CRITICAL ACCOUNTING POLICIES

In the opinion of the Management of the Fresenius Group, the following accounting policies and topics are critical for the consolidated financial statements in the present economic environment. The influences and judgments as well as the uncertainties which affect them are also important factors to be considered when looking at present and future operating earnings of the Fresenius Group.

a) Recoverability of goodwill and intangible assets with indefinite useful lives

The amount of goodwill and other non-amortizable intangible assets with indefinite useful lives represents a considerable part of the total assets of the Fresenius Group. At December 31, 2018 and December 31, 2017, the carrying amount of these was € 25,915 million and € 25,480 million, respectively. This represented 46% and 48%, respectively, of total assets.

is recognized in the opening balance of retained earnings as of January 1, 2019 without adjustments to the comparative information of the previous period.

In the application of the modified retrospective method, the carrying amount of the lease liability at the date of the initial application is determined by discounting the remaining lease payments of lease agreements that were classified as operating leases under IAS 17 using the incremental borrowing rate at date of initial application. Furthermore, right-of-use assets are to be recognized. In the application of the modified retrospective method, the carrying amount of the right-of-use asset equals the carrying amount of the lease liability (adjusted for any prepaid or accrued lease payments). For a part of the existing contracts, the Fresenius Group recognizes the right-of-use asset with its carrying amount assuming the new standard had been applied since the commencement date of the lease discounted using its incremental borrowing rate at the date of initial application.

Regarding the options and exemptions available upon the initial application of IFRS 16 the Fresenius Group adopted the following approach:

▶ IFRS 16 is only applied to contracts that were previously identified as leases under IAS 17 and IFRIC 4.

▶ Recognition, valuation and disclosure principles of IFRS 16 are not applied to lease contracts with a lease term ending in less than 12 months from the date of the initial application. The respective lease contracts are accounted for as if they were short-term leases and rec-ognized as an expense accordingly.

▶ Material initial direct costs are included in the measure-ment of a right-of-use asset with the carrying amount assuming the new standard was applied since the com-mencement date of the lease.

▶ Upon initial recognition, no impairment review is per-formed. The right-of-use assets are adjusted for onerous contract provisions, recognized on the consolidated statement of financial position immediately before the date of initial application.

Financial Statements

An impairment test of goodwill and non-amortizable intangible assets with indefinite useful lives is performed at least once a year, or if events occur or circumstances change that would indicate the carrying amount may not be recoverable.

To determine possible impairments of these assets, the recoverable amount as its value in use of the cash generat-ing units (CGUs) is compared to their carrying amount. The value in use of each CGU is determined using estimated future cash flows for the unit discounted by a weighted-average cost of capital (WACC) specific to that CGU. Estimating the discounted future cash flows involves significant assump-tions, especially regarding future reimbursement rates and sales prices, number of treatments, sales volumes and costs.

In determining discounted cash flows, the Fresenius Group utilizes for every CGU its approved three-year budget, projec-tions for years 4 to 10 and a corresponding growth rate for all remaining years. Projections for up to 10 years are possible due to historical experience and the stability of Fresenius Group’s business, which is largely independent from the eco-nomic cycle. Except for the CGUs in Asia-Pacific, the CGUs’

average revenue growth for the 10-year planning period is between 3% and 7%. In Asia-Pacific, the average growth is in the upper single-digit range for Fresenius Medical Care and in the low double-digit range for Fresenius Kabi. A signifi-cant part of goodwill is assigned to the CGUs of Fresenius Medical Care and Fresenius Kabi in North America (carrying amounts of goodwill as of December 31, 2018: € 10,128 million and € 4,167 million, respectively) as well as the CGUs of Fresenius Helios in Germany and Spain (carrying amounts of goodwill as of December 31, 2018: € 4,443 million and

€ 3,414 million, respectively). A significant part of the operat-ing income is also achieved in these CGUs. For the 10-year planning period, the average growth of the operating income is in the low to mid single-digit range for these CGUs. For the period after 10 years, the growth rates are 1% to 4% for Fresenius Medical Care, 3% for Fresenius Kabi, 1% for Fresenius Helios (Germany), 1.5% for Fresenius Helios (Spain) and 1% for Fresenius Vamed. The growth rates of the main CGUs of Fresenius Medical Care and Fresenius Kabi in North

America were 1% and 3%, respectively. The discount factor is determined by the WACC of the respective CGU. Fresenius Medical Care’s WACC consisted of a basic rate of 5.99% and the WACC in the business segment Fresenius Kabi consisted of a basic rate of 5.79% for 2018, respectively.

