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Other Disclosures

(35) Other disclosures

The following derivatives were held by the Merck Group as of the balance sheet date:

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Nominal volume Fair value
€ million Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2015
Cash flow hedge 2,741 2,161 – 91 – 90
Interest
Currency 2,741 2,161 – 91 – 90
Fair value hedge
Interest
Currency
No hedge accounting 8,012 5,468 – 55 – 103
Interest 1,100 1,100 – 87 – 99
Currency 6,912 4,368 32 – 4
10,753 7,629 – 146 – 193

Cash flow hedges included currency hedges in a nominal volume of € 1,795 million (2015: € 1,387 million) with a remaining term of up to one year and hedges in a nominal volume of € 946 million (2015: € 774 million) with a remaining term of more than one year.

The maturities of the derivatives (nominal volume) were as follows as of the balance sheet date:

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€ million Remaining
maturity
less than 1 year
Remaining
maturity
more than 1 year
Total
Dec. 31, 2016
Remaining
maturity
less than 1 year
Remaining
maturity
more than 1 year
Total
Dec. 31, 2015
Forward exchange contracts 8,555 784 9,339 5,715 765 6,480
Currency options 153 162 314 40 9 49
Interest rate swaps 1,100 1,100 1,100 1,100
8,707 2,046 10,753 5,755 1,874 7,629

Currency hedging serves to economically protect the company from the foreign exchange risks of the following types of transaction:

  • Forecast transactions in non-functional currency, the expected probability of which is very high for the next 36 months,
  • Off-balance sheet firm purchase commitments of the next 36 months in non-functional currency,
  • Intragroup financing in non-functional currency as well as
  • Receivables and liabilities in non-functional currency.

Exchange rate fluctuations of mainly the following currencies against the euro were hedged:

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Nominal volume € million Dec. 31, 2016 Dec. 31, 2015
USD 5,031 3,674
CHF 1,211 402
JPY 800 458
CNY 717 480
GBP 576 312
TWD 406 343

Forecast transactions and firm purchase commitments in non-­functional currency are hedged using forward exchange contracts and currency options which are due within the next 36 months. Overall, forecast transactions and firm purchase commitments in non-functional currency were hedged in the amount of € 2,741 million (2015: € 1,921 million).

All hedging transactions for forecast transactions and firm purchase commitments in non-functional currency represent cash flow hedges in 2016.

Intragroup financing as well as receivables and payables in non-functional currency were hedged exclusively using forward exchange contracts. Overall, balance sheet items amounting to € 6,912 million (2015: € 4,608 million) were hedged. In this context, the hedging transactions in 2016 were exclusively purely economic hedges for which hedge accounting is not applied.

To fix the interest rate level of a bond issued in August 2015 for refinancing purposes with a volume of € 550 million, in 2012 and 2013 forward starting payer interest rate swaps were entered into with a nominal volume of € 550 million and interest payments from 2015 to 2022. Up until May 2015, these interest hedging relationships represented cash flow hedges. With entry into offsetting transactions in May 2015, the hedging relationship was terminated voluntarily. Therefore, in 2016 an amount of € 13 million (2015: € 4 million) was reclassified from Other Comprehensive Income under the line item “Reclassification to profit or loss” within “Derivative financial instruments” to the financial result. The original transactions as well as the offsetting transactions are now classified as “held for trading”. The changes in fair value are reflected in the consolidated income statement.

In 2015, the ineffective portion from hedge accounting amounted to € – 3 million. In 2016, there was no ineffectiveness.

(36) Management of financial risks

Market fluctuations with respect to foreign exchange and interest rates represent significant profit and cash flow risks for Merck. Merck aggregates these Group-wide risks and steers them centrally, also by using derivatives. Merck uses scenario analyses to estimate existing risks of foreign exchange and interest rate fluctuations. Merck is not subject to any material risk concentration from financial transactions.

Merck uses derivative financial instruments (hereinafter “derivatives”) to hedge risks from currency and interest rate positions. Merck uses marketable forward exchange contracts, options and interest rate swaps as hedging instruments. Depending on the nature of the hedged item, changes in the fair values of derivatives are recorded in the consolidated income statement either in the operating result or in the financial result. The strategy to hedge interest rate and foreign exchange rate fluctuations arising from forecast transactions and transactions already recognized in the balance sheet is set by a risk committee, which meets on a regular basis. Extensive guidelines regulate the use of derivatives. There is a ban on speculation. Derivative transactions are subject to continuous risk management procedures. Trading, settlement and control functions are strictly separated. Derivatives are only entered into with banks that have a good credit rating. Related default risks are continuously monitored.

