OTHER NOTES
30. FINANCIAL INSTRUMENTS
The relationship between classes and categories as well as the reconciliation to the statement of fi nancial position line items is shown in the following table:
Categories
Loans and receivables
Financial liabilities measured at amortized cost
Financial liabilities / assets measured at fair value
in the consolidated statement of income
Available for sale
financial assets Relating to no category
Classes
Cash and cash equivalents
▶ Cash and cash equivalents
Assets recognized at carrying amount
▶ Trade accounts receiv-able (incl. receivreceiv-ables from and loans to related parties)
▶ Other current and non-current fi nancial assets
▶ Other current and non-current fi nancial assets
Assets recognized at fair value
▶ Shares in funds
Liabilities recognized at carrying amount
▶ Trade accounts payable
▶ Short-term accounts pay-able to related parties
▶ Short-term debt (incl.
short-term loans from related parties)
▶ Long-term debt excluding capital lease obligations
▶ Senior Notes
▶ Convertible bonds
▶ Other short-term and long-term fi nancial liabilities
▶ Long-term capital lease obligations
Liabilities recognized at fair value
▶ Other short-term and long-term fi nancial liabilities
Noncontrolling interest subject to put provisions recognized at fair value
▶ Other short-term and long-term fi nancial liabilities
Derivatives for hedging purposes
▶ Other current and non-current fi nancial assets
▶ Other short-term and long-term fi nancial liabilities
▶ Other current and non-current fi nancial assets
▶ Other short-term and long-term fi nancial liabilities
Consolidated Financial Statements Other notes 115
Financial Statements
VALUATION OF FINANCIAL INSTRUMENTS
The carrying amounts of fi nancial instruments at December 31, classifi ed into categories according to IAS 39, were as follows:
€ in millions 2016 2015
Loans and receivables 5,798 5,343
Financial liabilities measured at amortized cost 18,223 18,039
Assets measured at fair value in the consolidated statement of income 1 389 358
Liabilities measured at fair value in the consolidated statement of income 1 609 396
Available for sale fi nancial assets 258 257
Relating to no category 525 204
1 There are no fi nancial instruments designated as at fair value through profi t or loss upon initial recognition according to IAS 39.
The following table presents the carrying amounts and fair values as well as the fair value hierarchy levels of Fresenius Group’s fi nancial instruments as of December 31, classifi ed into classes:
2016 2015
€ in millions hierarchy levelFair value
Carrying amount
Fair value Carrying amount
Fair value
Cash and cash equivalents 1 1,579 1,579 1,044 1,044
Assets recognized at carrying amount 2 5,926 5,926 5,455 5,455
Assets recognized at fair value 1 258 258 257 257
Liabilities recognized at carrying amount 2 18,369 19,349 18,190 19,292
Liabilities recognized at fair value 3 586 586 389 389
Noncontrolling interest subject to
put provisions recognized at fair value 3 1,029 1,029 808 808
Derivatives for hedging purposes 2 359 359 358 358
The signifi cant methods and assumptions used to estimate the fair values of fi nancial instruments as well as classifi cation of fair value measurements according to the three-tier fair value hierarchy are as follows:
Cash and cash equivalents are stated at nominal value, which equals the fair value.
The nominal value of the predominant part of short-term fi nancial instruments such as trade accounts receivable and payable, other current fi nancial assets, other short-term fi nan-cial liabilities and short-term debt rep resents its carrying amount, which is a reasonable estimate of the fair value due to the relatively short period to maturity for these instruments.
The fair values of major long-term fi nancial instruments are calculated on the basis of market information. Financial instruments for which market quotes are available are mea-sured with the market quotes at the reporting date. The fair values of the other long-term fi nancial liabilities are calculated at the present value of respective future cash fl ows. To deter-mine these present values, the prevailing interest rates and credit spreads for the Fresenius Group as of the date of the statement of fi nancial position are used.
The class assets recognized at carrying amount is classifi ed as hierarchy Level 2.
The class assets recognized at fair value was comprised of shares in funds. The fair values of these assets are calcu-lated on the basis of market information. The fair value of available for sale fi nancial assets quoted in an active market is based on price quotations at the period-end date (Level 1).
Therefore, this class is classifi ed as Level 1.
The class liabilities recognized at carrying amount is clas-sifi ed as hierarchy Level 2.
The derivatives embedded in the convertible bonds are included in the class liabilities recognized at fair value.
The fair value of the embedded derivatives is calculated using the difference between the market value of the convertible bonds and the market value of an adequate straight bond discounted with the market interest rates as of the reporting date (Level 2). Furthermore, this class comprises variable payments outstanding for acquisitions which are recognized at their fair value. The estimation of the individual fair val-ues is based on the key inputs of the arrangement that determine the future contingent payment as well as the Fresenius Group's expectation of these factors (Level 3).
