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. 20 in Göttingen, Federal Republic of Germany.
The Sartorius Group is a leading international partner of biopharmaceutical research and the industry. With innovative laboratory instruments and consumables, the Group’s Lab Products & Services Division (LPS) concentrates on serving the needs of laboratories performing research and quality control at pharma and biopharma companies and those of academic research institutes. The Bioprocess Solutions Division (BPS) with its broad product portfolio focusing on single-use solutions helps customers to manufacture biotech medications and vaccines safely and efficiently.
2. Significant Accounting Policies
The consolidated annual financial statements of Sartorius AG for the period ended December 31, 2018, 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 2018 were based with the exception of those principles that were effective in 2019 for the first time.
Furthermore, all interpretations of the International Financial Reporting Standards Interpretations Commit-tee (IFRS IC) to be applied effective June 30, 2019, 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, 2018. 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 2018 Annual Report. In the current fiscal year, the following entities - that previously were not consolidated due to materiality considerations - were included for the first time in the consolidated financial statements of the Group:
- Sartorius Argentina S.A., Buenos Aires, Argentina
- Sartorius do Brasil Ltda., São Paulo, Brazil
- Sartorius de México S.A. de C.V., Tepotzotlán, Mexico
- Sartorius Vietnam Co. Ltd., Ho Chi Minh City, Vietnam
Furthermore, the Group obtained control over the company Sartorius South Africa (Pty) Ltd. that is domiciled in South Africa as of January 1, 2019. The acquired company is not consolidated based on materiality considerations.
For calculation of 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, 2018.
4. Accounting Rules Applied for the First Time in the Current Fiscal Year
Standards to Be Applied for the First Time in 2019
The Group initially applied the following new accounting rules for the reporting period:
- Annual Improvements to IFRSs – Cycle 2015–2017 (issued in Dec. 2017), Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23
- Amendments to IAS 19, Plan Amendment, Curtailment or Settlement
- Amendments to IAS 28, Long-term Interests in Associates and Joint Ventures
- Amendments to IFRS 9, Prepayment Features with Negative Compensation
- IFRIC 23, Uncertainty over Income Tax Treatments
- IFRS 16, Leases
Only IFRS 16 had an impact on the consolidated financial statements. For lessees, IFRS 16 eliminates the distinction between operating and finance leases. Instead, 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 as well as a liability resulting from the lease, which represents its obligation to make lease payments.
The Group makes use of the exemptions for short-term leases and leases of low-value assets, and recognizes the lease payments for such leases as an expense generally on a straight-line basis over the contract period. Accordingly, no right-of-use assets and lease liabilities are recognized for these leases. In addition, no right-of-use assets and lease liabilities according to IFRS 16 are recognized for leases between Group entities. Furthermore, the Group does not apply the standard to leases of intangible assets.
In the statement of financial position, the Group presents the right-of-use assets according to the nature of the underlying lease assets within “Property, plant and equipment.” The right-of-use assets are recognized at cost less accumulated depreciation and any impairments. The cost of the right-of-use assets comprises the present value of the future lease payments, any payments paid upon or before commencement of the lease, any initial direct costs, and costs for dismantling or removing the lease asset. The right-of-use assets are typically depreciated over the lease term. If the transfer of legal ownership of the lease asset is planned at the end of the lease term, the right-of-use asset is depreciated over the economic useful life of the lease asset. In the statement of profit or loss, depreciation is recognized in functional costs.
The lease liabilities are presented separately on the face of the statement of financial position. Lease liabilities are initially recognized at an amount equal to the present value of the future lease payments. In general, the incremental borrowing rate of the Group specific to the respective country and lease term is used for discounting. Subsequently, the carrying amount of the lease liabilities is increased by the interest expenses and reduced by the lease payments. Interest expenses are reported within the financial result.
Accounting for the lessor is largely comparable to that of the previous standard IAS 17; i.e., lessors continue to classify leases as finance or operating leases.
The transition method and the effects from the initial application of the standard on the interim financial report are described below.
Initial Application of IFRS 16, Leases
The Group has initially applied IFRS 16 in the 2019 reporting period. Accordingly, the date of initial application is January 1, 2019. In accordance with IFRS 16, the Group applies this standard using the modified retrospective transition approach. Therefore, the cumulative effect of initially applying the standard is recognized on January 1, 2019. There was no material transition effect to be recognized in retained earnings. In line with the transition regulations, the Group does not adjust the prior-year figures.
The Group is mainly affected by the new standard in its role as a lessee as its lessor activities are not material. For leases that were previously classified as operating leases under IAS 17, the Group recognized a lease liability on January 1, 2019. The liabilities were measured at the present value of the remaining lease payments discounted using the respective incremental borrowing rate of the Group as of the date of initial application. The weighted average incremental borrowing rate was 2.1%. On the same date, for each of these leases, a right-of-use asset was recognized at an amount equal to the corresponding lease liability, adjusted for any prepaid or deferred lease payments. At the date of initial application, initial direct costs were not taken into consideration when the right-of-use assets were measured. Furthermore, the Group did not perform an impairment review but relied on its assessment of whether a lease was onerous in accordance with IAS 37 immediately before the date of initial application of IFRS 16. On this basis, no adjustments were necessary on the date of initial application.
No lease liabilities and no right-of-use assets were recognized in the course of the initial application of IFRS 16 for short-term leases and leases of low value assets that were previously classified as operating leases. Instead, in accordance with this standard, the lease payments for these leases are recognized as an expense on a straight-line basis over the lease term. Regardless of their original lease term, leases for which the remaining lease term did not exceed 12 months from the date of initial application onwards were generally not considered lease liabilities and right-of-use assets. Accounting for such leases follows the general accounting rule for short-term leases. The remaining lease terms of the leases were determined based on the knowledge of the Group as of January 1, 2019.
For leases that were previously classified as finance leases and, thus, already reflected on the Group’s statement of financial position, the carrying amounts of the corresponding assets and liabilities as of December 31, 2018 were considered as carrying amounts of the right-of-use assets and lease liabilities at the date of initial application of IFRS 16 without any adjustments.
In the course of the transition to IFRS 16, right-of-use assets of €68 million (including €18 million related to leases previously classified as finance leases), as well as lease liabilities of €70 million (including €19 million related to leases previously classified as finance leases), were recognized as of January 1, 2019. In addition, the Group recognized lease receivables from sub-leases of about €1 million. As expected, the new standard led to an increase in total assets of about €51 million at the date of initial application. This corresponds to a reduction in the equity ratio of somewhat less than one percentage point.
Based on the financial commitments from operating leases according to IAS 17 as of December 31, 2018, reconciliation with the opening balance of the lease liabilities as of January 1, 2019, is presented in the table below.