Financial Statements
3. Effects of new accounting pronouncements
Accounting standards applied for the first time in 2010
In 2010, the following accounting standards and interpretations were applied for the first time. These new standards had no impact, or no material impact, on the presentation of the Group’s financial position or results of operations, or on earnings per share.
In January 2008, the IASB published the revised standards IFRS 3 (Business Combinations) and IAS 27 (Consolidated and Separate Financial Statements). Significant changes required by IFRS 3 (revised 2008) include:
- In future, a non-controlling interest may be measured either at fair value (i. e. including goodwill) or at the proportionate share of the identifiable net assets of the entity in which the non-controlling interest is held.
- In the case of a step acquisition, the acquirer must remeasure its previously held interest at fair value on the date on which it gains control of the acquiree and recognize the resulting gain or loss in income. The difference between the (remeasured) carrying amount of the interest in the subsidiary and the acquirer’s remeasured proportionate share of the net assets of the subsidiary must be recognized as goodwill.
- Liabilities recognized as of the acquisition date for the purpose of future purchase price adjustments in light of future events can no longer be offset against goodwill in subsequent periods.
- Ancillary acquisition costs must be recognized in income.
The principal changes required by IAS 27 (revised 2008) are:
- A reduction in the equity interest held in a subsidiary that does not result in a loss of control by the parent is to be accounted for in future as an equity transaction outside profit or loss.
- If a reduction in the equity interest held in a subsidiary involves a loss of control, the assets and liabilities of the subsidiary must be derecognized in their entirety. The remaining interest in the company is to be recognized at fair value. The difference between the remaining carrying amounts and the fair values must be recognized in income.
- Non-controlling interests that become negative due to incurred losses must be recognized at their net negative amounts.
The amendments to IAS 39 (Financial Instruments: Recognition and Measurement) issued in July 2008 deal with one-sided risk hedging using options and with inflation hedging. They clarify the circumstances in which a hedged risk or portion of cash flows is eligible for hedge accounting.
In April 2009 the IASB issued amendments to a number of standards as part of its annual project “Improvements to IFRSs.” The amendments address details of the recognition, measurement and disclosure of business transactions and serve to standardize terminology. They consist mainly of editorial changes to existing standards. As part of the project, IAS 17 (Leases) was amended to the effect that land leases (such as heritable building rights) must be assessed according to the general leasing criteria and may have to be capitalized by the lessee. The previous assumption that a land lease is normally to be classified as an operating lease was abolished.
In June 2009 amendments were issued to IFRS 2 (Share-based Payment) that clarify the accounting for group cash-settled share-based payment transactions. The amendments specify how an individual subsidiary in a group should account for certain share-based payment arrangements in its own financial statements, and also incorporate the rules previously included in IFRIC 8 (Scope of IFRS 2) and IFRIC 11 (IFRS 2 – Group and Treasury Share Transactions).
IFRIC 17 (Distributions of Non-cash Assets to Owners) was issued in November 2008. The interpretation addresses the recognition and measurement of liabilities related to non-cash dividends. It clarifies when an obligation to distribute a non-cash dividend is to be recognized, that it must be measured at fair value, and that the difference between the obligation to distribute and the carrying amount of the net assets distributed must be recognized in profit or loss at the distribution date.
Published accounting standards that have not yet been applied
The IASB and the IFRS Interpretations Committee have issued the following standards, amendments to standards, and interpretations whose application was not yet mandatory for the 2010 fiscal year and is conditional upon their endorsement by the European Union.
An amendment to IAS 32 (Financial Instruments: Presentation) was issued in October 2009. The amendment clarifies that rights issues, options and warrants denominated in a currency other than the issuer’s functional currency and offered on a pro-rata basis to all owners of the same class of equity must be classified as equity. Such rights issues have so far been accounted for as liabilities. The change relates only to issues of a fixed number of shares at a fixed foreign-currency exercise price. The amendment is to be applied for annual periods beginning on or after February 1, 2010. It will not have a material impact on the presentation of the Group’s financial position or results of operations.