This basic rate is then adjusted by a country-specific risk premium and, if appropriate, by a factor to reflect higher risks associated with the cash flows from recent material acquisitions, until they are appropriately integrated, within each CGU. In 2018, WACCs (after tax) for the CGUs of Fresenius Medical Care ranged from 5.99% to 13.52% and WACCs (after tax) for the CGUs of Fresenius Kabi ranged from 6.40% to 12.08%. In the CGU Fresenius Helios (Germany) and the business segment Fresenius Vamed, the WACC (after tax) was 5.79%, country-specific adjustments did not occur.

In the CGU Fresenius Helios (Spain), the WACC (after tax) was 7.11%. The WACCs (after tax) of the main CGUs of Fresenius Medical Care and Fresenius Kabi in North America were 5.99% and 6.66%, respectively. If the value in use of the CGU is less than its carrying amount, the difference is recorded as an impairment of the fair value of the goodwill at first. An increase of the WACC (after tax) by 0.5 percentage points would not have resulted in the recognition of an impair-ment loss in 2018.

Additional sensitivity analyses were carried out for the CGUs in Latin America. An increase of the WACC of the CGU Fresenius Medical Care Latin America (carrying amount of goodwill as of December 31, 2018: € 137 million) by 0.27 per-centage points would have led to the fair value being equal to the carrying amount. An increase of the WACC of the CGU Fresenius Kabi Latin America (carrying amount of goodwill as of December 31, 2018: € 146 million) by 1 percentage point would not have led to the recognition of an impairment loss. An increase of the WACC by 3.29 percentage points would have led to the fair value being equal to the carrying amount.

A prolonged downturn in the health care industry with lower than expected increases in reimbursement rates and prices and / or higher than expected costs for providing health care services and the manufacture of products could

Financial Statements

adversely affect the estimated future cash flows of certain countries or segments. Future adverse changes in a reporting unit’s economic environment could affect the discount rate.

A decrease in the estimated future cash flows and / or a decline in the reporting unit’s economic environment could result in impairment charges to goodwill and other intangible assets with indefinite useful lives which could materially and adversely affect Fresenius Group’s future operating results.

b) Legal contingencies

The Fresenius Group is involved in several legal matters arising from the ordinary course of its business. The outcome of these matters may have a material effect on the financial position, results of operations or cash flows of the Fresenius Group. For details, please see note 29, Commitments and contingencies.

The Fresenius Group regularly analyzes current information about such claims for probable losses and provides accruals for such matters, including the estimated legal expenses and consulting services in connection with these matters, as appropriate. The Fresenius Group utilizes its internal legal department as well as external resources for these assess-ments. In making the decision regarding the need for a pro-vision for legal matters, the Fresenius Group considers the degree of probability of an unfavorable outcome and its abil-ity to make a reasonable estimate of the amount of loss.

The filing of a suit or formal assertion of a claim or assess-ment, or the disclosure of any such suit or assertion, does not necessarily indicate that a provision for a loss is appropriate.

c) Allowance for doubtful accounts

Trade accounts receivable are a significant asset and the allow-ance for doubtful accounts is a significant estimate made by the Management. Trade accounts receivable were € 6,540 mil-lion and € 6,260 milmil-lion in 2018 and 2017, respectively, net of allowance. Approximately 51% of receivables derive from

the business segment Fresenius Medical Care and mainly relate to the dialysis care business in North America.

The major debtors or debtor groups of trade accounts receivable were U.S. Medicare and Medicaid health care pro-grams with 17%, private insurers in the United States with 7% as well as the public health authority of the region of Madrid with 12%, at December 31, 2018. Other than that, the Fresenius Group has no significant risk concentration, due to its international and heterogeneous customer structure.

The allowance for doubtful accounts was € 323 million and € 741 million as of December 31, 2018 and December 31, 2017, respectively.

A valuation allowance is calculated if specific circum-stances indicate that amounts will not be collectible. When all efforts to collect a receivable, including the use of outside sources where required and allowed, have been exhausted, and after appropriate management review, a receivable deemed to be uncollectible is considered a bad debt and written off.

Deterioration in the aging of receivables and collection difficulties could require that the Fresenius Group increases the estimates of allowances for doubtful accounts. Additional expenses for uncollectible receivables could have a signifi-cant negative impact on future operating results.

d) Self-insurance programs

Under the insurance programs for professional, product and general liability, auto liability, worker’s compensation claims and medical malpractice claims, the largest subsidiary of Fresenius Medical Care AG & Co. KGaA, located in the United States, is partially self-insured for professional liability claims.

For further details regarding the accounting policies for self-insurance programs, please see note 1. III. x, Self-insurance programs.

Financial Statements

2. ACQUISITIONS, DIVESTITURES AND INVESTMENTS

ACQUISITIONS, DIVESTITURES AND INVESTMENTS