Effects of New Financial Reporting Standards

Financial reporting standards applied for the first time in 2016

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

In May 2014, the IASB published amendments to IAS 16 (Property, Plant and Equipment) and IAS 38 (Intangible Assets) entitled “Clarification of Acceptable Methods of Depreciation and Amortisation.” These amendments clarify that revenue-based depreciation of property, plant and equipment or amortization of intangible assets is inappropriate.

In May 2014, the IASB published amendments to IFRS 11 (Joint Arrangements) entitled “Accounting for Acquisitions of Interests in Joint Operations.” The amendments clarify the accounting for the acquisition of an interest in a joint operation in which the activity constitutes a business.

In December 2014, the IASB published its Disclosure Initiative containing amendments to IAS 1 (Presentation of Financial Statements), which are intended to clarify the disclosure requirements. They relate to materiality, line-item aggregation, subtotals, the structure of the Notes to the financial statements, the identification of significant accounting policies and the separate disclosure of the other comprehensive income of associates and joint ventures.

In December 2014, the IASB published amendments to IFRS 10 (Consolidated Financial Statements), IFRS 12 (Disclosure of Interests in Other Entities) and IAS 28 (Investments in Associates and Joint Ventures) entitled “Investment Entities: Applying the Consolidation Exception.” The amendments largely clarify which subsidiaries an investment entity must consolidate and which must be recognized at fair value through profit or loss.

Changes in accounting methods

The legal and economic independence of Covestro results in changes to the global annual impairment tests for Covestro. In the future, from the perspective of the Bayer Group, the strategic business entities of Covestro will be subjected to impairment testing as a group of cash-generating units because the goodwill of Covestro will be monitored by Bayer Group management at this aggregated level from now on.

Published financial reporting standards that have not yet been applied

The IASB and the IFRS Interpretations Committee have issued the following standards, amendments to standards, and interpretations whose application was not yet mandatory for the 2016 fiscal year and is conditional upon their endorsement by the European Union.

In July 2014, the IASB published the most recent version of IFRS 9 (Financial Instruments). The new standard contains revised rules for the classification and measurement of financial assets and liabilities, impairments of financial assets, and hedge accounting. IFRS 9 defines three instead of four measurement categories for capitalized financial instruments, with classification to be based partly on the company’s business model and partly on the characteristics of the contractual cash flows from the respective financial asset. In the case of equity instruments that are not held for trading, an entity may irrevocably opt at initial recognition either to account for such instruments at fair value through profit or loss or to recognize future changes in their fair value outside profit or loss in the statement of comprehensive income and not subsequently reclassify these changes in fair value, even upon their derecognition.

The new impairment model is based on the principle of accounting for an expected loss from the date of first-time recognition of a financial asset, before a loss event occurs. The aim of the revisions regarding hedge accounting is to achieve a more objective presentation of risk management in the financial statements. This also involved the revision of IFRS 7, leading to a requirement for additional disclosures in the Notes. IFRS 9 is to be applied for annual periods beginning on or after January 1, 2018. It was endorsed by the European Union in November 2016. The evaluation of this standard’s impact on the presentation of Bayer’s financial position and results of operations has not yet been completed. No decision has yet been made on whether to exercise the options the standard provides for facilitating the transition and for accounting for financial instruments recognized from January 1, 2018, onward. Based on current knowledge, the effects of applying the final version of IFRS 9 on the allocation of financial instruments to measurement categories and thus on the results of operations are estimated to be immaterial.

In May 2014, the IASB issued IFRS 15 (Revenue from Contracts with Customers). IFRS 15 is the new standard for revenue recognition. It clarifies that the expected consideration for goods or services must be recognized as revenue when the goods or intangible assets are transferred or the services are rendered to the customer. This principle is applied in five steps. In step 1, the contract with the customer is identified. In step 2, the distinct performance obligations in the contract are identified. In step 3, the transaction price is determined. In step 4, this transaction price is allocated to the distinct performance obligations. Finally, in step 5, revenue is recognized when the identified distinct performance obligations are satisfied, either over time or at a point in time. IFRS 15 replaces IAS 11 (Construction Contracts), IAS 18 (Revenue), IFRIC 13 (Customer Loyalty Programmes), IFRIC 15 (Agreements for the Construction of Real Estate), IFRIC 18 (Transfers of Assets from Customers) and SIC‑31 (Revenue-Barter Transactions Involving Advertising Services). The new standard is to be applied for annual periods beginning on or after January 1, 2018.

Bayer currently plans to implement IFRS 15 on the basis of the modified retrospective method, accounting for the aggregate amount of any transition effects by way of an adjustment to retained earnings as of January 1, 2018, and presenting the comparative period in line with previous rules. All of the established business models for the Bayer Group’s Life Sciences This term describes Bayer’s activities in health care and agriculture and comprises the Bayer Group excluding its legally independent subsidiary Covestro. It refers to the businesses of the Pharmaceuticals, Consumer Health and Crop Science divisions and the Animal Health business unit. divisions were examined in the course of the implementation project. The analysis did not yet cover all material consolidated companies. Based on current knowledge, Bayer does not expect the new standard to materially affect the timing of revenue recognition for the transactions concerned or their components. The evaluation of certain individual licensing agreements has not yet been completed.

