1. General Information
Sartorius AG is a listed joint stock corporation established according to German law and is the highest level parent company of the Sartorius Group. The corporation is recorded in the German Commercial Register of the District Court of Göttingen (HRB 1970) and is headquartered at Otto-Brenner-Str. 22 in Göttingen, Federal Republic of Germany.
The Sartorius Group organizes its business in two divisions: Bioprocess Solutions and Lab Products & Services. With its Bioprocess Solutions Division, Sartorius is a leading international supplier of products and technologies for the manufacture of medications and vaccines on a biological basis, so called biopharmaceuticals. As part of its total solutions provider strategy, the Bioprocess Solutions Division offers the biopharmaceutical industry a product portfolio that covers nearly all process steps of the industry's manufacture. These products encompass cell culture media for the cultivation of cells, bioreactors of various sizes for cell propagation, and different technologies, such as filters and bags for cell harvesting, purification and concentration, all the way to filling.
The Lab Products & Services Division focuses on laboratories in the research and quality assurance sectors of pharmaceutical and biopharmaceutical companies and on academic research institutes. It serves further customers in the chemical and food industries. The division's portfolio covers instruments and consumables that laboratories use, for example, in sample preparation or in other standard applications.
2. Significant Accounting Policies
The consolidated annual financial statements of Sartorius AG for the period ended December 31, 2017, were prepared in accordance with the accounting standards of the International Accounting Standards Board (IASB) – the International Financial Reporting Standards (IFRS) – as they are to be applied in the EU. In the present interim financial statements that were prepared in conformance with the requirements of IAS 34 “Interim financial reporting,” basically the same accounting and measurement principles were applied on which the past consolidated financial statements of fiscal 2017 were based.
Furthermore, all interpretations of the International Financial Reporting Standards Interpretations Committee (IFRS IC) to be applied effective June 30, 2018, were observed. An explanation of the individual accounting and measurement principles applied is given in the Notes to the Financial Statements of the Group for the year ended December 31, 2017. The material Standards applied for the first time and the amended significant accounting policies are explained in Section 4 below.
A list of the companies included in the scope of consolidation for the Group financial statements is provided in our 2017 Annual Report.
A list of the consolidated companies is provided in the 2017 Annual Report. In the current fiscal year, the newly founded Sartorius Ventures GmbH was included in the consolidated financial statements for the first time in the current fiscal year.
In the previous year, the U.S. company Essen BioScience Inc. headquartered in Ann Arbor, Michigan, USA, was acquired. The purchase price allocation was finalized in present the reporting period. The respective details are provided in Section 5 below.
For calculation of the income tax expenses, the rule of IAS 34.30c was applied to the interim financial statements; i.e., the best estimate of the weighted average annual income tax rate expected for the full financial year, 27%, is applied as a matter of principle.
3. Use of Judgements and Estimates
In preparing these interim financial statements, management has made judgments, estimates and assumptions, based on their best knowledge of the current and future situation, that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates, however. The significant judgments and estimates and the key sources of estimation uncertainty have remained the same as those applied to the consolidated financial statements for the year ended December 31, 2017.
4. Accounting Rules Applied for the First Time in the Current Fiscal Year
Standards to Be Applied for the First Time in 2018
The Group initially applied the following new accounting rules for the reporting period:
- Annual Improvements to IRFSs – Cycle 2014-2016 (issued in Dec. 2016), Amendments to IFRS 1, IFRS 12 and IAS 28
- Amendments to IFRS 2, Classification and Measurement of Share-based Payment Transactions
- IFRS 9, Financial Instruments
- IFRS 15, Revenue from Contracts with Customers
- Clarifications to IFRS 15, Revenue from Contracts with Customers
- Amendments to IAS 40, Transfers of Investment Property
- IFRIC 22, Foreign Currency Transactions and Advance Consideration
Initial Application of IFRS 9, Financial Instruments
The initial date of application of IFRS 9, Financial Instruments, is January 1, 2018. The Group has applied IFRS 9 retrospectively, without restating the prior-year figures. Therefore, the comparative period is presented in line with previous rules. The aggregated effects from the transition to IFRS 9 are accounted for in equity by an adjustment to the opening balance of retained earnings (earnings reserves and retained profits) as of the initial date of application. The effect from the initial application of IFRS 9 results from the adjustment of the credit impairment approach for trade receivables and amounts to about €0.4 million. As a result, this increased retained earnings from €513.3 million as of December 31, 2018, to €513.7 million as of January 1, 2018.