The Report on Risks and Opportunities included in the combined management report provides further information on the management of financial risks.

Foreign exchange risks

Owing to its international business focus, Merck is exposed to foreign-exchange-related transaction risks within the scope of both ordinary business and financing activities. Different strategies are used to limit or eliminate these risks. Foreign exchange risks from transactions already recognized on the balance sheet are eliminated as far as possible through the use of forward exchange contracts. Foreign exchange risks arising from forecast transactions are analyzed regularly and reduced if necessary through forward exchange contracts or currency options by applying the hedge accounting rules. The Merck Group is exposed to currency translation risks since many Merck companies are located outside the eurozone. The financial statements of these companies are translated into euros. Exchange differences resulting from currency translation of the assets and liabilities of these companies are recognized in equity. These effects are not taken into consideration in the following tables.

The following table presents the net exposure of the Merck Group in relation to exchange rate fluctuations of the major currencies against the euro:

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€ million CHF CNY GBP JPY TWD USD
Net exposure Dec. 31, 2016 – 267 412 82 154 165 1,009
 
Net exposure Dec. 31, 2015 – 265 203 95 135 215 1,407

The net exposure of each of the aforementioned currencies consists of the following components:

  • Planned cash flows in the next 12 months in the respective currency as well as
  • Derivatives to hedge these planned cash flows. Usually, the hedging ratio is 30% – 70%.

Balance sheet items in the aforementioned currencies were economically hedged in full in both 2016 and 2015 by derivatives if they did not correspond to the functional currency of the respective company. Accordingly, they do not affect the net exposure presented above.

The following table shows the effects of exchange rate movements of the key currencies against the euro in relation to the net income and equity of the Group on the balance sheet date. The effects of planned cash flows of the next 12 months are not taken into consideration here. By contrast, the effects of cash flow hedges are taken into consideration in the equity of the Group and are included in the following table.

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€ million
Dec. 31, 2016
CHF CNY GBP JPY TWD USD
Exchange rate + 10% (Appreciation vs. €) Consolidated income statement
Equity 17 – 31 – 1 – 26 – 26 – 148
Exchange rate – 10% (Depreciation vs. €) Consolidated income statement
Equity – 20 38 3 25 32 159
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€ million
Dec. 31, 2015
CHF CNY GBP JPY TWD USD
Exchange rate + 10%
(Appreciation vs. €)
Consolidated income statement
Equity 12 – 15 – 15 – 21 – 109
Exchange rate – 10%
(Depreciation vs. €)
Consolidated income statement
Equity – 15 19 17 25 133

Interest rate risks

The Merck Group’s exposure to interest rate changes comprises the following:

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€ million Dec. 31, 2016 Dec. 31, 2015
Short-term or variable interest rate monetary deposits 1,085 1,059
Short-term or variable interest rate monetary borrowings – 4,587 – 5,800
Net interest rate exposure – 3,502 – 4,741

The effects of a parallel shift in the yield curve by + 100 or – 100 basis points on the consolidated income statement as well as on equity relative to all short-term or variable monetary deposits and monetary borrowings, all securities classified as “available for sale” as well as all derivatives are presented in the following table.

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€ million 2016 2015
Change in market interest rate + 100 basis points – 100 basis points + 100 basis points – 100 basis points
Effects on consolidated income statement – 36 22 – 47 23
Effects on equity

The scenario calculations here assumed that for material variable interest-bearing loan agreements, the risk-free interest rate component (EURIBOR) cannot fall below 0%.

Changes in market interest rates did not have effects on equity since an interest rate hedge for a bond issued in August 2015 for refinancing purposes was voluntarily terminated in 2015 with the entry into an offsetting transaction. Additionally, as in 2015, the level of interest-bearing securities was immaterial as of the balance sheet date.