IFRS 15 clarifies the allocation of individual topics to (new) line items in the statement of financial position and to functional cost items in the income statement, and whether gross or net amounts are to be presented. Determination of the effects on the level of sales or selling expenses has not yet been completed. Based on current knowledge, however, we do not anticipate any material effects on these items. Overall, we do not currently expect any material effects on the presentation of Bayer’s financial position or results of operations as a whole, or on earnings per share.

In September 2014, the IASB published amendments to IFRS 10 (Consolidated Financial Statements) and IAS 28 (Investments in Associates and Joint Ventures) entitled “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture.” The amendments clarify that in a transaction involving an associate or joint venture the extent of gain or loss recognition depends on whether the assets sold or contributed constitute a business. An amendment issued in December 2015 indefinitely defers the effective date of the September 2014 amendments, which were originally intended to be applied for annual periods beginning on or after January 1, 2016. The IASB is to set a new effective date.

In January 2016, the IASB issued IFRS 16 (Leases), the new standard for lease accounting. IFRS 16 introduces a uniform lease accounting model for lessees, requiring recognition of assets and liabilities for all leases with a term of more than 12 months unless such leases are immaterial. It will eliminate the current requirement for lessees to classify lease contracts as either operating leases – without recognizing the respective assets or liabilities – or as finance leases. The new standard is to be applied for annual periods beginning on or after January 1, 2019. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the standard will have on the presentation of its financial position and results of operations.

In January 2016, the IASB published amendments to IAS 12 (Income Taxes) under the title “Recognition of Deferred Tax Assets for Unrealised Losses.” These amendments clarify the accounting for deferred tax assets related to debt instruments measured at fair value. The amendments are to be applied for annual periods beginning on or after January 1, 2017. They have not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations.

In January 2016, the IASB published amendments to IAS 7 (Statement of Cash Flows) under its Disclosure Initiative. The following changes in liabilities arising from financing activities must be disclosed in the future: a) changes from financing cash flows; b) changes arising from obtaining or losing control of subsidiaries or other businesses; c) the effect of changes in Foreign exchange Claims for payments in foreign currencies traded on foreign exchanges, usually in the form of balances with foreign banks or bills of exchange or checks payable abroad; banknotes and coins denominated in foreign currencies are not considered to be foreign exchange. rates; d) changes in fair values; e) other changes. The amendments are to be applied for annual periods beginning on or after January 1, 2017. They have not yet been endorsed by the European Union.

In April 2016, the IASB issued Clarifications to IFRS 15 (Revenue from Contracts with Customers). These amendments address three topics: identifying performance obligations, principal versus agent considerations, and licensing. They also provide some transition relief for modified contracts and completed contracts. The amendments are to be applied for annual periods beginning on or after January 1, 2018. They have not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations.

In June 2016, the IASB published an amendment to IFRS 2 (Share-based Payment) under the title “Classification and Measurement of Share-based Payment Transactions.” This amendment provides guidance on certain accounting issues relating to cash-settled share-based payments. For example, the fair value of the equity instruments is not to be adjusted for service conditions or non-market-based performance conditions. Instead, these are to be taken into account by adjusting the number of equity instruments expected to vest. The amendment is to be applied for annual periods beginning on or after January 1, 2018. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendment will have on the presentation of its financial position and results of operations.

In December 2016, the IASB published an amendment to IAS 40 (Investment Property) under the title “Transfers of Investment Property.” This specifies that a property may only be transferred to or from the investment property classification when there has been an actual change in use and not when there is a mere change of intent concerning the property. The amendment is to be applied for annual periods beginning on or after January 1, 2018. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendment will have on the presentation of its financial position and results of operations.

In December 2016, the IASB published “Annual Improvements to IFRS Standards 2014‑2016 Cycle” as part of its annual improvements project. The amendments relate to IFRS 1 (First Time Adoption of IFRS), IFRS 12 (Disclosure of Interest in Other Entities) and IAS 28 (Investments in Associates and Joint Ventures). They mainly contain clarifications on the scope of application and other matters. The amendments to IFRS 1 and IAS 28 are to be applied for annual periods beginning on or after January 1, 2018, those to IFRS 12 for annual periods beginning on or after January 1, 2017. They have not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial position and results of operations.

In December 2016, the IASB published the IFRIC Interpretation 22 (Foreign Currency Transactions and Advance Consideration) relating to IAS 21 (The Effects of Changes in Foreign Exchange Rates). The Interpretation clarifies that the assets, income and expenses accounted for following a foreign currency transaction are to be translated at the same exchange rate as any related receipts or payments of advance consideration. IFRIC 22 is to be applied for annual periods beginning on or after January 1, 2018. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the Interpretation will have on the presentation of its financial position and results of operations.