Financial Statements
The Fresenius Group assesses the likelihood and timing of achieving the relevant objectives. The underlying assump-tions are reviewed regularly. The class was classifi ed as Level 3.
The valuation of the class noncontrolling interest subject to put provisions recognized at fair value is determined using signifi cant unobservable inputs. It is therefore classifi ed as Level 3.
Following is a roll forward of noncontrolling interest sub-ject to put provisions:
€ in millions 2016
Noncontrolling interest subject to put provisions
as of January 1, 2016 808
Noncontrolling interest subject to put provisions in profi t 173 Purchase of noncontrolling interest subject to put provisions 85
Dividend payments - 178
Curreny effects and other changes 141
Noncontrolling interest subject to put provisions
as of December 31, 2016 1,029
98% of noncontrolling interest subject to put provisions applied to Fresenius Medical Care at December 31, 2016.
Derivatives, mainly consisting of interest rate swaps and foreign exchange forward contracts, are valued as follows:
The fair value of interest rate swaps is calculated by discount-ing the future cash fl ows on the basis of the market interest rates applicable for the remaining term of the contract as of the date of the statement of fi nancial position. To determine the fair value of foreign exchange forward contracts, the con-tracted forward rate is compared to the current forward rate
for the remaining term of the contract as of the date of the statement of fi nancial position. The result is then discounted on the basis of the market interest rates prevailing at the date of the statement of fi nancial position for the respective currency.
Fresenius Group’s own credit risk is incorporated in the fair value estimation of derivatives that are liabilities. Counter-party credit risk adjustments are factored into the valuation of derivatives that are assets. The Fresenius Group monitors and analyses the credit risk from derivative fi nancial instru-ments on a regular basis. For the valuation of derivative fi nan-cial instruments, the credit risk is considered in the fair value of every individual instrument. The basis for the default probability are Credit Default Swap Spreads of each counter-party appropriate for the duration. The calculation of the credit risk considered in the valuation is done by multiplying the default probability appropriate for the duration with the expected discounted cash fl ows of the derivative fi nancial instrument.
The class of derivatives for hedging purposes includes the call options which have been purchased to hedge the convert-ible bonds. The fair values of these call options are derived from market quotes. For the fair value measurement of the class deriv atives for hedging purposes, signifi cant other observ-able inputs are used. Therefore, the class is classifi ed as Level 2 in accordance with the defi ned fair value hierarchy levels.
Currently, there is no indication that a decrease in the value of Fresenius Group’s fi nancing receivables is probable.
Therefore, the allowances on credit losses of fi nancing receivables are immaterial.
FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
Dec. 31, 2016 Dec. 31, 2015
€ in millions Assets Liabilities Assets Liabilities
Interest rate contracts (current) 0 0 0 2
Interest rate contracts (non-current) 5 1 0 1
Foreign exchange contracts (current) 14 24 16 6
Foreign exchange contracts (non-current) – 1 1 1
Derivatives designated as hedging instruments 1 19 26 17 10
Interest rate contracts (current) 0 – 0 0
Interest rate contracts (non-current) – 1 0 3
Foreign exchange contracts (current) 1 27 23 23 7
Foreign exchange contracts (non-current) 1 – – – –
Derivatives embedded in the convertible bonds 0 362 0 335
Call options to secure the convertible bonds 1 362 0 335 0
Derivatives not designated as hedging instruments 389 386 358 345
1 Derivatives designated as hedging instruments, foreign exchange contracts and call options to secure the convertible bonds not designated as hedging instruments are classifi ed as derivatives for hedging purposes.
Consolidated Financial Statements Other notes 117
Financial Statements
Derivative fi nancial instruments are marked to market each reporting period, resulting in carrying amounts equal to fair values at the reporting date.
Derivatives not designated as hedging instruments, which are derivatives that do not qualify for hedge accounting, are also solely entered into to hedge economic business transac-tions and not for speculative purposes.
Derivatives for hedging purposes as well as the deriva-tives embedded in the convertible bonds were recognized at gross value within other assets in an amount of € 408 mil-lion and other liabilities in an amount of € 411 milmil-lion.
The current portion of derivatives indicated as assets in the preceding table is recognized within other current assets in the consolidated statement of fi nancial position, while the current portion of those indicated as liabilities is included in short-term accrued expenses and other short-term liabilities.
The non-current portions indicated as assets or liabilities are recognized in other non-current assets or in long-term accrued expenses and other long-term liabilities, respectively.
