1. PRINCIPLES
I. GROUP STRUCTURE
Fresenius is a worldwide operating health care group with products and services for dialysis, the hospital and the medical care of patients at home. Further areas of activity are hospital operations as well as engineering and services for hospitals and other health care facilities. In addition to the activities of Fresenius SE, the operating activities were split into the following legally-independent business segments (subgroups) in the fiscal year 2007:
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Fresenius Medical Care | |
Fresenius Kabi | |
Fresenius ProServe |
Fresenius Medical Care is the world’s leading provider of dialysis products and dialysis care for the life-saving treatment of patients with chronic kidney failure. Fresenius Medical Care treats 173,863 patients in its 2,238 own dialysis clinics.
Fresenius Kabi is Europe’s leading company in the field of infusion therapy and clinical nutrition with subsidiaries and distributors worldwide. Fresenius Kabi’s products are used in hospitals as well as in out-patient medical care to treat critically and chronically ill patients. Fresenius Kabi is also a leading provider of transfusion technology products in Europe.
Fresenius ProServe is a leading German, private hospital operator with 60 facilities. Moreover, the company offers engineering and services for hospitals and other health care facilities. As of January 1, 2008, Fresenius ProServe was replaced by two new business segments – Fresenius Helios and Fresenius Vamed, which so far have formed Fresenius ProServe. Fresenius Helios is focused on hospital operations. Fresenius Vamed offers engineering and services for hospitals and other health care facilities.
Fresenius SE owned 36.41% of the ordinary voting shares of Fresenius Medical Care AG & Co. KGaA (FMC-AG & Co. KGaA) and 35.95% of the total subscribed capital of FMC-AG & Co. KGaA at the end of the fiscal year 2007. Fresenius Medical Care Management AG (FMC Management AG), the general partner of FMC-AG & Co. KGaA, is a wholly-owned subsidiary of Fresenius SE. Due to this structure, FMC-AG & Co. KGaA is fully consolidated in the consolidated financial statements of the Fresenius Group. Fresenius SE continued to hold 100% of the management companies of the business segments Fresenius Kabi (Fresenius Kabi AG) and Fresenius ProServe (Fresenius ProServe GmbH) on December 31, 2007. In addition, Fresenius SE holds interests in companies with holding functions regarding real estate, financing and insurance, as well as in Fresenius Netcare GmbH which offers services in the field of information technology and in Fresenius Biotech Beteiligungs GmbH.
The reporting currency in the Fresenius Group is the euro. In order to make the presentation clearer, amounts are mostly shown in million euros. Amounts which are lower than € 1 million after they have been rounded are marked with “–”.
II. CONVERSION OF FRESENIUS AG INTO A EUROPEAN COMPANY (SE) AND NEW DIVISION OF THE SUBSCRIBED CAPITAL
On December 4, 2006, at the Extraordinary General Meeting, Fresenius AG’s shareholders approved the proposal to convert the Company’s legal form from a German stock corporation (Aktiengesellschaft) into a European Company (Societas Europaea – SE). The conversion became effective on July 13, 2007 upon the registration in the commercial register after the successful completion of the procedure for the involvement of the employees. Fresenius AG’s name after the conversion is Fresenius SE. The conversion of Fresenius AG into a SE neither leads to a liquidation of the Company nor to the formation of a new legal entity. The Company’s corporate structure and management organization as well as the interests of the shareholders in the Company continue to exist unchanged because of the identity of the legal entity. In the Articles of Association of Fresenius SE, the existing two-tier system consisting of Management Board and Supervisory Board will remain unchanged. The Supervisory Board of Fresenius SE continues to have twelve members.
