Merck 2014 Annual Report Download - page 190

185CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
The Group also receives upfront and milestone payments as part
of research and development collaborations or out-licensing
agreements. In this context, income may only be recognized if
the
Group has transferred any material risks and rewards of an
intangible asset to the acquirer, has no interest in the remaining
business activities and has no other continuing commitment. If
these criteria are not deemed to be met, the received payments are
deferred and recognized over the period in which the Group is
expected to fulfill its performance obligations. Both the assess-
ment of the revenue recognition criteria and the determination of
the appropriate period during which revenue is recognized are
subject to judgment. If the upfront payment, which was agreed as
part of the strategic alliance with Pfizer Inc., USA, entered into
during the reporting period and which was received in cash and
deferred as a liability, had been deferred and recognized in the
income state
ment over a shorter period reduced by one year, profit
before income tax for fiscal year 2014 would have increased by
€2.7 million.
Identification of impairment of non-financial assets
Judgments are required in the identifi cation of existing indications
of impairment of intangible assets and
property, plant and equip-
ment. As of December 31, 2014, the carrying amounts of these
assets amounted to €14,385.9 million (2013: €12,514.4 million).
The Group uses external and internal information to identify indi-
cations of impairment. For example, the approval of a competing
product in the Biopharmaceuticals division or the closure of a
location can be an indicator of impairment. Nevertheless, the
Group’s analysis of indications of impairment can prove too
optimistic, too pessimistic or incorrect in hindsight due to the high
degree of uncertainty. This would result in impairment tests being
carried out too late, too early or erroneously not carried out at all.
Impairment of financial assets
On every reporting date, the Group reviews whether there is any
objective evidence that a financial asset is impaired and, if this is
the case, carries out the impairment to the extent estimated as
necessary. Particularly important in this context are impairment
losses on trade receivables whose carrying amount was €2,235.6
million in 2014 (2013: €2,021.4).
Significant indicators for the identification of impaired receiv-
ables and the subsequent impairment tests are in particular
payment default or delay in the payment of interest or principal,
negative changes in economic or regional economic framework
conditions as well as considerable financial difficulties of a debtor.
These estimates are discretionary and can later prove to be incorrect.
Other provisions
As a global Group for high-tech products in the pharmaceutical
and chemical industries, the Group is
exposed to a multitude of
litigation risks. In particular, these include
risks from product
liability, competition and antitrust law, pharmaceutical law, patent
law, tax law and environmental protection. The Group is engaged
in legal proceedings and official investigations, the outcomes of
which are uncertain. A detailed description of the most important
legal matters as of the balance sheet date can be found in Note
[48]. The provisions recognized for legal disputes mainly relate to
the Biopharmaceuticals division and amounted to €393.1 million
as of the reporting date (2013: €772.3 million). To assess the exis-
tence o
f a reporting obligation and to quantify pending outflows
of resources, the Group draws on the knowledge of the legal
department as well as any other outside counsel.
In spite of this, both the assessment of the existence of a pres-
ent obligation and the estimate of the probability of a future
outflow of resources are highly subject to uncertainty. Equally, the
evaluation of a possible payment obligation is to be considered
a major source of estimation uncertainty.
To a certain extent, the Group is obliged to take measures to
protect the environment and reported provisions for environmen-
tal protection of €123.7 million as of December 31, 2014 (2013:
€111.2 million). The underlying obligations were located mainly
in Germany and the United States. Provisions were recognized
primarily for obligations from soil remediation and groundwater
protection in connection with the discontinued crop protection
business.
The calculation of the present value of the future settlement
amount requires, among other things, estimates of the future
settlement date, the actual severity of the identified contamination,
the applicable remediation methods and the associated future
costs. The measurement is carried out regularly in consultation
with independent experts. In spite of this, the determination of the
future settlement amount of the provisions for environmental pro-
tection measures is subject to a considerable degree of uncertainty.
In the event of the discontinuation of clinical development
projects, the Group is regularly required to bear unavoidable sub-
sequent costs for a certain future period of time. The measurement
of these provisions requires estimates regarding the length of time
and the amount of the subsequent costs.