Merck 2010 Annual Report Download - page 94

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Default risks arise in connection with financial investments, loans and financing commitments
as well as receivables in operating business. As a result of the financial crisis, the default risks
for receivables in the eurozone have increased to some extent. Merck has therefore reviewed all
its positions in the respective countries and taken precautions for default risks to the necessary
extent. Merck minimizes these risks by spreading its financial positions and the associated
active management of its trading partners. Significant financial transactions involving credit
risk are only entered into with banks that have a good credit rating and a minimum rating
of A- from Standard & Poor’s. In addition, Merck’s large banking syndicate – the existing
credit line of EUR 2 billion was syndicated by 17 banks – reduces possible losses in the event
of default. Nevertheless, the default of individual trading partners cannot be fundamentally
excluded, even if they have an excellent credit rating.
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Due to its international business operations in different currency and interest rate regions,
Merck is inevitably exposed to currency and interest risks. Merck is affected by market price
risks owing to its global group structure and the associated financial transactions, receivables
in operating business, as well as expected future cash flows from sales and costs in foreign
currency. We use derivative financial instruments to minimize currency risks and financing
costs caused by exchange rate or interest rate fluctuations. Financial transactions, receivables
and liabilities recognized in foreign currency are generally hedged. In certain cases, the company
also hedges anticipated sales and future costs for a period of up to three years. More informa-
tion can be found in Notes (40) to (42) of the Consolidated Financial Statements.
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The values of individual items in the balance sheet are exposed to the risk of changing market
and business circumstances and thus also to changes in fair values. The need for write-downs
could significantly impact profit and lead to changes in balance sheet ratios. This applies
in particular to the high level of intangible assets including goodwill, which have become
significantly more important to the Merck Group due to the acquisitions of Serono in 2007
and Millipore in 2010. Further details can be found in Note (23) to the Consolidated Financial
Statements.
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Merck has commitments in connection with pension obligations. The present value of these
obligations can be influenced by changes in the relevant valuation parameters, e.g. the interest
rate, salary increase rate or death probabilities. Pension obligations are regularly evaluated
based on external actuarial valuations prepared annually. The majority of these obligations is
covered by the pension provisions disclosed in the balance sheet, while the smaller remainder
is externally funded or covered by long-term monetary investments made for this purpose and
Merck Annual Report 2010 90