Furthermore, Fresenius AG’s shareholders approved at the Extraordinary General Meeting to conduct a new division of the subscribed capital of Fresenius AG (share split) in connection with a capital increase from the Company’s funds without the issuance of new shares. As a result, the number of ordinary shares and preference shares issued tripled. The share split in connection with an increase of the subscribed capital became effective upon the registration in the commercial register on January 24, 2007. Before the registration in the commercial register, the subscribed capital of Fresenius AG amounted to € 131,715,307.52 and was divided in 25,725,646 ordinary shares and 25,725,646 preference shares. Through a conversion of capital reserves, the subscribed capital was first increased by € 22,638,568.48 to € 154,353,876.00 and then divided in 77,176,938 ordinary shares and 77,176,938 preference shares. The new proportionate amount of the subscribed capital is € 1.00 per share. Following the share split, every holder of an ordinary share holds three ordinary shares and every holder of a preference share holds three preference shares.
III. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with the United States Generally Accepted Accounting Principles (US GAAP).
Since January 1, 2005, Fresenius SE as a stock exchange listed company with a domicile in a member state of the European Union fulfills its obligation to prepare and publish the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) applying Section 315a of the German Commercial Code (HGB). Simultaneously, the Fresenius Group voluntarily prepares and publishes the consolidated financial statements in accordance with US GAAP.
In order to improve clarity of presentation, various items are aggregated in the consolidated balance sheet and statement of income. These items are analyzed separately in the Notes where this provides useful information to the users of the consolidated financial statements.
The consolidated balance sheet is classified on the basis of the liquidity of assets and liabilities; the consolidated statement of income is classified using the cost-of-sales accounting format.
IV. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Principles of consolidation
The financial statements of consolidated entities have been prepared using uniform accounting methods.
Capital consolidation is performed according to FAS 141 (Business Combinations) and FAS 142 (Goodwill and Other Intangible Assets) by offsetting investments in subsidiaries against the underlying equity at the date of acquisition. The identifiable assets and liabilities of subsidiaries are recognized at their fair values. Any remaining debit balance is recognized as goodwill and is tested at least once a year for impairment.
The equity method is performed according to APB No. 18 (The Equity Method of Accounting for Investments in Common Stock).
All significant intercompany revenues, expenses, income, receivables and payables are eliminated.
Profits and losses on items of property, plant and equipment and inventory acquired from other group entities are also eliminated.
Deferred tax assets and liabilities are recognized on temporary differences resulting from consolidation procedures.
Minority interest comprises the interest of minority shareholders in the consolidated equity of group entities. Profits and losses attributable to the minority shareholders are separately disclosed in the statement of income.
b) Composition of the Group
The consolidated financial statements include all material companies in which Fresenius SE has legal or effective control. In addition, the Fresenius Group consolidates variable interest entities (VIEs) for which it is deemed the primary beneficiary. If material, the equity method of accounting is used for investments in associated companies (usually 20% to 50% owned). All other investments are recorded at acquisition costs.
Fresenius Medical Care enters into various arrangements with certain dialysis clinics to provide management services, financing and product supply. Clinics that are VIEs under FIN 46R (Consolidation of Variable Interest Entities (revised)) in which Fresenius Medical Care is determined to be the primary beneficiary generated approximately € 70 million (US$ 96 million) and € 61 million (US$ 77 million) in revenue in 2007 and 2006, respectively. The interest held by the other shareholders in these consolidated VIEs is reported as minority interest in the consolidated balance sheet at December 31, 2007.
Fresenius Vamed participates in long-term project entities which are set up for long-term defined periods of time and for the specific purpose of constructing and operating thermal centers. Some of these project entities qualify as VIEs, in which Fresenius Vamed is not the primary beneficiary. The project entities generated approximately € 43 million in annual revenue in 2007. From today’s perspective and due to the contractual situation, Fresenius Vamed is not exposed to any material risk of loss from these VIEs.
The consolidated financial statements of 2007 include, in addition to Fresenius SE, 133 (2006: 123) German and 854 (2006: 838) foreign companies.
The composition of the Group changed as follows:
| Germany | Abroad | Total |
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| December 31, 2006 | 123 |
838 |
961 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additions | 16 | 56 |
72 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| of which newly founded | 2 | 8 |
10 |
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| of which acquired | 9 |
38 |
47 |
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| Disposals | 6 |
40 | 46 |
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| of which no longer consolidated | 4 | 21 | 25 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| of which merged | 2 | 19 | 21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2007 | 133 | 854 | 987 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
18 companies (2006: 13) were accounted for under the equity method.