In November 2009 the IASB issued the revised standard IAS 24 (Related Party Disclosures), which simplifies the reporting requirements of companies in which a government owns an interest. Under the revised standard, certain kinds of related-party transactions resulting from government ownership of private companies are exempt from some of the disclosure requirements. In addition, the definition of related parties was amended in several respects. The revised standard applies for annual periods beginning on or after January 1, 2011. The changes will not have a material impact on the presentation of the Group’s financial position or results of operations.
In November 2009 the IASB issued IFRS 9 (Financial Instruments), which addresses the classification and measurement of financial assets. Publication of IFRS 9 marks the completion of the first part of a three-part project to completely revise the accounting treatment of financial instruments. The new standard defines two instead of four measurement categories for financial assets, with classification to be based partly on the company’s business model and partly on the characteristics of the contractual cash flows from the respective financial asset. An embedded derivative in a structured product will no longer have to be assessed for possible separate accounting treatment unless the host is a non-financial contract. A hybrid contract that includes a financial host must be classified and measured in its entirety. Application of IFRS 9 is mandatory for annual periods beginning on or after January 1, 2013. It has not yet been endorsed by the European Union. The new standard will not have a material impact on the presentation of the Group’s financial position or results of operations.
In May 2010 the IASB issued a third collection of amendments as part of its annual project “Improvements to IFRSs.” The amendments address details of the recognition, measurement and disclosure of business transactions and serve to standardize terminology. They consist mainly of editorial changes to existing standards. Some of the amendments are to be applied for annual periods beginning on or after January 1, 2011, and the others for annual periods beginning on or after July 1, 2011. They have not yet been endorsed by the European Union. The changes probably will not have a material impact on the presentation of the Group’s financial position or results of operations.
In October 2010 the IASB published amendments to IFRS 7 (Financial Instruments: Disclosures). These amendments require additional disclosures about transactions that transfer financial assets, partly to provide insight into the possible effects of any risks remaining with the transferring entity. Additional disclosures are also required if a disproportionately large number of such transactions is undertaken around the end of a reporting period. The changes are to be applied for annual periods beginning on or after July 1, 2011. They have not yet been endorsed by the European Union. These changes will not have a material impact on the presentation of the Group’s financial position or results of operations.
In December 2010, the IASB issued an amendment to IAS 12 (Income Taxes). This amendment introduces a rebuttable presumption that the carrying amount of an asset will normally be recovered through sale rather than use. The change is particularly relevant in countries where the income tax rates on gains from divestments differ from those on regular rental income, for example. In this connection, SIC 21 (Income Taxes – Recovery of Revalued Non-Depreciable Assets) was integrated into IAS 12 (Income Taxes), except where it related to real estate held as investment property. The revised standard is to be applied retrospectively for annual periods beginning on or after January 1, 2012. The amendments have not yet been endorsed by the European Union. The Bayer Group is currently evaluating the impact that the change will have on the presentation of its financial position and results of operations.
IFRIC 19 (Extinguishing Financial Liabilities with Equity Instruments) was issued in November 2009. The interpretation addresses the accounting treatment in cases where a company settles all or part of a financial liability by issuing equity instruments to the creditor. It is to be applied for annual periods beginning on or after July 1, 2010. Its impact on the presentation of the Group’s financial position and results of operations will depend on the extent to which financial liabilities are settled with equity instruments in the future.
In November 2009 an amendment was issued to IFRIC 14 (IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction), an interpretation of IAS 19 (Employee Benefits). The amendment applies when a company is subject to minimum pension plan funding requirements. It enables prepayment of the respective contributions to be recognized as an asset. The amendment is to be applied for annual periods beginning on or after January 1, 2011. It will not have a material impact on the presentation of the Group’s financial position or results of operations.