Share price risks

The shares in publicly listed companies amounting to € 8 million (2015: € 16 million) are generally exposed to a risk of fluctuations in fair value. A 10% change in the value of the stock market would impact equity by € 1 million (2015: € 2 million). This change in value would initially be recognized in equity and then in profit or loss at the time of disposal.

Liquidity risks

The liquidity risk, meaning the risk that Merck cannot meet its payment obligations resulting from financial liabilities, is limited by establishing the required financial flexibility and by effective cash management. Information on bonds issued by the Merck Group and other sources of financing can be found in Note (27) “Financial liabilities / Capital management”.

Liquidity risks are monitored and reported to management on a regular basis.

The following tables present the contractual cash flows such as repayments and interest on financial liabilities and derivative financial instruments with a negative fair value as well as the settlement amount of trade accounts payable:

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Cash flows < 1 year Cash flows 1 – 5 years Cash flows > 5 years
€ million
Dec. 31, 2016
Carrying amount Interest Repayment Interest Repayment Interest Repayment
Bonds and commercial paper 9,650 224 1,855 759 4,314 245 3,523
Bank loans 1,978 11 1,128 5 600 1 250
Trade accounts payable 2,048 2,048
Liabilities to related parties 1,215 1,215
Other financial liabilities 478 464 14
Loans from third parties and other financial liabilities 80 6 22 10 55 2
Liabilities from derivatives 233 18 95 70 34 17
Finance lease liabilities 4 1 3
15,686 259 6,829 845 5,020 263 3,775
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Cash flows < 1 year Cash flows 1 – 5 years Cash flows > 5 years
€ million
Dec. 31, 2015
Carrying amount Interest Repayment Interest Repayment Interest Repayment
Bonds and commercial paper 9,851 237 1,272 852 4,201 401 4,429
Bank loans 3,006 19 2,135 13 619 2 250
Trade accounts payable 1,921 1,921
Liabilities to related parties 1,031 1,031
Other financial liabilities 451 437 14
Loans from third parties and other financial liabilities 89 6 27 11 60 3
Liabilities from derivatives 244 17 126 65 14 26
Finance lease liabilities 5 2 3
16,599 279 6,951 941 4,911 428 4,682

Credit risks

Merck limits credit risk by only entering into financial contracts with banks and industrial companies with good credit ratings. Moreover, the broad-based business structure with a large number of different customers results in a diversification of credit risks within the Merck Group. The credit risk from financial contracts is monitored daily on the basis of rating information as well as market information on credit default swap rates.

The credit risk of customers is monitored using established credit management processes that take the individual customer risks into account. This is done in particular by continuously analyzing the age structure of trade accounts receivable. Merck continuously reviews and monitors open positions of all trading partners in the affected countries and takes risk-mitigating measures if necessary. If there is objective evidence that particular accounts receivable are fully or partially impaired, respective impairment losses are recognized to provide for credit defaults. On the balance sheet date, the theoretically maximum default risk corresponded to the net carrying amounts less any compensation from credit insurance.

There were no indications of impairment for financial assets neither past due nor impaired on the balance sheet date.

(37) Other disclosures on financial instruments

The following table presents the reconciliation of the balance sheet items to categories of financial instruments pursuant to the disclosures required by IFRS 7 and provides information on the measurement of fair value:

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Subsequent measurement according to IAS 39 Subsequent measurement according to IAS 39
€ million Carrying amount Dec. 31, 2016 Amortized cost At cost Fair value Carrying amount according to IAS 17 Non-financial items Fair value,
Dec. 31, 2016
2
Carrying amount
Dec. 31, 2015
Amortized cost At cost Fair value Carrying amount according to IAS 17 Non-financial items Fair value
Dec. 31, 20152
Assets
Cash and cash equivalents 939 939 832 832
Current financial assets 145 44 101 227 33 194
Held for trading (non-derivatives)
Derivatives without a hedging relationship 59 59 59 33 33 33
Held to maturity 30 30
Loans and receivables 44 44 3 3
Available for sale 43 43 43 162 162 162
Derivatives with a hedging relationship
Trade accounts receivable 2,889 2,889 2,738 2,738
Loans and receivables 2,889 2,889 2,738 2,738
Other current and non-current other assets1 805 277 12 516 628 155 14 459
Derivatives without a hedging relationship 1 1 1 2 2 2
Loans and receivables 277 277 155 155
Derivatives with a hedging relationship 11 11 11 12 12 12
Non-financial items1 516 516 459 459
Non-current financial assets1 218 10 59 149 130 17 81 33
Derivatives without a hedging relationship 17 17 17 5 5 5
Held to maturity
Loans and receivables 10 10 17 17
Available for sale1 191 59 132 132 109 81 28 28
Derivatives with a hedging relationship
 
