Merck 2014 Annual Report Download - page 193

188 CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
(11) RESEARCH AND DEVELOPMENT COSTS
Research and development costs comprise the costs of research
departments and process development, the expenses incurred as
a result of research and development collaborations as well as the
costs of clinical trials (both before and after approval is granted).
The costs of research cannot be capitalized and are expensed
in full in the period in which they are incurred. As internally gen-
erated intangible assets, it is necessary to capitalize development
expenses if the cost of the internally generated intangible asset can
be reliably determined and the asset can be expected to lead to fu-
ture economic benefits. The condition for this is that the necessary
resources are available for the development of the asset, technical
feasibility of the asset is given, its completion and use are intended,
and marketability is given. Owing to the high risks up to the time
that pharmaceutical products are approved, these criteria are not
met in the pharmaceutical business. Costs incurred after regulatory
approval are usually insignificant and are therefore not recognized
as intangible assets. Owing to the risks existing up until market
launch, development expenses in the Performance Materials and
the Life Science divisions can likewise not be capitalized.
Reimbursements for R&D are offset against research and
development costs.
(12) FINANCIAL INSTRUMENTS:
PRINCIPLES
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 sepa-
rately at fair value if the economic characteristics of the embedded
derivative are not closely related to the economic characteristics
of the host contract. Issued compound financial instruments with
both an equity and a liability component must be recognized
separately depending on their characteristics. The Group was
not
a party to hybrid or compound financial instruments during the
fiscal year.
As a rule, the Group accounts for regular way purchases
or sales of financial instruments at the settlement date and of
derivatives at the trade date.
Financial assets and financial liabilities are generally mea-
sured at fair value on initial recognition, if necessary including
transaction costs.
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 expired. Cash and
cash equivalents are carried at nominal value.
(13) FINANCIAL INSTRUMENTS:
CATEGORIES AND CLASSES OF
FINANCIAL INSTRUMENTS
Financial assets and liabilities are classified into the following
IAS39 measurement categories and IFRS7 classes. The classes
required to be disclosed in accordance with IFRS7 consist of the
measurement categories set out here. Additionally, cash and cash
equivalents with an original maturity of up to 90 days, finance
lease liabilities, and derivatives designated as hedging instruments
are also classes in accordance with IFRS7. There were no reclassi-
fications between the aforementioned measurement categories
during the fiscal year.
Financial assets and financial liabilities at fair value
through profit or loss
“Financial assets and financial liabilities at fair value through
profit or loss” can be both non-derivative and derivative financial
instruments. Financial instruments in this category are subse-
quently 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”. The fair
value option was not applied during the fiscal year. The Group 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.
Held to maturity investments
“Held to maturity investments” are non-derivative financial assets
with fixed or determinable payments and a 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. Within in the Group this measurement
category is used for current and non-current financial assets.