3. Effects of new accounting pronouncements

Accounting standards applied for the first time in 2008

In 2008, the following accounting standards and interpretations were applied for the first time. None of the new standards had a material impact on the presentation of the Group’s financial position or results of operations, or on earnings per share.

In October and November 2008 the IASB published amendments to IAS 39 (Financial Instruments: Recognition and Measurement) and IFRS 7 (Financial Instruments: Disclosures). The purpose of these amendments is to permit companies to reclassify certain financial assets that are held for trading from the “fair value through profit or loss” category to a different category in exceptional circumstances, and also to allow available-for-sale financial assets to be reclassified to loans and receivables if they meet the applicable recognition criteria. The Bayer Group did not reclassify any assets as a result of these amendments in 2008.

IFRIC 11 (IFRS 2 – Group and Treasury Share Transactions), endorsed by the European Union in June 2007, states that share-based payment for goods or services received (as from employees) must be accounted for as equity-settled regardless of whether the enterprise acquires the necessary equity instruments voluntarily or is forced to do so. IFRIC 11 also specifies the accounting treatment of the issuance of equity instruments in the parent company to employees of a subsidiary.

IFRIC 12 (Service Concession Arrangements), published in November 2006, addresses the recognition of service agreements between public-sector entities and private companies for the operation of public infrastructure such as swimming pools, freeways, electric and water utilities by private licensees.

In July 2007, the IFRIC issued IFRIC 14 (IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction) dealing with accounting for plan assets that exceed pension obligations. This interpretation provides details of how to determine the economic benefit of such assets to the enterprise. It also sets out specific rules on accounting for plan assets in light of statutory minimum funding requirements.

Published accounting standards that have not yet been applied

In November 2006, the IASB published IFRS 8 (Operating Segments), which will replace IAS 14 (Segment Reporting), the existing standard in this field. Under IFRS 8, segment reporting must be based on the information used internally by management to identify operating segments and to evaluate their performance. IFRS 8 is to be applied for the first time for annual periods beginning on or after January 1, 2009. The application of IFRS 8 will not have a material impact on the presentation of our segment reporting.

In March 2007, the IASB issued amendments to IAS 23 (Borrowing Costs) requiring the capitalization of interest on borrowings made to acquire, construct or produce a qualifying asset. The amendments are to be applied for annual periods beginning on or after January 1, 2009. Since the option to capitalize interest on borrowed capital that is directly attributable to qualifying assets was already utilized in the past, the amendments will have no impact on the consolidated financial statements of the Bayer Group.

In September 2007, the IASB issued amendments to IAS 1 (Presentation of Financial Statements). Apart from proposing the renaming of certain sections of the financial statements, these amendments mandate that in certain circumstances an opening balance sheet for the previous financial year be published along with a separate presentation of changes in equity arising from transactions with owners and with non-owners, and that the income tax effects of such transactions also be disclosed separately by component in the statement of recognized income and expense. The amendments are to be applied for the first time for annual periods beginning on or after January 1, 2009. They will not have a material impact on the presentation of the Group’s financial position or results of operations.

In January 2008 the IASB published amendments to IFRS 2 (Share-based Payment) to clarify the definition of vesting conditions (exercisability) and cancellation of share-based payment. The revised standard is to be applied for the first time for annual periods beginning on or after January 1, 2009. The change will not have a material impact on the presentation of the Group’s financial position or results of operations.

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 now to be accounted for as an equity transaction.
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.

IFRS 3 (revised 2008) and IAS 27 (revised 2008) are applicable prospectively for annual periods beginning on or after July 1, 2009. Earlier application is permitted provided that both revised standards are applied simultaneously. The impact on the presentation of the Group’s financial position and results of operations will depend on the scale of future business combinations or divestments. The revised standards have not yet been endorsed by the European Union.

In February 2008, the IASB issued amendments to IAS 32 (Financial Instruments: Presentation) and IAS 1 (Presentation of Financial Statements). These refer particularly to the distinction between equity and debt in accounting for company capital to which cancellation rights are attached (puttable financial instruments). Puttable financial instruments previously had to be classified as a liability, whereas in the future such cancellable instruments are to be classified as equity in certain circumstances. The amendments are to be applied for the first time for annual periods beginning on or after January 1, 2009. Their application will not have a material impact on the presentation of the Group’s financial position or results of operations.

In May 2008 the IASB published amendments – mainly of a terminological or editorial nature – to a number of International Financial Reporting Standards as part of its “Annual Improvements” project. The amendments are to be applied for the first time for annual periods beginning on or after January 1, 2009. They are not expected to have a material impact on the presentation of the Group’s financial position or results of operations.

In July 2008 the IASB published amendments to IAS 39 (Financial Instruments: Recognition and Measurement) to clarify the circumstances in which a hedged risk or portion of cash flows is eligible for hedge accounting. It deals with one-sided risk hedging using options and with inflation hedging. The amendments are to be applied for the first time for annual periods beginning on or after July 1, 2009. They have not yet been endorsed by the European Union.

In June 2007 the IFRIC issued IFRIC 13 (Customer Loyalty Programmes), which addresses both revenue and expense recognition relating to “award credits” that are provided to customers as purchase incentives and can be exchanged for free or discounted goods or services in the future. This interpretation is to be applied for annual periods beginning on or after July 1, 2008. The application of IFRIC 13 to customer loyalty programs is not expected to have a material impact since the Bayer Group makes little use of such programs.

In July 2008 the IFRIC adopted IFRIC 15 (Agreements for the Construction of Real Estate), which addresses revenue recognition for real estate sold before completion. The interpretation defines the criteria for deciding whether IAS 11 (Construction Contracts) or IAS 18 (Revenue) is applicable. It is applicable for annual periods beginning on or after January 1, 2009. It has not yet been endorsed by the European Union. IFRIC 15 will not have a material impact on the presentation of the Group’s financial position or results of operations.

In July 2008 IFRIC 16 (Hedges of a Net Investment in a Foreign Operation) was issued. It defines the risk to which hedge accounting may be applied in this context and which entity or entities within a group may hold the respective hedging instrument. This interpretation is to be applied for annual periods beginning on or after October 1, 2008. It has not yet been endorsed by the European Union. IFRIC 16 is not expected to have a material impact on the presentation of the Group’s financial position or results of operations as the Group so far has not hedged net investments in foreign operations.

In November 2008 IFRIC 17 (Distributions of Non-cash Assets to Owners) was published. This interpretation defines 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 dividend paid and the carrying amount of the net assets distributed must be recognized in profit or loss at the distribution date. This interpretation, which is to be applied prospectively for annual periods beginning on or after July 1, 2009, has not yet been endorsed by the European Union. It is not expected to have a material impact on the presentation of the Group’s future financial position or results of operations.

In January 2009 the IFRIC issued IFRIC 18 (Transfers of Assets from Customers). This interpretation relates to agreements in which an entity receives from a customer an item of property, plant and equipment – or cash earmarked exclusively for its acquisition or construction – that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services. The interpretation specifies the circumstances and timing of asset recognition by the receiving entity and how the asset is to be measured. It also clarifies how to determine the receiving entity’s obligation to render one or more separately identifiable services in exchange for the transferred asset and sets forth the conditions for revenue recognition. IFRIC 18 is to be applied prospectively to transfers of assets from customers on or after July 1, 2009. Earlier application is permitted on certain conditions. It has not yet been endorsed by the European Union. The Bayer Group is currently evaluating the impact that the application of the interpretation may have on the presentation of the Group’s financial position or results of operations.