Liabilities
Current and non-current financial liabilities 12,597 12,465 128 4 13,713 13,524 184 5
Derivatives without a hedging relationship 128 128 128 139 139 139
Other liabilities 12,465 12,465 12,802 13,524 13,524 13,706
Derivatives with a hedging relationship 45 45 45
Finance lease liabilities 4 4 5 5
Trade accounts payable 2,048 2,048 1,921 1,921
Other liabilities 2,048 2,048 1,921 1,921
Current and non-current other liabilities 2,386 936 105 1,345 2,427 904 61 1,462
Derivatives without a hedging relationship 3 3 3 3 3 3
Other liabilities 936 936 904 904
Derivatives with a hedging relationship 102 102 102 57 57 57
Non-financial items 1,345 1,345 1,462 1,462
1
Previous year’s figures have been adjusted, see “Acquisitions, assets held for sale and disposal groups”.
2
The exemption provisions under IFRS 7.29a were applied for information on specific fair values.

Net gains and losses on financial instruments mainly included measurement results from fair value adjustments, impairments and reversals of impairments, disposal gains / losses as well as the recognition of premiums and discounts. Dividends and interest were not recognized in the net gains and losses on financial instruments, except for dividends and interest in the category “held for trading”. At Merck, the category “held for trading” only included derivatives that were not in a hedging relationship.

The net gains and losses on financial instruments by category (excluding amounts recognized in other comprehensive income) were as follows:

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Net gains and losses
€ million
2016
Interest Impairments Reversals of impairment Fair value adjustments Disposal gains / losses
Financial instruments of the category
Held for trading 69
Held to maturity
Loans and receivables 18 – 52 59
Available for sale 2 – 5 34
Other liabilities – 287
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Net gains and losses
€ million
2015
Interest Impairments Reversals of impairment Fair value adjustments Disposal gains / losses
Financial instruments of the category
Held for trading – 15
Held to maturity 3
Loans and receivables 18 – 84 40
Available for sale 11 7 18
Other liabilities – 314

In 2016, foreign exchange losses of €  57 million resulting from receivables and payables in operating business, their economic hedging, as well as hedging of forecast transactions in operating business were recorded (2015: foreign exchange losses of € – 49 million). Foreign exchange losses of € – 4 million resulting from financial balance sheet items, their economic hedging as well as fair value fluctuations of option contracts to hedge forecast transactions were recorded (2015: losses of € – 40 million).

The fair value of financial assets and liabilities is based on the official market prices and market values quoted on the balance sheet date (Level 1 assets and liabilities) as well as mathematical calculation models with inputs observable in the market on the balance sheet date (Level 2 assets and liabilities). Level 1 assets comprised stocks and bonds and were classified as “available for sale”, Level 1 liabilities comprised issued bonds and were classified as “other liabilities”. Level 2 assets and liabilities were primarily liabilities to banks classified as “other liabilities”, unlisted equity instruments classified as “available for sale” as well as derivatives with and without hedging relationships.

The fair value of the liabilities classified as “other liabilities” was determined by discounting future cash flows using market interest rates. The calculation of the fair value of forward exchange contracts and currency options used spot and forward rates observable in the market as well as foreign exchange volatilities applying recognized mathematical principles. The fair value of interest rate swaps is determined with standard market valuation models using interest rate curves available in the market. The fair values of unlisted equity instruments were derived from observable prices taken from equity refinancing transactions.

