Merck 2010 Annual Report Download - page 156

Changes in the fair value or cash flows of the hedged item and the hedging instrument must be
effective at all times. In both cash flow and fair value hedges, the ineffective portion of the gain or
loss on a hedging instrument is recognized in profit or loss. Merck uses the dollar offset method to
measure hedge effectiveness. There are strict documentation requirements for hedge accounting.
Derivatives that do not or no longer meet the documentation or effectiveness requirements for hedge
accounting, or whose hedged item no longer exists, are reported as “financial assets and liabilities
at fair value through profit or loss.” Changes in fair value are then recognized in profit or loss.
As a rule, the purpose of a fair value hedge is to offset the exposure to changes in the fair value of
recognized hedged items (financial assets or financial liabilities) through offsetting changes in the
fair value of a hedging instrument. Offsetting gains and losses on the hedging instrument resulting
from changes in fair value are recognized in profit or loss, net of deferred taxes. Offsetting gains
and losses on the hedged item that are attributable to the hedged risk are also recognized in profit
or loss, irrespective of the item’s allocation to a measurement category.
At Merck, cash flow hedges are normally a hedge of the exposure to variability in cash flows resulting
from highly probable forecast transactions in foreign currencies. In cash flow hedges, the effective
portion of the gains and losses on the hedging instrument is recognized in equity until the hedged
item occurs. This is also the case if the hedging instrument expires, is sold, or is terminated before the
hedged transaction occurs. The ineffective portion of a cash flow hedge is always recognized in profit
or loss. See Note [40] for a detailed overview.
Other non-financial assets are carried at amortized cost. Impairment losses are recognized for any
credit risks. Long-term non-interest-bearing and low-interest receivables are carried at their pres-
ent value. Other non-financial liabilities are carried at the amount to be repaid.
Inventories are carried at cost using the weighted average method. In accordance with IAS 2, in
addition to directly attributable unit costs, manufacturing costs also include overheads attributable
to the production process, including an appropriate share of depreciation charges on production
facilities, which are determined on the basis of normal capacity utilization of the production facilities.
Inventories are written down if the net realizable value is lower than the acquisition or manu-
facturing cost carried in the balance sheet.
Acquired intangible assets are recognized at cost and are classified as assets with finite and
indefinite useful lives. Self-developed intangible assets are not capitalized. Intangible assets with
indefinite useful lives acquired in the course of business combinations are recognized at fair value
on the date of acquisition. This includes purchased goodwill and intangible assets used in products
that have not yet reached market maturity. Intangible assets with indefinite useful lives are not
amortized, however they are tested for impairment when a triggering event arises or at least once
a year. Goodwill is tested for impairment either annually or if there are indications of impair-
ment, and is allocated to cash-generating units. A cash-generating unit is normally a division as
presented under Segment Reporting.
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152 Merck Annual Report 2010