Merck 2010 Annual Report Download - page 154

Financial assets and financial liabilities are generally measured at fair value on initial recognition,
if necessary including transaction costs. The fair value of a financial instrument is the amount
which would be agreed by two willing, independent parties in an arm’s length transaction for that
financial instrument. If quoted prices in an active market are available, they are used to measure
the financial instrument. In other cases, generally accepted financial techniques using observable
prices on the market or third-party valuations are used.
Financial assets are derecognized in part or in full if the contractual rights to the cash flows from
the financial asset have expired or if control and substantially all the risks and rewards of ownership
of the financial asset have been transferred to a third party. Financial liabilities are derecognized if
the contractual obligations have been discharged, cancelled, or expire.
Financial assets and liabilities are classified into the following IAS 39 measurement categories and
IFRS 7 classes.
“Financial assets and financial liabilities at fair value through profit or loss” can be both non-deriv-
ative and derivative financial instruments. Financial instruments in this category are subsequently
measured at fair value. Gains and losses on financial instruments in this measurement category
are recognized directly in the income statement. This measurement category includes an option
to designate non-derivative financial instruments as at “fair value through profit or loss” on initial
recognition (fair value option) or as “financial instruments held for trading”. We did not apply the
fair value option during the fiscal year.
Merck only assigns derivatives to the “held for trading” measurement category. Special accounting
rules apply to derivatives that are designated as hedging instruments in a hedging relationship
(hedge accounting).
“Held-to-maturity investments” are non-derivative financial assets with fixed or determinable
payments and fixed maturity that are quoted in an active market. To be able to assign a financial
asset to this measurement category, the entity must have the positive intention and ability to
hold it to maturity.
These investments are subsequently measured at amortized cost. If there is objective evidence that
such an asset is impaired, an impairment loss is recognized in profit or loss. Subsequent reversals
of impairment losses are also recognized in profit or loss up to the amount of the original cost of
the asset. At Merck, this measurement category is used for short-term securities and other current
financial assets, as well as long-term investments.
“Loans and receivables” are non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market. They are subsequently measured at amortized cost. If there
is objective evidence that such assets are impaired, an impairment loss is recognized in the income
statement. Subsequent reversals of impairment losses are also recognized in the income statement
up to the amount of the original cost of the asset. Long-term non-interest-bearing and low-
interest receivables are measured at their present value. Merck primarily assigns trade receivables,
loans, and miscellaneous other current and non-current receivables to this measurement category.
Merck uses a separate allowance account for impairment losses on trade and other receivables.



150 Merck Annual Report 2010