Level 3 assets were classified as “available for sale”. These comprised an interest in a partnership, contingent consideration from the sale of an interest in a corporation as well as contingent consideration from the divestment of business activities in connection with the product Kuvan®. They also included equity investments in unlisted funds. The fair value of the interest in the partnership was determined through an internally performed valuation using the discounted cash flow method. Expected future cash flows based on the company’s latest medium-term planning were taken into account. The planning relates to a period of five years. Cash flows for periods beyond this were included in the terminal value calculation by applying a long-term growth rate of 0.5% (2015: 0.5%). The after-tax discount rate used was 7.0% (2015: 7.0%). To calculate the fair values of the contingent consideration components, the expected future milestone payments were weighted using the probability of occurrence and discounted using after-tax discount rates of 7.1%. The determination of the fair values of the fund investments took into account the fair values of companies in which the funds were invested.

Level 3 liabilities consisted of contingent consideration from the acquisition of a corporation. These were reported as other liabilities” and amounted to € 1 million as of the balance sheet date.

Counterparty credit risk was taken into consideration for all valuations. In the case of non-derivative financial instruments, such as other liabilities or interest-bearing securities, this was reflected using risk-adequate premiums on the discount rate, while discounts on market value (so-called credit valuation adjustments and debit valuation adjustments) were used for derivatives.

The fair values of investments in equity instruments classified as “available for sale” with a carrying amount of € 59 million (2015: € 81 million) could not be reliably determined since there was no quoted price for an identical instrument in an active market and it was not possible to make a reliable estimate of fair value. They were measured at cost. Financial investments primarily included investments in equity instruments in various companies. There is currently no intention to sell these financial instruments. The Merck Group had no information on a market for these financial instruments.

The amounts of the financial instruments recognized at fair value in the balance sheet and the disclosed fair values for financial instruments were determined as follows:

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€ million
Dec. 31, 2016
Assets Liabilities
Fair value determined by official prices and quoted market values (Level 1) 54 9,058
thereof: available for sale 54
thereof: other liabilities 9,058
Fair value determined using inputs observable in the market (Level 2) 134 3,978
thereof: available for sale 46
thereof: derivatives with a hedging relationship 11 102
thereof: derivatives without a hedging relationship 77 131
thereof: other liabilities 3,744
Fair value determined using inputs unobservable in the market (Level 3) 75 1
thereof: available for sale 75
thereof: other liabilities 1
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€ million
Dec. 31, 2015
Assets Liabilities
Fair value determined by official prices and quoted market values (Level 1) 178 9,022
thereof: available for sale 178
thereof: other liabilities 9,022
Fair value determined using inputs observable in the market (Level 2) 51 4,928
thereof: available for sale
thereof: derivatives with a hedging relationship 12 102
thereof: derivatives without a hedging relationship 39 142
thereof: other liabilities 4,684
Fair value determined using inputs unobservable in the market (Level 3) 12 1
thereof: available for sale 12
thereof: other liabilities 1

The changes in financial assets and liabilities assigned to Level 3 and measured at fair value were as follows:

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€ million 2016 2015
Net book values as of January 1 11 11
Additions due to acquisitions / disposals 46 – 1
Transfers to Level 3 from previous measurement at cost / Level 1 / Level 2 16
Fair value changes
Gains (+) / losses (–) recognized in consolidated income statement 4
Gains (+) / losses (–) recognized in consolidated statement of comprehensive income – 3 1
Disposals
Transfers out of Level 3 into Level 1 / Level 2
Net book values as of December 31 74 11

The gains and losses from Level 3 assets recognized in other comprehensive income were reported in the consolidated statement of comprehensive income under the item “fair value adjustments” related to “available-for-sale financial assets”. If the discount rate used for the determination of the fair value of the interest in the partnership had been one percentage point higher, other comprehensive income would have decreased by € 2 million. By contrast, a decline in the discount rate by one percentage point would have increased other comprehensive income by € 3 million. An increase or decrease in the discount rates used to calculate the fair values of the contingent consideration components would not have had a material impact on other comprehensive income since the corresponding calculations assume a limited planning horizon and the determination of the fair values does not include a calculation of a terminal value.

Balance sheet netting of financial instruments is not possible. From an economic perspective, netting is only possible for derivatives. This possibility results from the framework agreements on derivatives trading which Merck enters into with commercial banks. Merck does not offset financial assets and financial liabilities in its balance sheet.

