of the consumer care business of Merck & Co., Inc., Whitehouse Station, New Jersey, United States, the production facilities at the Pointe-Claire site in Canada were acquired on July 1, 2015.

The global purchase price allocation for the consumer care business of Merck & Co., Inc. currently remains incomplete pending compilation and review of the relevant financial information. Significant changes may yet be made in the allocation of the purchase price to the individual assets and liabilities.

Divestitures

On March 2, 2015, Consumer Health completed the sale of two equine products, Legend/Hyonate and Marquis, to Merial, Inc. A purchase price of €120 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.

Discontinued operations

On June 8, 2015, an agreement was signed to sell the Diabetes Care business to Panasonic Healthcare Holdings Co., Ltd., Tokyo, Japan, for €1,022 million. The sale will include the leading ContourTM portfolio of blood glucose monitoring meters and strips, as well as other products such as BreezeTM2, EliteTM and MicroletTM lancing devices. Closing of the transaction is subject to customary conditions, including relevant antitrust clearance, and is expected to occur in the first quarter of 2016.

The Diabetes Care activities are reported as a discontinued operation. The respective information is provided from the standpoint of the Bayer Group and is not intended to present these activities as a separate entity.

The income statements for the discontinued operation are given below:

Income Statements for Discontinued Operations   [Table 33]
 2nd Quarter 20142nd Quarter 20151st Half 20141st Half 2015
 € million€ million€ million€ million
Net sales230235433473
Cost of goods sold(89)(96)(170)(186)
Gross profit141139263287
     
Selling expenses(88)(94)(163)(179)
Research and development expenses(9)(12)(17)(22)
General administration expenses(9)(6)(18)(18)
Other operating income/expenses1(4)27
EBIT138206974
     
Financial result
     
Income before income taxes38206974
     
Income taxes(2)(3)(6)(12)
     
Income after income taxes36176362
1 EBIT = earnings before financial result and taxes
2014 figures restated

The assets and liabilities of the discontinued operation are shown in the following table:

Assets and Liabilities of Discontinued Operations [Table 34]
 June 30, 2015
 € million
Noncurrent assets 
Goodwill34
Other intangible assets10
Property, plant and equipment8
Other financial assets
Other receivables
Deferred taxes
 52
Current assets 
Inventories114
Trade accounts receivable
Other financial assets
Other receivables
Claims for income tax refunds
Cash and cash equivalents
 114
  
Total assets166
  
Noncurrent liabilities 
Provisions for pensions and other post-employment benefits24
Other provisions
Financial liabilities
Other liabilities
Deferred taxes
 24
Current liabilities 
Other provisions81
Financial liabilities
Trade accounts payable
Income tax liabilities
Other liabilities9
 90
  
Total liabilities 114

In addition to the assets of the discontinued Diabetes Care business amounting to €166 million, the statement of financial position as of June 30, 2015, reflects a further €17 million in assets held for sale.

The discontinued operation affected the Bayer Group statements of cash flows as follows:

Cash Flows of Discontinued Operations    [Table 35]
 2nd Quarter 20142nd Quarter 20151st Half 20141st Half 2015
 € million€ million€ million€ million
Net cash provided by (used in) operating activities (net cash flow)3295156
Net cash provided by (used in) investing activities(2)(1)(3)(1)
Net cash provided by (used in) financing activities(30)(8)(48)(55)
Change in cash and cash equivalents

Financial instruments

Carrying Amounts and Fair Values of Financial Instruments     [Table 36]
 June 30, 2015
  Carried at
amortized cost
Carried at
fair value
Non-financial
assets/
liabilities
 
   

Based on
quoted prices

in active
markets
(Level 1)

Based on
observable
market data
(Level 2)
Based on
unobservable
inputs
(Level 3)
  
  Carrying
amount
June 30, 2015
Fair value
(for
information)
Carrying amountCarrying  amountCarrying  amountCarrying amount

Carrying
amount in the

statement of
financial
position

 € million€ million€ million€ million€ million€ million€ million
Trade accounts receivable11,242     11,242
Loans and receivables11,24211,242    11,242
        
Other financial assets1,022 35852250 1,952
Loans and receivables928928    928
Available-for-sale financial assets31 358 8 397
Held-to-maturity financial assets6364    63
Derivatives   52242 564
        
Other receivables595    1,3051,900
Loans and receivables595595    595
Non-financial assets     1,3051,305
        
Cash and cash equivalents3,247     3,247
Loans and receivables3,2473,247    3,247
        