The derivatives embedded in the convertible bonds and the call options to secure the convertible bonds are recognized in other non-current liabilities / assets in the consolidated state-ment of fi nancial position.
Effects of fi nancial instruments recorded in the consolidated statement of income
The net gains and losses from fi nancial instruments consisted of allowances for doubtful accounts in an amount of € 431 million and foreign currency transactions of € 4 million. Interest income of € 96 million resulted mainly from the valuation of call options in connection with the convertible bonds of Fresenius SE & Co. KGaA and the valuation of the derivatives embedded in the convertible bonds of Fresenius Medical Care AG & Co. KGaA, trade accounts receivable and loans to related parties. Interest expense of € 678 million resulted mainly from fi nancial liabilities, which are not recognized at fair value in the consolidated statement of income.
EFFECT OF DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS ON THE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2016
€ in millions
Gain or loss recognized in other comprehensive income (loss) (effective portion)
Gain or loss reclassifi ed from accumulated other
comprehensive income (loss) (effective portion)
Gain or loss recognized in the consolidated statement of income
Interest rate contracts 3 36 0
Foreign exchange contracts - 19 3 0
Derivatives in cash fl ow hedging relationships 1 - 16 39 0
1 The amount of gain or loss recognized in the consolidated statement of income solely relates to the ineffective portion.
2015
€ in millions
Gain or loss recognized in other comprehensive income (loss) (effective portion)
Gain or loss reclassifi ed from accumulated other comprehensive income (loss) (effective portion)
Gain or loss recognized in the consolidated statement of income
Interest rate contracts - 6 37 0
Foreign exchange contracts 27 5 0
Derivatives in cash fl ow hedging relationships 1 21 42 0
1 The amount of gain or loss recognized in the consolidated statement of income solely relates to the ineffective portion.
Financial Statements
Losses from foreign exchange contracts not designated as hedging instruments recognized in the consolidated statement of income are faced by gains from the under lying transac-tions in the corresponding amount.
The Fresenius Group expects to recognize a net amount of € 4 million of the existing losses for foreign exchange con-tracts deferred in accumulated other comprehensive income (loss) in the consolidated statement of income within the next 12 months. For interest rate contracts, the Fresenius Group expects to recognize € 29 million of losses in the course
of normal business during the next 12 months in interest expense.
Gains and losses from foreign exchange contracts and the corresponding underlying transactions are accounted for as cost of sales, selling, general and administrative expenses and net interest. Gains and losses resulting from interest rate contracts are recognized as net interest in the consoli-dated statement of income.
In 2016, gains of € 13 thousand (2015: losses of € 79 thou-sand) for available for sale fi nancial assets were recognized in other comprehensive income (loss).
EFFECT OF DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS ON THE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Gain or loss recognized in the consolidated statement of income
€ in millions 2016 2015
Interest rate contracts – –
Foreign exchange contracts - 4 28
Derivatives embedded in the convertible bonds - 27 - 190
Call options to secure the convertible bonds 27 190
Derivatives not designated as hedging instruments - 4 28
The following table shows when the cash fl ow from derivative fi nancial instruments is expected to occur.
CASH FLOW FROM DERIVATIVE FINANCIAL INSTRUMENTS
expected in period of
€ in millions 1 year 1 to 3 years 3 to 5 years over 5 years
Derivatives designated as hedging instruments - 10 - 2 5 0
Derivatives not designated as hedging instruments 4 - 1 – –
MARKET RISK General
The Fresenius Group is exposed to effects related to foreign exchange fl uctuations in connection with its international business activities that are denominated in various currencies.
In order to fi nance its business operations, the Fresenius Group issues senior notes and commercial papers and enters into mainly long-term credit agreements and Schuldschein Loans with banks. Due to these fi nancing activities, the Fresenius Group is exposed to interest risk caused by changes in variable interest rates and the risk of changes in the fair value of statement of fi nancial position items bearing fi xed interest rates.
In order to manage the risk of interest rate and foreign exchange rate fl uctuations, the Fresenius Group enters into certain hedging transactions with highly rated fi nancial insti tutions as authorized by the Management Board. Deriva-tive fi nancial instruments are not entered into for trading purposes.
In general, the Fresenius Group conducts its derivative fi nancial instrument activities under the control of a single centralized department. The Fresenius Group has established guidelines derived from best practice standards in the bank-ing industry for risk assessment procedures and supervi sion concerning the use of fi nancial derivatives. These guidelines require amongst other things a clear segregation of duties
Consolidated Financial Statements Other notes 119
Financial Statements
in the areas of execution, administration, accounting and controlling. Risk limits are continuously monitored and, where appropriate, the use of hedging instruments is adjusted to that extent.