IFRS 9 replaces the existing guidelines in IAS 39, Financial Instruments: Recognition and Measurement. IAS 9 contains the revised guidance for classification and measurement of financial instruments, including a new model of expected credit losses for calculation of the impairment of financial assets, as well as the new, general guidelines for hedge accounting. This Standard also adopts the guidance of IAS 39 for recognition and derecognition of financial instruments.
Under IFRS 9, the new classification and measurement approach for financial assets reflects both the entity's business model (held-to-collect, held-to-collect-and-sell, other) within the scope of which assets are held and the contractual cash flow characteristics (SPPI criterion). The following table shows the categories according to IAS 39 and IFRS 9, as well as the respective carrying amounts at the date of initial application of IFRS 9.
|Carrying amounts of financial assets at the date of initial application of IFRS 9||Category acc. to IAS 39||Carrying amount acc. to IAS 39 Dec. 31, 2017 € in mn||Reclassification € in mn||Remeasurement € in mn||Carrying amount acc. to IFRS 9 Jan. 1, 2018 € in mn||Category acc. to IFRS 9|
|Cash and cash equivalents||Loans and receivables||59.4||59.4|| |
Measured at amortized cost
|Receivables and other assets||Loans and receivables||19.3||19.3|| |
Measured at amortized cost
|Derivative financial instruments in hedge relationships||n/a||9.0||9.0||n/a|
|Other financial assets (current)||28.2||28.2|
|Trade receivables||Loans and receivables||275.2||0.4||275.7||Measured at amortized cost|
|Amounts due from customers for contract work||n/a||7.0||0.0||7.0||n/a|
|Financial assets||Loans and receivables||6.5||–2.3||4.2||Measured at amortized cost|
|Financial assets||Available for sale||1.7||1.9||3.6||Debt instruments at fair value through profit or loss|
|Financial assets||Available for sale||2.1||2.1||Equity instruments at fair value through profit or loss|
|Financial assets (investments in non-consolidated subsidiaries)||n/a||1.3||1.3||n/a (investments in non-consolidated subsidiaries)|
|Derivative financial instruments in hedge relationships||n/a||8.6||8.6||n/a|
|Financial assets (non-current)||20.1||–0.4||19.8|
There were no effects on the Group's financial liabilities. The few reclassifications of financial assets were determined on the basis of individual assessments of the financial instruments, especially with regard to the contractual cash flow characteristics. For equity instruments that existed as of the date of initial application of the Standard and that were not held for trading, the Group dediced to recognize future changes in the fair value of these instruments in profit or loss. This choice is generally to be made on an instrument-by-instrument basis upon initial recognition of the instrument. Reclassification did not lead to measurement effects. The measurement effects presented result from the adjustment of the impairment approach for trade receivables.