The following table presents the potential netting volume of the reported derivative financial assets and liabilities:

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Potential netting volume
€ million Dec. 31, 2016 Gross presentation Netting Net presentation due to ­
master netting agreements
due to financial collateral Potential
net amount
Derivative financial assets 88 88 64 24
Derivative financial liabilities – 233 – 233 – 64 – 170
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Potential netting volume
€ million Dec. 31, 2015 Gross ­presentation Netting Net presentation due to ­
master netting ­agreements
due to financial collateral Potential
net amount
Derivative financial assets 51 51 46 5
Derivative financial liabilities – 245 – 245 – 46 – 199

(38) Contingent liabilities

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€ million
Dec. 31, 2016 Dec. 31, 2015
Contingent liabilities from legal disputes and tax matters 73 64
Guarantees / Warranties 2 1

Contingent liabilities from legal disputes included potential obligations, for which the probability of an outflow of resources did not suffice to recognize a provision as of the balance sheet date. These mainly related to obligations under civil law as well as under environmental and antitrust law. The potential civil law obligations primarily related to potential liabilities to pay damages due to a legal dispute under antitrust law. It was possible that Merck would be subject to claims for compensation for damages asserted by health insurance companies due to excessively high drug prices in case of a valid judgment under antitrust law.

In addition, there were contingent liabilities from various legal disputes with Merck & Co. of the United States (outside the United States and Canada: Merck Sharp & Dohme (MSD)), among other things due to breach of the co-existence agreement between the two companies and / or trademark / name right infringement regarding the use of the designation “Merck.” An outflow of resources – except costs for legal defense – was not deemed sufficiently probable as of the balance sheet date to justify the recognition of a provision. Since the contingent liability from these legal disputes could not be reliably quantified as of the balance sheet date, this matter was not taken into account in the table presented above.

Contingent liabilities pertaining to tax matters included various non-German income and non-income-related tax matters that mainly related to intragroup business transfers as well as legal disputes attributable to the determination of earnings under tax law, customs regulations, excise tax matters, and transfer pricing adjustments.

(39) Other financial obligations

Other financial obligations comprised the following:

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€ million
Dec. 31, 2016 Dec. 31, 2015
Obligations to acquire intangible assets and to pay due to collaboration agreements 2,826 3,021
Obligations to acquire property, plant and equipment 187 109
Future operating lease payments 362 344
Long-term purchase commitments 309 384
Other financial obligations 208 35
3,891 3,892

Obligations to acquire intangible assets existed in particular owing to contingent consideration and within the scope of research and development collaborations. Here Merck has obligations to make milestone payments when certain objectives are reached. In the unlikely event that all contract partners achieve all milestones, Merck would be obligated to pay up to € 1,456 million (2015: € 1,544 million) for the acquisition of intangible assets.

Moreover, within the scope of collaboration agreements, individual research and development or commercialization budgets were contractually set, upon the basis of which collaboration partners can commit Merck to make payments in the amount of up to € 1,370 million (2015: € 1,447 million).

The expected maturities of these obligations were as follows:

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€ million Dec. 31, 2016 Dec. 31, 2015
Obligations to acquire intangible assets and to pay due to collaboration agreements
within one year 263 258
in 1 – 5 years 1,176 1,219
more than 5 years 1,387 1,544
2,826 3,021

The increase in the other financial obligations is largely attributable to a building leasing agreement, the term of which starts in 2017.

Other financial obligations were recognized at nominal value.

The maturities of liabilities from lease agreements were as follows:

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€ million
Dec. 31, 2016
within 1 year 1 – 5 years more than
5 years
Total
Present value of future payments from finance leases 1 2 4
Interest component of finance leases
Future finance lease payments 2 2 4
 
Future operating lease payments 112 221 29 362
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€ million
Dec. 31, 2015
within 1 year 1 – 5 years more than
5 years
Total
Present value of future payments from finance leases 2 3 5
Interest component of finance leases
Future finance lease payments 2 3 5
 
Future operating lease payments 99 207 38 344

Operating leasing agreements related mainly to leasing arrangements to lease real estate, company fleet vehicles as well as operating and office equipment. The payments resulting from operating leasing agreements amounted to € 132 million (2015: € 113 million) and were recorded as an expense in the reporting period.