The complete list of the investments of Fresenius SE, registered office in Bad Homburg v.d.H., will be submitted to the electronic Federal Gazette and the electronic companies register.
In 2007, the following fully consolidated German subsidiaries of the Fresenius Group applied the exemption provided in Section 264 (3) of the German Commercial Code (HGB).
| Name of the company | Registered office | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius Kabi | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius HemoCare GmbH | Bad Homburg v.d.H. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius HemoCare Beteiligungs GmbH | Frankfurt am Main | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius HemoCare Deutschland GmbH | Bad Homburg v.d.H. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius Kabi AG | Frankfurt am Main | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius Kabi Deutschland GmbH | Bad Homburg v.d.H. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hosped GmbH |
Friedberg | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| MC Medizintechnik GmbH | Alzenau | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| V. Krütten Medizinische Einmalgeräte GmbH | Idstein | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius Helios | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Agnes Karll Krankenhaus GmbH | Bad Schwartau | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Care GmbH | Berlin | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Catering GmbH | Berlin | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Kids in Pflege GmbH | Geesthacht | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Klinik Dresden-Wachwitz GmbH | Dresden | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Klinik Geesthacht GmbH | Geesthacht | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Kliniken GmbH | Berlin | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Kliniken Leipziger Land GmbH | Borna | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Klinikum Bad Saarow GmbH | Bad Saarow | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Klinikum Erfurt GmbH | Erfurt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Pflege Dresden GmbH | Dresden | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Privatkliniken GmbH | Berlin | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Schlossbergklinik Oberstaufen GmbH | Oberstaufen | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HELIOS Service GmbH | Berlin |
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| HELIOS Vogtland-Klinikum Plauen GmbH | Plauen | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HUMAINE Kliniken GmbH | Berlin | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Senioren- und Pflegeheim Erfurt GmbH | Erfurt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| St. Josefs-Hospital GmbH | Bochum | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate/Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius Biotech GmbH | Gräfelfing | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius Biotech Beteiligungs GmbH | Frankfurt am Main | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius Netcare GmbH | Berlin | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius ProServe GmbH | Bad Homburg v.d.H. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresenius ProServe Beteiligungs GmbH | Bad Homburg v.d.H. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
c) Classifications
Certain items in the prior year’s consolidated financial statements have been reclassified to conform with the current year’s presentation. The calculation of earnings per share (see Note 10, Earnings per share) has been adjusted due to the share split of Fresenius SE (formerly: Fresenius AG) recorded in the commercial register on January 24, 2007 for the increased number of shares in the fiscal year 2006.
d) Sales recognition policy
Sales from services are recognized at amounts estimated to be received under reimbursement arrangements with third party payors. Sales are recognized on the date services and related products are provided and the payor is obligated to pay.
Product sales are recognized when title to the product passes to the customers, either at the time of shipment, upon receipt by the customer or upon any other terms that clearly define passage of title. As product returns are not typical, no return allowances are established. In the event a return is required, the appropriate reductions to sales, cost of sales and accounts receivable are made. Sales are stated net of discounts, allowances and rebates.
In the business segment Fresenius Vamed, sales are recognized for long-term production contracts depending on the individual agreement and in accordance with the percentage of completion (PoC) method. The sales to be recognized are calculated as a percentage of the costs already incurred based on the estimated total cost of the contract, milestones laid down in the contract or the percentage of completion. Profits are only recognized when the outcome of a production contract accounted for using the PoC method can be measured reliably.
