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 statements of financial position. Since the line items “Other receivables,” “Trade accounts payable” and “Other liabilities” contain both financial instruments and non-financial assets or 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 included 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 closing date do not differ significantly from the fair values.

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

Income, Expense, Gains and Losses on Financial Instruments					[Table 4.88]
	2009
	Loans and receivables	Held-to- maturity financial 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	58	3	1	490	128	680
Interest expense	-	-	-	(490)	(795)	(1,285)
Income from affiliated companies	-	-	5	-	-	5
Changes in fair value	-	-	-	(62)	-	(62)
Impairment charges	(107)	-	(15)	-	-	(122)
Income from write-backs	63	-	-	-	-	63
Gains/losses from retirements	-	-	(1)	-	-	(1)
Other non-operating income and expense	2	-	(2)	-	(5)	(5)
Net result	16	3	(12)	(62)	(672)	(727)

Income, Expense, Gains and Losses on Financial Instruments (Previous Year)					[Table 4.89]
	2008
	Loans and receivables	Held-to- maturity financial 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)

The column headed “Held for trading” consisted almost entirely of interest income and expenses relating to interest rate and cross-currency interest rate hedges that did not qualify for hedge accounting.

The aggregate amount of financial assets and liabilities recognized at fair value based on individual measurement parameters was €56 million at the beginning of 2009. The carrying amount in the statement of financial position at the end of 2009 was €38 million, following €1 million in fair value changes recognized in the income statement, €18 million in retirements and minus €1 million in value changes recognized outside profit or loss. Of the value changes recognized in income, €10 million related to assets or liabilities still recognized in the statement of financial position at the end of the year and minus € 9 million to retired assets and liabilities. There were also divestment gains of €4 million.

30.2 Maturity analysis

As of the closing date, the liquidity risk to which the Bayer Group was exposed from its financial instruments comprised 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].

As of the closing 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. These fair value hedges relate mainly to the €2 billion bond issued in 2002 and the €1.3 billion bond issued in 2005.

Gains of €45 million (2008: €70 million) were recorded on fair value hedging instruments in 2009. Losses of €44 million (2008: €75 million) were recorded on the underlying hedged items.

Fluctuations in future cash flows resulting from forecasted foreign currency transactions are avoided partly through derivative contracts, most of which are designated as cash flow hedges. Hedging contracts, some of which are designated as cash flow hedges, are also used to partly reduce exposure to fluctuations in future cash flows resulting from price changes on procurement markets. The notional volumes in these two categories are €3,523 million and €323 million (2008: €2,948 million and €140 million), respectively.

Accumulated other comprehensive income increased by €55 million after taxes in 2009 due to positive changes in the fair values of derivatives designated as cash flow hedges (2008: decreased by €64 million due to negative changes). In 2009, an amount of €10 million, representing fair value changes of derivatives designated as cash flow hedges, which originally had been recognized in accumulated other comprehensive income, was expensed to the income statement. In 2008, a corresponding amount of €47 million was recognized in income. Similarly, pro-rated deferred taxes of €4 million previously reflected in accumulated other comprehensive income were recognized as deferred tax income (2008: €14 million as deferred tax expense). No material ineffective portions of hedges had to be recognized in the income statement in 2009 or 2008.

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

Fair Values of Derivatives				[Table 4.91]
	Dec. 31, 2008			Dec. 31, 2009
		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	7,498	240	(421)	7,652	58	(294)
Forward exchange contracts	5,342	193	(169)	5,868	43	(88)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	340	-	(52)	384	-	(5)
Cross-currency interest-rate swaps	2,156	47	(252)	1,784	15	(206)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	1,535	41	(161)	1,512	15	(175)

Currency hedging of forecasted transactions	2,948	152	(87)	3,523	136	(45)
Forward exchange contracts	2,948	152	(87)	3,245	129	(44)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	2,928	147	(87)	2,451	104	(37)
Currency options	-	-	-	278	7	(1)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	-	-	-	239	7	-

Interest-rate hedging of recorded transactions	10,937	214	(191)	12,612	368	(284)
Interest rate swaps	8,937	211	(188)	10,612	368	(284)
of which FV hedges	1,510	59	-	2,467	92	-
of which CF hedges	-	-	-	-	-	-
Interest rate options	2,000	3	(3)	2,000	-	-
of which FV hedges	-	-	-	-	-	-
of which CF hedges	-	-	-	-	-	-

Commodity price hedging	140	81	(223)	323	36	(91)
Forward commodity contracts	94	37	(180)	167	13	(68)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	31	1	(95)	85	-	(55)
Commodity option contracts	46	44	(43)	156	23	(23)
of which FV hedges	-	-	-	-	-	-
of which CF hedges	-	-	-	-	-	-

Total	21,523	687	(922)	24,110	598	(714)
of which short-term derivatives	8,962	410	(268)	10,922	239	(204)
for currency hedging	8,853	306	(190)	8,259	179	(126)
for interest rate hedging	27	47	(1)	2,400	26	(32)
for commodity hedging	82	57	(77)	263	34	(46)

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