Total financial assets16,106 35852250 17,036
of which loans and receivables16,012     16,012
        
Financial liabilities24,110  744  24,854
Carried at amortized cost24,11025,773    24,110
Derivatives   744  744
        
Trade accounts payable5,174    655,239
Carried at amortized cost5,1745,174    5,174
Non-financial liabilities     6565
        
Other liabilities793  247471,9533,040
Carried at amortized cost793793    793
Carried at fair value (non-derivative)    39 39
Derivatives   2478 255
Non-financial liabilities     1,9531,953
        
Total financial liabilities30,077  99147 31,115
of which carried at amortized cost30,077     30,077
of which derivatives   9918 999

The table on the preceding page 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.

Receivables from government institutions and private customers in Greece are under special observation in view of the government debt crisis. Although there were no material defaults on such receivables in 2015 or 2014, it is possible that future developments could result in payment delays and/or defaults. This could necessitate the recognition of impairment losses due to new occurrences. Receivables from goverment institutions and private customers in Greece as of June 30, 2015, totaled €138 million (June 30, 2014: €94 million).

Based on our assessment of the situation in Venezuela, we recognized impairment losses of €74 million on other receivables.

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 37]
 2015
 € million
Net carrying amounts, Jan. 1(25)
Gains (losses) recognized in profit or loss13
of which related to assets/liabilities recognized in the statement of financial position 7
Gains (losses) recognized outside profit or loss
Additions of assets/(liabilities)
Settlements of (assets)/liabilities9
Reclassifications to “Liabilities directly related to assets held for sale and discontinued operations”6
Net carrying amounts, June 303

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 July 17, 2015, the number of claimants in the pending lawsuits and claims in the United States totaled about 4,000 (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 July 17, 2015, Bayer had reached agreements, without admission of liability, to settle approximately 9,900 claims in the u.s. for venous clot injuries (deep vein thrombosis or pulmonary embolism) for a total amount of about us$1.97 billion. Bayer will continue to consider the option of settling such claims after a case-specific analysis of medical records. At present, about 590 such claims are under review. In July 2015, Bayer reached an agreement in principle to settle, without admission of liability, lawsuits and claims in which plaintiffs allege an arterial thromboembolic injury (strokes and heart attacks) for a total maximum aggregate amount of us$56.9 million. Bayer may withdraw from the settle­ment if fewer than 97.5 percent of those who are eligible choose to participate. As of July 17, 2015, about 1,200 of the 4,000 above-mentioned claimants alleged arterial thromboembolic injuries.

MirenaTM: As of July 17, 2015, lawsuits from approximately 3,350 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 July 17, 2015, lawsuits of approximately 1,200 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 July 17, 2015, six 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.

Bayer Pharma AG former shareholder litigation: In the special court proceedings initiated by former minority stockholders of Bayer Pharma AG (formerly named Bayer Schering Pharma AG), Berlin, Bayer still believes that the severance and compensation payments originally determined were adequate and that the decision that has since been taken by the District Court of Berlin in one such proceeding was incorrect. However, without acknowledging liability, Bayer has now offered a settlement providing for an increase of the compensation in both proceedings to a uniform amount. The offer is subject to all claimants in both proceedings agreeing to the settlement.

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 €0.3 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.

Other information

The Annual Stockholders’ Meeting on May 27, 2015, approved the proposal by the Board of Management and the Supervisory Board that a dividend of €2.25 per share be paid for the 2014 fiscal year.

The actions of the members of the Board of Management and the Supervisory Board were ratified.

One stockholder representative was elected to the Supervisory Board in accordance with the nomination submitted by the Supervisory Board.

The object of the company stated in Section 2, Paragraph 1 of the Articles of Incorporation was amended as proposed by the Board of Management and the Supervisory Board.

PricewaterhouseCoopers Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Essen, was elected as auditor of the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group for the fiscal year 2015 and to perform the audit review of the 2015 half-year financial report.

The Vice Chairman of the Supervisory Board, Thomas de Win, stepped down from the Supervisory Board, effective at the end of the day on June 30, 2015. He was succeeded as a member of the Supervisory Board by the respective replacement member elected by the employees, Heinz Georg Webers. The Supervisory Board elected Oliver Zühlke as its Vice Chairman.

Leverkusen, July 27, 2015
Bayer Aktiengesellschaft

The Board of Management

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

Last updated: July 29, 2015  Copyright © Bayer AG
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