Any tax assessed by a governmental authority that is incurred as a result of a revenue transaction is reported on a net basis, i.e. excluded from revenues.
e) Government grants
Public sector grants are not recognized until there is reasonable assurance that the respective conditions are met and the grants will be received. At first, the grant is recorded as a liability and as soon as the asset is acquired it is offset against the acquisition costs. Expense-related grants are recognized as income in the periods in which related costs occur.
f) Research and development expenses
Research is the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is the technical and commercial implementation of research findings. Research and development costs are expensed as incurred.
g) Impairment
The Fresenius Group reviews the carrying amount of its property, plant and equipment, its intangible assets with definite useful lives as well as other non-current assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable in accordance with FAS 144 (Accounting for the Impairment or Disposal of Long-Lived Assets). Recoverability of these assets is measured by a comparison of the carrying amount of an asset to the future net cash flow directly associated with the asset. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying amount exceeds the fair value of the asset. The Fresenius Group uses a discounted cash flow approach or other methods, if appropriate, to assess fair value. In accordance with FAS 144, long-lived assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell and depreciation is ceased.
h) Capitalized Interest
The Fresenius Group includes capitalized interest as part of the cost of the asset if they are directly attributable to the acquisition, construction or manufacture of qualifying assets in accordance with FAS 34 (Capitalization of Interest Costs).
For the fiscal years 2007 and 2006, interest of € 6 million and € 5 million, based on an average interest rate of 5.60% and 5.58%, respectively, was recognized as a component of the cost of assets.
i) Deferred taxes
In accordance with FAS 109 (Accounting for Income Taxes), deferred tax assets and liabilities are recognized for the future consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Furthermore, deferred taxes are recognized on consolidation procedures affecting net income. Deferred tax assets also include claims to future tax reductions which arise from the expected usage of existing tax losses available for carryforward where future recoverability is more likely than not.
Deferred taxes are computed using enacted or adopted tax rates in the relevant national jurisdictions when the amounts are recovered. Tax rates, which will be valid in the future, but are not adopted till the balance sheet date, are not considered.
The recoverability of the carrying amount of a deferred tax asset is reviewed at each balance sheet date. The carrying amount of a deferred tax asset is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. The reduction is reversed to the date and extent that it becomes probable that sufficient taxable profit will be available.
j) Earnings per ordinary share and preference share
Basic earnings per ordinary share and preference share for all years presented have been calculated in accordance with FAS 128 (Earnings per Share) using the two-class method based upon the weighted-average number of ordinary and preference shares outstanding. Basic earnings per ordinary share is computed by dividing net income less preference amounts by the weighted-average number of ordinary shares and preference shares outstanding during the year. Basic earnings per preference share is derived by adding the preference per preference share to the basic earnings per ordinary share. Diluted earnings per share include the effect of all potentially dilutive instruments on ordinary shares and preference shares that would have been outstanding during the fiscal year. The awards granted under Fresenius’ and Fresenius Medical Care’s stock option plans can result in a dilutive effect.
k) Cash and cash equivalents
Cash and cash equivalents comprise cash funds and all short-term, liquid investments with original maturities of up to three months.
l) Trade accounts receivable
Trade accounts receivable are stated at their nominal value less allowance for doubtful accounts. Allowances are estimated mainly on the basis of payment history to date, the age structure of balances and the contractual partner involved. In order to assess the appropriateness of allowances, the Fresenius Group checks regularly whether there have been any divergences to previous payment history.
m) Inventories
Inventories comprise all assets which are held for sale in the normal course of business (finished products), in the process of production for such sale (work in progress) or consumed in the production process or in the rendering of services (raw materials and supplies).
Inventories are stated at the lower of acquisition or manufacturing cost (determined by using the average or first-in, first-out method) or market value. Manufacturing costs comprise direct costs, production and material overhead, including depreciation charges.
n) Property, plant and equipment
Property, plant and equipment are stated at acquisition and manufacturing cost less accumulated depreciation. Significant improvements are capitalized; repair and maintenance costs that do not extend the useful lives of the assets are charged to expense as incurred. Depreciation on property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets ranging from 4 to 50 years for buildings and improvements (with a weighted-average life of 15 years) and 3 to 20 years for machinery and equipment (with a weighted-average life of 10 years).
o) Intangible assets with definite useful lives
In accordance with FAS 142 (Goodwill and Other Intangible Assets), intangible assets with definite useful lives, for example non-compete agreements and technology, are amortized using the straightline method over their respective useful lives to their residual values and reviewed for impairment in accordance with FAS 144 (Accounting for Impairment or Disposal of Long-Lived Assets) (see Note 1. IV.g, Impairment). Non-compete agreements with definite useful lives have useful lives ranging from 7 to 25 years with an average useful life of 8 years. Technology has a useful live of 15 years. All other intangible assets are amortized over their individual estimated useful lives between 2 and 40 years.