IFRS 9 replaces the incurred loss model for impairment measurement by the expected loss model. Financial assets are generally regarded as credit-impaired when there are objective indications that cast doubt about the full recoverability of the cash flows of the respective financial assets. In the Sartorius Group, the simplified impairment approach is used, in particular, to measure trade receivables. The new impairment model starts with an analysis of the actual historical credit loss rates. These are adjusted, taking into consideration forward-looking information, by the effects of current changes in the macroeconomic environment, if significant. The Group currently determines the expected credit losses for the Group's portfolio of trade receivables as a whole based on the immaterial level of past credit losses. Historical loss rates are analyzed in more detail to apply different loss rates to different portfolios, where appropriate. On the date of initial application of IFRS 9, the allowance for expected credit losses amounted to €0.1 million. This amount includes the expected credit loss in relation to contract assets that do not contain a significant financing component according to IFRS 15. In the course of the transition to IFRS 9, the Group also analyzed and revised its approach for recognition of incurred losses, given its low level of historical losses. Defaults are determined on the basis of individual assessments in which past due status (days overdue) is an important criterion in this context. The opposite effect resulting upon the date of initial application of IFRS 9 led to a total effect of about €0.4 million, which increased the Group's retained earnings as of January 1, 2018. The following table shows the effects resulting from the adjustments to the Group's impairment approach for trade receivables:
|Valuation allowances at the date of initial application of IFRS 9||Category acc. to IAS 39||Closing loss allowances acc. to IAS 39 Dec. 31, 2017 € in mn||Remeasurement due to implementation of IFRS 9 € in mn||Opening loss allowances acc. to IFRS 9 Jan. 1, 2018 € in mn||Category acc. to IFRS 9|
|Trade receivables||Loans and receivables||–5.5||0.4||–5.1||Measured at amortized cost|
|Amounts due from customers for contract work||n/a||0.0||0.0||0.0||n/a|
Besides trade receivables, cash and cash equivalents are the most significant financial assets on the Group's statement of financial position at the date of initial application of IFRS 9 and as of the reporting date, June 30, 2018. Due to the high creditworthiness of the Group's counterparties and to short-term maturities, the impairment that would have had to be recognized for these financial assets is immaterial. Therefore, no impairment is recognized for cash and cash equivalents.
For the remaining financial assets measured at amortized cost, no impairment is recognized as of the date of initial application of IFRS 9 and for the period ended June 30, 2018, for the 12-month expected credit losses, given the Group's due to immaterial historical losses. In the event of a significant increase in credit risk, which is generally presumed when a payment is more than 30 days past due, the lifetime expected credit losses are recognized for the respective financial asset. A default is generally presumed when there is no reasonable expectation of recovering a financial asset. This is generally presumed when payments are more than 90 days past due.
The Group applies the new hedge accounting rules of IFRS 9 prospectively. As part of its hedge accounting, the Group uses forward transactions to hedge cash flow risks that result from changes in foreign exchange rates in relation to sales of products and the procurement of materials, and designates only the spot element of the hedging instrument. No transition effects result from the application of the new hedge accounting requirements.
Initial Application of IFRS 15, Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers, defines a comprehensive model to determine when to recognize revenue and which amount. It replaces existing guidelines for recognition of revenue, including IAS 18, Revenue; IAS 11, Construction Contracts; and IFRIC 13, Customer Loyalty Programmes.
The Sartorius Group applied IFRS 15 for the first time as of January 1, 2018, on the basis of the modified retrospective method. Accordingly, the prior-year figures were not restated, and the comparative period is presented in line with previous standards. Any effects of the initial application of IFRS 15 are recorded as an adjustment to the opening balance of retained earnings as of January 1, 2018. Furthermore, upon initial adoption, the Group has been applying IFRS 15 only to contracts that are not considered completed contracts at the date of initial application. Moreover, the group used the practical expedients offered regarding contract modifications that occurred prior to the date of initial application of IFRS 15 and did not retrospectively restate such contracts. As the impact of the new Standard on the Group's consolidated financial statements is low, the use of this practical expedient is expected not to have a material impact.
The Group uses the practical expedient regarding the existence of a significant financing component. This means that a financing component is only taken into consideration when the length of time between transfer and receipt of consideration is expected to exceed one year and the effect is material. Revenue is recognized when or as control of goods or services is transferred to the customer. If revenue is recognized over time, the progress toward complete satisfaction of a performance obligation is generally measured according to the costs actually incurred in proportion to the total planned costs, unless another method reflects the transfer of goods or services to a customer more appropriately.
