30. Financial instruments

30.1 Information on financial instruments by category

The system used by the Bayer Group to manage credit risk, liquidity risk and the various types of market risks (interest-rate risk, currency risk and other price risks), together with its objectives, methods and procedures, is outlined in the Risk Report, which forms part of the Management Report.

30.1 Information on financial instruments by category

The following table shows the carrying amounts and fair values of financial assets and liabilities by category of financial instrument and a reconciliation to the corresponding line item in the balance sheet. Since the line items “Other receivables” and “Other liabilities” contain both financial instruments and non-financial assets and liabilities (such as other tax receivables or advance payments for services to be received in the future), the reconciliation is shown in the column headed “Non-financial assets/liabilities.”

Loans and receivables and liabilities carried at amortized cost also include receivables and liabilities under finance leases where Bayer is the lessor or lessee and which therefore have to be measured in accordance with IAS 17.

The fair value stated for receivables, loans, held-to-maturity financial investments and primary liabilities is the present value of the respective future cash flows. This is determined by discounting the cash flows at a closing-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. If a market price is available, however, this is deemed to be the fair value.

Because of the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the balance sheet date do not differ significantly from the fair values.

Income, expense, gains and losses on financial instruments can be assigned to the following categories:

	2008
	Loans and receivables	Held-to- maturity investments	Available-for-sale financial assets	Held for trading (derivatives only)	Liabilities carried at amortized cost	Total
	€ million	€ million	€ million	€ million	€ million	€ million
Interest income	123	10	1	370	24	528
Interest expense	-	-	-	(295)	(917)	(1,212)
Income from affiliated companies	-	-	-	-	-	-
Changes in fair value	-	-	-	12	-	12
Impairment charges	(114)	(27)	(14)	-	-	(155)
Income from write-backs	92	-	-	-	-	92
Gains/losses from retirements	-	-	(7)	-	-	(7)
Other non-operating income and expense	17	-	-	-	(22)	(5)
Net result	118	(17)	(20)	87	(915)	(747)

	2007
	Loans and receivables	Held-to- maturity investments	Available-for-sale financial assets	Held for trading (derivatives only)	Liabilities carried at amortized cost	Total
	€ million	€ million	€ million	€ million	€ million	€ million
Interest income	243	9	9	114	350	725
Interest expense	-	-	-	(107)	(1,288)	(1,395)
Income from affiliated companies	-	-	-	-	-	-
Changes in fair value	-	-	-	1	-	1
Impairment charges	(107)	-	(27)	-	-	(134)
Income from write-backs	83	-	-	-	-	83
Gains/losses from retirements	-	-	1	-	-	1
Other non-operating income and expense	12	-	(1)	-	1	12
Net result	231	9	(18)	8	(937)	(707)

The column headed “Held for trading” consists almost entirely of interest income and expenses relating to interest-rate and cross-currency interest-rate hedges that do not qualify for hedge accounting. Further information is provided in Note [13.2].

30.2 Maturity analysis

As of the reporting date, the liquidity risk to which the Bayer Group was exposed from its financial instruments comprises obligations relating to future interest and repayment installments for financial liabilities and the liquidity risk arising from derivatives, as shown in the table in Note [30.3].

The carrying amount of bonds includes €2,296 million (2007: €2,285 million) for the mandatory convertible bond. The future interest payments on this bond are stated. There will be no repayments because the bond will be converted into equity.

As of the reporting date, there was an unpaid portion of the effective initial fund of Bayer-Pensionskasse amounting to €490 million, which may result in further payments by Bayer AG in subsequent years.

30.3 Information on derivatives

Fair value hedges are used to eliminate the risk of fluctuations in market value, especially on fixed-interest borrowings, by obtaining a variable interest rate. Essentially these fair value hedges relate to the €2 billion bond issued in 2002 and the €1.3 billion bond issued in 2005.

The ineffective portion of fair value hedges amounts to €2 million (2007: €1 million).

Fluctuations in future cash flows resulting from forecasted foreign currency transactions are avoided by designating cash flow hedges. Cash flow hedges may also be used to reduce exposure to fluctuations in future cash flows resulting from price changes on procurement markets. The notional volumes in these two categories are €2,948 million and €140 million (2007: €1,294 million and €293 million), respectively.

Other comprehensive income decreased by €64 million after taxes in 2008 due to negative changes in the fair values of derivatives designated as cash flow hedges (2007: increased by €124 million due to positive changes). In 2008, an amount of €47 million (2007: €65 million) representing changes in the fair values of derivatives designated as cash flow hedges, having originally been recognized in other comprehensive income, was released to the income statement. Similarly, pro-rated deferred taxes of €14 million (2007: €19 million) previously reflected in other comprehensive income were recognized as deferred tax expenses. No ineffective portions of hedges had to be recognized in the income statement in 2008 or 2007.

An amount of €15 million (2007: €22 million) is expected to be reclassified from other comprehensive income to the income statement during 2009. The realization of all forecasted transactions is considered highly probable.

The market values of contracts existing at year end in the major categories were as follows:

	Dec. 31, 2007			Dec. 31, 2008
		Fair value			Fair value
	Notional amount	Positive fair value	Negative fair value	Notional amount	Positive fair value	Negative fair value
	€ million	€ million	€ million	€ million	€ million	€ million
Currency hedging of recorded transactions	5,523	136	(54)	7,498	240	(421)
Forward exchange contracts	4,572	77	(24)	5,342	193	(169)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	-	-	-	340	-	(52)
Currency options	34	2	(1)	-	-	-
of which FV hedges	-	-	-	-	-	-
of which CF hedges	-	-	-	-	-	-
Cross-currency interest-rate swaps	917	57	(29)	2,156	47	(252)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	874	57	(29)	1,535	41	(161)

Currency hedging of forecasted transactions	1,294	69	(7)	2,948	152	(87)
Forward exchange contracts	1,294	69	(7)	2,948	152	(87)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	1,273	68	(7)	2,948	147	(87)
Currency options	-	-	-	-	-	-
of which FV hedges	-	-	-	-	-	-
of which CF hedges	-	-	-	-	-	-

Interest-rate hedging of recorded transactions	8,703	99	(183)	10,937	214	(191)
Interest-rate swaps	7,703	95	(183)	8,937	211	(188)
of which FV hedges	1,719	7	(69)	1,510	59	-
of which CF hedges	-	-	-	-	-	-
Interest-rate options	1,000	4	-	2,000	3	(3)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	-	-	-	-	-	-

Commodity price hedging	293	247	(219)	140	81	(223)
Forward commodity contracts	208	86	(70)	94	37	(180)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	8	2	(1)	31	1	(95)
Commodity option contracts	85	161	(149)	46	44	(43)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	-	-	-	-	-	-

Total	15,813	551	(463)	21,523	687	(922)
of which short-term derivatives	6,071	180	(79)	8,962	410	(268)
for currency hedging	5,878	142	(30)	8,853	306	(190)
for interest-rate hedging	-	-	-	27	47	(1)
for commodity hedging	193	38	(49)	82	57	(77)

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