(40) Personnel expenses / Headcount

Personnel expenses comprised the following:

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€ million 2016 2015
Wages and salaries 3,575 2,993
Compulsory social security contributions and special financial assistance 555 432
Pension expenses 226 210
4,356 3,634

As of December 31, 2016, the Merck Group had 50,414 employees (2015: 49,613). The average number of employees during the year was 50,439 (2015: 41,511). The increase was mainly due to the acquisition of the Sigma-­Aldrich Corporation, USA, which was completed on November 18, 2015.

The breakdown of personnel by function was as follows:

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Average number of employees 2016 2015
Production 14,829 11,563
Logistics 3,955 2,581
Marketing and Sales 14,887 12,871
Administration 8,190 6,763
Research and Development 6,249 5,097
Infrastructure and Other 2,329 2,636
50,439 41,511

(41) Material costs

Material costs in 2016 amounted to € 2,358 million (2015: € 1,737 million) and were largely reported under cost of sales.

(42) Auditors’ fees

The costs of the auditors (KPMG) of the financial statements of the Merck Group consisted of the following:

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2016 2015
€ million Merck Group thereof: KPMG Germany Merck Group thereof: KPMG Germany
Audits of financial statements 8.2 2.2 7.9 2.2
Other audit-related services 0.3 0.2 1.0 0.8
Tax consultancy services 0.7 0.5 0.9 0.5
Other services 1.4 1.3 1.2 0.9
10.6 4.2 11.0 4.4

(43) Corporate governance

The Statement of Compliance in accordance with section 161 of the German Stock Corporation Act (Aktiengesetz) was published in the corporate governance section of the website ­www.merckgroup.com/investors corporate governance in March 2016 and thus made permanently available.

(44) Companies opting for exemption under section 264 (3) HGB or section 264b HGB

The following companies, which have been consolidated in these financial statements, opted for exemption:

Allergopharma GmbH & Co. KG, Reinbek

Allergopharma Verwaltungs GmbH, Darmstadt

Biochrom GmbH, Berlin

Chemitra GmbH, Darmstadt

Litec-LLL GmbH, Greifswald

Merck Accounting Solutions & Services Europe GmbH, Darmstadt

Merck Chemicals GmbH, Darmstadt

Merck Consumer Health Holding GmbH, Darmstadt

Merck Export GmbH, Darmstadt

Merck Life Science GmbH, Eppelheim

Merck Selbstmedikation GmbH, Darmstadt

Merck Serono GmbH, Darmstadt

Merck Versicherungsvermittlung GmbH, Darmstadt

(45) Related-party disclosures

Related parties in respect of the Merck Group are E. Merck KG, Emanuel-Merck-Vermögens-KG and E. Merck Beteiligungen KG. In principle, direct or indirect subsidiaries of Merck KGaA, associates of the Merck Group, jointly controlled companies where the Merck Group is involved, as well as pension funds that are classified as defined benefit plans in accordance with IAS 19 are also related parties within the meaning of IAS 24. This also includes the companies Merck Capital Asset Management Ltd., Malta, and Merck Pensionstreuhandverein e.V. Members of the Executive Board and the Supervisory Board of Merck KGaA, the Executive Board and the Board of Partners of E. Merck KG as well as close members of their families are also related parties.

As of December 31, 2016, there were liabilities by Merck Financial Services GmbH, Merck KGaA and Merck & Cie, Switzerland, to E. Merck KG in the amount of € 1,186.3 million (2015: € 1,031.2 million). In addition, as of December 31, 2016, Merck KGaA had receivables from E. Merck Beteiligungen KG in the amount of € 123.7 million (2015: € 35.4 million). Merck Financial Services GmbH had receivables from Merck Capital Asset Management Ltd., Malta, in the amount of € 2.5 million (2015: € 0.0 million) and from Merck Pensionstreuhandverein e.V. in the amount of € 0.1 million (2015: € 0.0 million). The balances result mainly from the profit transfers by Merck & Cie, Switzerland, to E. Merck KG as well as the reciprocal profit transfers between Merck KGaA and E. Merck KG. They included financial liabilities of € 729.2 million (2015: € 577.8 million) and financial receivables of € 2.5 million (2015: € 0.0 million), which were subject to standard market interest rates. Neither collateral nor guarantees existed for any of the balances either in favor or to the disadvantage of the Merck Group.

