Merck 2010 Annual Report Download - page 153

Sales are recognized net of related taxes as well as revenue-lowering items. They are deemed
realized once the goods have been delivered or the services have been rendered and the material
opportunities and risks of ownership have been transferred to the purchaser. The amount of
revenue can be reliably determined and payment is sufficiently probable. When sales are recog-
nized, estimated amounts are set aside for expected revenue-lowering items, for example rebates,
discounts and returns.
In addition to revenue from the sale of goods, sales also include revenue from services, but the
volume involved is insignificant. Depending on the substance of the relevant agreements, royalty,
license and commission income is recognized either immediately or on an accrued basis if further
contractual obligations exist.
Dividend income is recognized when the shareholders’ right to receive the dividend is established.
This is normally the date of the dividend resolution. Interest income is recognized on a time-propor-
tionate basis using the effective rate method.
The breakdown of research and development costs by division and region is presented under Seg-
ment Reporting. In addition to the costs of research departments and process development, this
item also includes the cost of purchased services and the cost of clinical trials. The costs of research
and development are expensed in full in the period in which they are incurred. Development
expenses in the Pharmaceuticals business sector cannot be capitalized since the high level of risk up
to the time that pharmaceutical products are marketed means that the requirements of IAS 38 are
not satisfied in full. Costs incurred after regulatory approval are insignificant. In the same way, the
risks involved until products are marketed means that development expenses in the Chemicals busi-
ness sector cannot be capitalized. In addition to our own research and development, Merck is also
a partner in collaborations aimed at developing marketable products. These collaborations typically
involve payments for the achievement of certain milestones.
With respect to this situation, an assessment is required as to whether these upfront or milestone
payments represent compensation for services performed (research and development expense) or
whether the payments represent the acquisition of a right which has to be capitalized. Reimburse-
ments for R & D are offset against research and development costs.
A financial instrument is any contract that gives rise to both a financial asset of one entity and
a financial liability or equity instrument of another entity. A distinction is made between non-
derivative and derivative financial instruments.
Derivatives can be embedded in other financial instruments or in non-financial instruments.
Under IFRS, an embedded derivative must be separated from the host contract and accounted for
separately at fair value if the economic characteristics of the embedded derivative are not closely
related to the economic characteristics of the host contract. Merck did not have any separable
embedded derivatives during the fiscal year. Issued compound financial instruments with both an
equity and a liability component must be recognized separately depending on their characteristics.
Merck was not a party to hybrid or compound financial instruments during the fiscal year. As a
rule, Merck accounts for regular way purchases or sales of financial instruments at the settlement
date and derivatives at the trade date.
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Company 149Management Report Corporate governance Consolidated Financial Statements
Notes
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