Impairment losses are recognized in the event of losses in value of a lasting nature.
p) Goodwill and other intangible assets with indefinite useful lives
Intangible assets such as tradenames and certain qualified management contracts acquired in a purchase method business combination are recognized and reported apart from goodwill, pursuant to the criteria specified by FAS 141 (Business Combinations). They are recorded at acquisition costs. Goodwill and intangible assets with indefinite useful lives are not amortized but tested for impairment annually or when an event becomes known that could trigger an impairment (Impairment Test).
To perform the annual impairment test of goodwill, the Fresenius Group identified several reporting units in accordance with FAS 142 and determined the carrying amount of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. At least once a year, the Fresenius Group compares the fair value of each reporting unit to the reporting unit’s carrying amount. The fair value of a reporting unit is determined using a discounted cash flow approach based upon the cash flow expected to be generated by the reporting unit. In case that the fair value of the reporting unit is less than its carrying amount the difference is at first recorded as an impairment of the fair value of the goodwill.
To evaluate the recoverability of separable intangible assets with indefinite useful lives, the Fresenius Group compares the fair values of these intangible assets with their carrying values. An intangible asset’s fair value is determined using a discounted cash flow approach and other methods, if appropriate.
The recoverability of goodwill and other separable intangible assets with indefinite useful lives recorded in the Group’s consolidated balance sheet was verified. As a result, the Fresenius Group did not record any impairment losses in 2007 and 2006.
q) Leases
Leased assets assigned to the Fresenius Group based on the risk and rewards approach (finance leases) are recognized as property, plant and equipment in accordance with FAS 13 (Accounting for Leases) and measured on receipt date at their present values of lease payments as long as their fair values are not lower. Leased assets are depreciated in straight-line over their useful lives. If there is doubt as to whether title to the asset passes at a later stage and there is no opportune purchase option the asset is depreciated over the lease term, if this is shorter. An impairment loss is recognized if the recoverable amount is lower than the amortized cost of the leased asset.
Finance lease liabilities are measured at the present value of the future lease payments and are recognized as financial liability.
Property, plant and equipment, rented by the Fresenius Group, is accounted at its purchase costs. Its depreciation is calculated using the straight-line method over the leasing time and its expected residual value.
r) Financial instruments
The Fresenius Group classifies its financial instruments as follows: cash and cash equivalents, assets recognized at carrying amount, liabilities recognized at carrying amount and derivatives. The class of assets recognized at carrying amount corresponds to the balance sheet item trade accounts receivable (including intercompany receivables). Liabilities recognized at carrying amount comprise trade accounts payable, short-term accounts payable to related parties, short-term borrowings (including intercompany borrowings), the current and non-current portion of debt and liabilities from capital lease obligations, Senior Notes and the current and non-current portion of trust preferred securities of the Fresenius Medical Care Capital Trusts (without capital lease obligations).
In accordance with FAS 133 (Accounting for Derivative Instruments and Hedging Activities), derivative financial instruments which primarily include foreign currency forward contracts and interest rate swaps are recognized as assets or liabilities at fair value in the balance sheet. Changes in the fair value of derivative financial instruments classified as fair value hedges and in the corresponding underlyings are recognized periodically in earnings. The effective portion of changes in fair value of cash flow hedges is recognized in accumulated other comprehensive income (loss) in shareholders’ equity (see Note 27, Financial instruments). The non-effective portion of cash flow hedges is recognized in earnings immediately.
s) Liabilities
Liabilities are generally stated at present value which normally corresponds to the value of products or services which are delivered. As a general policy, short-term liabilities are measured at their repayment amount.
t) Legal contingencies
In the ordinary course of Fresenius Group’s operations, the Fresenius Group is subject to litigation, arbitration and investigations relating to various aspects of its business. The Fresenius Group regularly analyzes current information about such claims for probable losses and provides accruals for such matters, including estimated expenses for legal services, as appropriate. The Fresenius Group utilizes its internal legal department as well as external resources for these assessments. In making the decision regarding the need for a loss accrual, the Fresenius Group considers the degree of probability of an unfavorable outcome and its ability to make a reasonable estimate of the amount of loss.