The Fresenius Group defi nes benchmarks for individual exposures in order to quantify interest and foreign exchange risks. The benchmarks are derived from achievable and sus-tainable market rates. Depending on the individual bench-marks, hedging strategies are determined and generally imple-mented by means of micro hedges.
Earnings of the Fresenius Group were not materially affected by hedge ineffectiveness in the reporting period since the critical terms of the interest and foreign exchange deriv-atives mainly matched the critical terms of the under lying exposures.
Derivative fi nancial instruments Classifi cation
To reduce the credit risk arising from derivatives, the Fresenius Group concluded master netting agreements with banks. Through such agreements, positive and negative fair values of the derivative contracts could be offset against one another if a partner becomes insolvent. This offsetting is valid for transactions where the aggregate amount of obliga-tions owed to and receivable from are not equal. If insol vency occurs, the party which owes the larger amount is obliged to pay the other party the difference between the amounts owed in the form of one net payment.
These master netting agreements do not provide a basis for offsetting the fair values of derivative fi nancial instru-ments in the consolidated statement of fi nancial position as the offsetting criteria under International Financial Reporting Standards are not satisfi ed.
At December 31, 2016 and December 31, 2015, the Fresenius Group had € 45 million and € 37 million of deriva-tive fi nancial assets subject to netting arrangements and
€ 46 million and € 19 million of derivative fi nancial liabilities
subject to netting arrangements. Offsetting these derivative fi nancial instruments would have resulted in net assets of € 28 million as well as net liabilities of € 29 million and € 10 million at December 31, 2016 and December 31, 2015, respectively.
Foreign exchange risk management
The Fresenius Group has determined the euro as its fi nancial reporting currency. Therefore, foreign exchange translation risks resulting from the fl uctuation of exchange rates between the euro and the local currencies, in which the fi nancial state-ments of the foreign subsidiaries are prepared, have an impact on results of operations and fi nancial positions reported in the consolidated fi nancial statements.
Besides translation risks, foreign exchange transaction risks exist. These mainly relate to transactions denominated in foreign currencies, such as purchases and sales, projects and services as well as intragroup sales of products to other Fresenius Group entities in different currency areas. Solely for the purpose of hedging existing and foreseeable foreign exchange transaction exposures, the Fresenius Group enters into foreign exchange forward contracts and, on a small scale, foreign exchange options. To ensure that no foreign exchange risks result from loans in foreign currencies, the Fresenius Group enters into foreign exchange swap contracts.
As of December 31, 2016, the notional amounts of for-eign exchange contracts totaled € 2,635 million. These forfor-eign exchange contracts have been entered into to hedge risks from operational business and in connection with loans in for-eign currency. Forfor-eign exchange forward contracts to hedge risks from operational business were exclusively recognized as cash fl ow hedges. The fair value of cash fl ow hedges was - € 11 million.
The hedge-effective portion of changes in the fair value of foreign exchange forward contracts that are designated and qualifi ed as cash fl ow hedges of forecasted product purchases and sales is reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassifi ed
Financial Statements
into earnings as a component of cost of sales or as selling, general and administrative expenses in the same period in which the hedged transaction affects earnings.
As of December 31, 2016, the Fresenius Group was party to foreign exchange contracts with a maximum maturity of 19 months.
The Fresenius Group uses a Cash-Flow-at-Risk (CFaR) model in order to estimate and quantify such transaction risks from foreign currencies. The basis for the analysis of the currency risks are the foreign currency cash fl ows that are reasonably expected to arise within the following 12 months, less any hedges. Under the CFaR approach, the potential cur-rency fl uctuations of these net exposures are shown as prob-ability distributions based on historical volatilities and correla-tions of the preceding 250 business days. The calculation is made assuming a confi dence level of 95% and a holding period of up to one year. The aggregation of currency risks has risk-mitigating effects due to correlations between the transactions concerned, i. e. the overall portfolio’s risk expo-sure is generally less than the sum total of the underlying individual risks. As of December 31, 2016, the Fresenius
The Fresenius Group uses a Cash-Flow-at-Risk (CFaR) model in order to estimate and quantify such transaction risks from foreign currencies. The basis for the analysis of the currency risks are the foreign currency cash fl ows that are reasonably expected to arise within the following 12 months, less any hedges. Under the CFaR approach, the potential cur-rency fl uctuations of these net exposures are shown as prob-ability distributions based on historical volatilities and correla-tions of the preceding 250 business days. The calculation is made assuming a confi dence level of 95% and a holding period of up to one year. The aggregation of currency risks has risk-mitigating effects due to correlations between the transactions concerned, i. e. the overall portfolio’s risk expo-sure is generally less than the sum total of the underlying individual risks. As of December 31, 2016, the Fresenius