Merck 2014 Annual Report Download - page 194

189CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Loans and receivables
“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 im-
pairment 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. Long-term non-interest-
bearing and low-interest receivables are measured at their present
value. The Group primarily assigns trade receivables, loans, and
miscellaneous other current and non- current receivables to this
measurement category. The Group always uses a separate allow-
ance account for impairment losses on trade and other receivables.
Amounts from the allowance account are recognized in the carry-
ing amount of the corresponding receivable as soon as this is
settled or derecognized due to irrecoverability.
Available-for-sale financial assets
“Available-for-sale financial assets” are those non-derivative
financial assets that are not assigned to the measurement categories
“financial assets and financial liabilities at fair value through profit
or loss”, “held-to-maturity investments” or “loans and receivables”.
Financial assets in this category are subsequently measured at fair
value. Changes in fair value are recognized immediately in equity
and are only transferred to the income statement when the financial
asset is derecognized. If there is objective evidence that such an
asset is impaired, an impairment loss is recognized immediately in
the income statement, including any amounts already recognized
in equity. Reversals of impairment losses on previously impaired
equity instruments are recognized immediately in equity. Rever-
sals of impairment losses on previously impaired debt instruments
are recognized in profit or loss up to the amount of the impair-
ment loss. Any amount in excess of this is recognized directly in
equity. In the Group this measurement category is used in partic-
ular for securities and financial assets, as well as interests in sub-
sidiaries that are not consolidated due to secondary importance
(affiliates). Financial assets in this category for which no fair value
is available or fair value cannot be reliably determined are mea-
sured at cost less any cumulative impairment losses. Impairment
losses on financial assets carried at cost may not be reversed.
Other liabilities
Other liabilities are non-derivative financial liabilities that are
subsequently measured at amortized cost. Differences between the
amount received and the amount to be repaid are amortized to
profit or loss over the maturity of the instrument. The Group
primarily assigns financial liabilities, trade payables, and miscel-
laneous other non-derivative current and non-current liabilities to
this category.
(14) FINANCIAL INSTRUMENTS:
DERIVATIVES AND HEDGE
ACCOUNTING
The Group uses derivatives solely to economically hedge recognized
assets or liabilities and forecast transactions. The hedge accounting
rules in accordance with IFRSare applied to some of these hedges.
A distinction is made between fair value hedge accounting and
cash flow hedge accounting. Designation of a hedging relation-
ship requires a hedged item and a hedging instrument. In the
Group all hedges relate to recognized or highly probable hedged
items. The Group currently only uses derivatives as hedging
instruments.
The hedging relationship must be effective at all times, i.e. the
change in fair value of the hedging instrument fully offsets changes
in the fair value of the hedged item. The Group uses the dollar
offset method as well as regression analyses to measure hedge
effectiveness. Derivatives that do not or no longer meet the docu-
mentation or effectiveness requirements for hedge accounting,
whose hedged item no longer exists, or for which hedge account-
ing rules are not applied 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. Gains and losses on the
hedging instrument resulting from changes in fair value are rec-
ognized 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.
In the Group cash flow hedges normally relate to highly
probable forecast transactions in foreign currency and to future
interest payments. In cash flow hedges, the effective portion of the
gains and losses on the hedging instrument is recognized in equi-
ty until the hedged expected cash flows affect profit or loss. This
is also the case if the hedging instrument expires, is sold, or is
terminated before the hedged transaction occurs and the occur-
rence of the hedged item remains likely. The ineffective portion of
a cash flow hedge is recognized directly in profit or loss.