From January to December 2016, Merck KGaA performed services for E. Merck KG with a value of € 1.0 million (2015: € 0.9 million), for E. Merck Beteiligungen KG with a value of € 0.1 million (2015: € 0.3 million), and for Emanuel-Merck-Vermögens-KG with a value of € 0.2 million (2015: € 0.2 million). During the same period, E. Merck KG performed services for Merck KGaA with a value of € 0.5 million (2015: € 0.5 million).

As of December 31, 2016, there were receivables from the Venezuelan entities deconsolidated as of February 29, 2016 (see Note (3) “Changes in the Scope of Consolidation”) with a carrying amount of € 25.7 million after impairment losses and liabilities with a carrying amount of € 24.2 million. Merck no longer makes any commercial deliveries to Venezuelan entities. For ethical reasons, essential drugs to treat cancer and multiple sclerosis are provided to patients to a certain extent. Revenues are recognized when payment is received and were consequently not included in the stated receivables. From March to December 2016, the Merck Group generated revenues of € 0.4 million from these deliveries and services. During the same period, the production costs of these deliveries and services totaled € 13.7 million.

As of December 31, 2016, there were receivables of € 18.8 million (2015: € 15.5 million) and liabilities of € 12.1 million (2015: € 10.5 million) vis-à-vis non-consolidated subsidiaries. From January to December 2016, the Merck Group generated revenues of € 0.9 million (2015: € 0.8 million) with these companies. During the same period, expenses amounting to € 6.1 million (2015: € 1.7 million) were incurred as a result of transactions with these companies.

Information on pension funds that are classified as defined benefit plans in accordance with IAS 19 can be found in Note (25) “Provisions for pensions and other post-employment benefits”. There were no further material transactions with these pension funds.

In 2016, there were no material transactions such as, for example, the provision of services or the granting of loans, between companies of the Merck Group and members of the Executive Board or the Supervisory Board of Merck KGaA, the Executive Board or the Board of Partners of E. Merck KG or members of their immediate families.

(46) Executive Board and Supervisory Board compensation

The compensation of the Executive Board of Merck KGaA is paid by the general partner, E. Merck KG, and recorded as an expense in its income statement. For the period from January to December 2016, fixed salaries of € 6.6 million (2015: € 6.5 million), variable compensation of € 16.8 million (2015: € 22.3 million), and additional benefits of € 0.2 million (2015: € 0.3 million) were recorded for members of the Executive Board. Furthermore, additions to the provisions of E. Merck KG for the Long-Term Incentive Plan totaled € 12.5 million (2015: € 9.9 million), and additions to the pension provisions of E. Merck KG included current service costs of € 2.8 million (2015: € 4.2 million) and past service costs of € 3.5 million (2015: € 0.0 million) for members of the Executive Board of Merck KGaA.

The compensation of the Supervisory Board amounting to € 869.0 thousand (2015: € 881.0 thousand) consisted of a fixed portion of € 822.5 thousand (2015: € 822.5 thousand) and meeting attendance compensation of € 46.5 thousand (2015: € 58.5 thousand).

Further individualized information and details can be found in the Compensation Report on pages 160 et seq.

(47) Information on preparation and approval

The Executive Board of Merck KGaA prepared the consolidated financial statements on February 14, 2017 and approved them for forwarding to the Supervisory Board. The Supervisory Board has the responsibility to examine the consolidated financial statements and to declare whether it approves them.

(48) Subsequent events

On January 11, 2017, Merck announced a licensing agreement with Vertex Pharmaceuticals Inc., Boston, USA, (Vertex). Within the scope of this agreement, Vertex will transfer to Merck the worldwide development and commercialization of four research and development programs that represent novel approaches to the treatment of cancer. In return, Merck will make an upfront payment of US$ 230 million (€ 218 million based on the exchange rate on January 11, 2017). In addition, Merck is obligated to pay royalties on future product sales.

On February 6, 2017, Merck entered into a contractual agreement according to which Merck will receive a one-time payment as compensation for future royalty and license payments. As a consequence of this agreement, in 2017 Merck will receive cash inflows of US$ 123 million (€ 114 million based on the exchange rate on February 6, 2017), which will be recognized as income in the Healthcare business sector.

Subsequent to the balance sheet date, no further events of special importance occurred that could have a material impact on the net assets, financial position and results of operations of the Merck Group.