For the large majority of the Group's businesses, there are no material effects as a result of the application of this new Standard. Meanwhile, as of the date of initial application, adjustments related to construction contracts in progress need to be made in the Group's project business as a result of this Standard. Revenue of approximately €5 million that used to be recognized over time is now required by IFRS 15 to be recognized at a point in time as the new criteria it introduced for recognition over time for contracts on the construction of customer-specific goods are no longer fulfilled. As a result, these adjustments have led to a balance sheet extension by about €2 million. There were no effects to be recognized in equity. The effects of applying the modified retrospective method on the opening statement of financial position as of January 1, 2018, are shown in the table below.
|Effects from the application of IFRS 15 on the opening balances of the statement of financial position as of Jan. 1, 2018||Carrying amount Dec. 31, 2017 € in mn||Adjustments on adoption of IFRS 15 € in mn||Carrying amount Jan. 1, 2018 € in mn3)|
|Amounts due from customers for contract work1)||7.0||–1.9||5.0|
|Trade payables | payments received for orders2)||47.5||2.2||49.7|
1) Contracts assets according to IFRS 15.
2) Contract liabilities according to IFRS 15.
3) Carrying amounts without consideration of the new impairment model according to IFRS 9.
If the Group would have applied the previous IAS 18 and IAS 11 Standards, sales revenue and the cost of sales would have been higher by about €0.5 million, while there would have not been any impact on the net result. In this case, the balance sheet total would have been lower by about €2 million. As for initial application of IFRS 15, these effects have resulted from the revised criteria for revenue recognition over time, which now require that revenue for individual projects be recognized at a point in time instead of over time as in the past.
The following table presents the impacts on the consolidated statement of financial position as of June 30, 2018, that the continued application of the previous Standards would have had in comparison with IFRS 15.
|Effects from the application of IFRS 15 on the consolidated financial statements as of June 30, 2018||Carrying amount June 30, 2018 (IFRS 15) € in mn||Adjustments on adoption of IFRS 15 € in mn||Carrying amount June 30, 2018 (IAS 11, IAS 18) € in mn|
|Amounts due from customers for contract work1)||2.5||2.7||5.2|
|Trade payables | payments received for orders2)||55.8||–2.2||53.6|
1) Contracts assets according to IFRS 15.
2) Contract liabilities according to IFRS 15.
Significant New Standards That Have Not Yet Been Applied
IFRS 16, Leases
The Group did not yet apply IFRS 16, Leases, as the application of this Standard was not yet mandatory for the reporting period and will be not be required until 2019 and onwards. IFRS 16 introduces a standardized accounting model according to which leases are generally to be recognized on the lessee's balance sheet. A lessee recognizes a right-of-use asset representing its right to use a lease asset, as well as a liability resulting from the lease, which represents its obligation to make lease payments. There are exemptions for short-term leases and leases of low-value assets. Accounting for the lessor is comparable to that of the current Standard; i.e., lessors continue to classify leases as financial or operating leases.
The Group is currently analyzing the effects of this new Standard on the consolidated financial statements and does not plan to apply it earlier than 2019. The company is planning to recognize the effect from initially applying IFRS 16 in consolidated retained earnings, but not to apply this Standard retrospectively in accordance with IAS 8. Based on the current stage of analysis, the Group plans to use the exemptions for short-term leases and leases of low-value assets and to recognize the corresponding lease payments as an expense generally on a straight-line basis over the particular lease term.
IFRS 16 will likely lead to an increase in fixed assets and financial liabilities. Based on its present level of knowledge, the Group does not expect any significant impacts overall on its key figures, such as equity ratio or underlying EBITDA. On the basis of a survey of relevant lease contracts conducted across the Group in the first half of 2018, a balance sheet extension by about €55 million would be yielded for the period ended June 30, 2018. This would correspond to a reduction in the equity ratio by about 1%. Based on the survey, the calculated full-year EBITDA margin would approximately increase by about 1%. Analysis of these effects has not yet been completed so the information provided above can be considered an update of that given in the 2017 consolidated financial statements.