The filing of a suit or formal assertion of a claim, or the disclosure of any such suit or assertion, does not necessarily indicate that an accrual of a loss is appropriate.
u) Other accrued expenses
In accordance with FAS 5 (Accounting for Contingencies), accruals for taxes and other obligations are recognized when there is a present obligation to a third party arising from past events, it is probable that the obligation will be settled in the future and the amount can be reliably estimated.
Tax accruals include obligations for the current year and for prior years.
v) Pension liabilities and similar obligations
The Fresenius Group recognizes the underfunded status of its defined benefit plans, measured as the difference between the benefit obligation and plan assets at fair value, as a liability as of December 31, 2007. Changes in the funded status of a plan, net of tax, resulting from actuarial gains or losses, prior service costs or costs that are not recognized as components of the net periodic benefit cost, will be recognized through accumulated other comprehensive income (loss) in the year in which they occur. Actuarial gains or losses and prior service costs are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of the standards.
w) Debt issuance costs
Debt issuance costs are amortized over the term of the related obligation.
x) Stock option plans
Effective January 1, 2006, the Fresenius Group adopted the provisions of Statement of Financial Accounting Standard No. 123R (revised 2004), Share-Based Payment (FAS 123(R)) using the modified prospective transition method. Under this transition method, compensation cost recognized in 2006 and in 2007 include applicable amounts of: (a) compensation cost of all stock-based payments granted prior to, but not yet vested as of, January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of FAS 123 and previously presented in Fresenius Group’s pro forma footnote disclosures); (b) compensation cost for all stock-based payments subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of FAS 123(R)).
y) Self-insurance programs
Under the insurance programs for professional, product and general liability, auto liability and worker’s compensation claims, the largest subsidiary of the Fresenius Group, located in North America, is partially self-insured for professional liability claims. For all other coverages, this subsidiary assumes responsibility for incurred claims up to predetermined amounts above which third party insurance applies. Reported liabilities for the year represent estimated future payments of the anticipated expense for claims incurred (both reported and incurred but not reported) based on historical experience and existing claim activity. This experience includes both the rate of claims incidence (number) and claim severity (cost) and is combined with individual claim expectations to estimate the reported amounts.
z) Foreign currency translation
The reporting currency is the euro. The Fresenius Group follows the provisions of FAS 52 (Foreign Currency Translation). Substantially all assets and liabilities of the foreign subsidiaries are translated at mid-closing rate on balance sheet date, while revenues and expenses are translated at average exchange rates. Adjustments due to foreign currency translation fluctuations are excluded from net earnings and are reported in accumulated other comprehensive income (loss). In addition, the translation adjustments of certain intercompany borrowings, which are considered foreign equity investments, are also reported in accumulated other comprehensive income (loss).
Gains and losses arising from the translation of foreign currency positions as well as those arising from the elimination of foreign currency intercompany loans are recorded as general and administrative expenses, as far as they are not considered foreign equity instruments. Out of this transaction only immaterial losses resulted in the fiscal year 2007.
The exchange rates of the main currencies affecting foreign currency translation developed as follows:
| Year-end exchange rate 1) Dec 31, 2007 |
Year-end exchange rate 1) Dec 31, 2006 |
Average exchange rate 2007 |
Average exchange rate 2006 |
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| US dollar per € | 1.4721 | 1.3170 | 1.3705 | 1.2558 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pound sterling per € | 0.7334 | 0.6715 | 0.6845 | 0.6817 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Swedish krona per € | 9.4415 | 9.0404 | 9.2507 | 9.2530 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Chinese renminbi per € | 10.7524 | 10.2793 | 10.4183 | 10.0099 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Japanese yen per € | 164.93 | 156.93 | 161.26 | 146.06 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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1) mid-closing rate on balance sheet date |
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aa) Use of estimates
The preparation of consolidated financial statements in conformity with US GAAP requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
bb) Receivables management
The entities of the Fresenius Group perform ongoing evaluations of the financial situation of their
customers and generally do not require a collateral from the customers for the supply of products
and provision of services. Approximately 22% and 24% of the Fresenius Group’s sales were earned
and subject to the regulations under governmental health care programs, Medicare and Medicaid,
administered by the United States government in 2007 and 2006, respectively.
cc) Recent pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements (FAS 157), which establishes a framework for reporting fair value and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Fresenius Group adopted this standard as of January 1, 2008 and is still determining its impact on its consolidated financial statements.
In February 2007, FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (FAS 159), which gives the company the irrevocable option to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.
The fair value option:
- may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method;
- is irrevocable (unless a new election date occurs); and
- is applied only to entire instruments and not to portions of instruments.
This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FAS 157. The Fresenius Group has decided not to adopt the provisions of this standard for its consolidated financial statements.
In December 2007, FASB issued Statement No. 160, Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (FAS 160), which establishes a framework for reporting of non-controlling or minority interests, the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. FAS 160 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Fresenius Group is currently evaluating the impact of this standard on its consolidated financial statements.
In December 2007, FASB issued Statement No. 141 (revised), Business Combinations (FAS 141(R)). This Statement replaces FASB Statement No. 141, Business Combinations and retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.
In general, the main points of this Statement are that the assets acquired, liabilities assumed and non-controlling interests in the acquiree are stated at fair value as of the date of acquisition, that assets acquired and liabilities assumed arising from contractual contingencies are recognized as of the acquisition date, measured at their acquisition date fair values and that contingent consideration is recognized at the acquisition date, measured at its fair value at that date.
This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The effective date of this Statement is the same as that of the related FAS 160. The Fresenius Group is currently evaluating the impact of this standard on its consolidated financial statements.
V. 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 intangible assets, including goodwill, tradenames and management contracts, represents a considerable part of the total assets of the Fresenius Group. At December 31, 2007 and December 31, 2006, the carrying amount of goodwill and non-regularly amortizable intangible assets with indefinite useful lives was € 7,411 million and € 7,457 million, respectively. This represented 48% and 50%, respectively, of total assets.
In accordance with FAS 142 (Goodwill and Other Intangible Assets), 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 might be impaired (Impairment test).
To comply with the regulations of FAS 142 and determine possible impairments of these assets, the fair value of the reporting units determined in accordance with FAS 142 is compared to the reporting units’ carrying amount. The fair value of each reporting unit is determined using estimated future cash flows for the unit discounted by a weighted-average cost of capital (WACC) specific to that reporting unit. Estimating the discounted future cash flows involves significant assumptions, 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 reporting unit its three-year budget, projections for years 4 to 10 and a corresponding growth rate for all remaining years. These growth rates are 0% to 4% for Fresenius Medical Care, 2% for Fresenius Kabi and 1% for Fresenius ProServe. This discount factor is determined by the WACC of the respective reporting unit. Fresenius Medical Care’s WACC consisted of a basic rate of 7.34% for 2007. This basic rate is then adjusted by a country specific risk rate within each reporting unit for determining the reporting unit’s fair value. In 2007, this rate ranged from 0% to 7%. In the business segments Fresenius ProServe and Fresenius Kabi the WACC was 7.57%, country specific adjustments did not occur. If the fair value of the reporting unit 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 by 0.5% would not have resulted in the recognition of an impairment loss in 2007.
A prolonged downturn in the health care industry with lower than expected increases in reimbursement rates and/or higher than expected costs for providing health care services could 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 lives which could materially and adversely affect the 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 26, Commitments and contingent liabilities.
The Fresenius Group regularly analyzes current information about such claims for probable losses and provides accruals for such matters, including estimated expenses for legal services, as appropriate. The Fresenius Group utilizes its internal legal department as well as external resources for these assessments. In making the decision regarding the need for a loss accrual, the Fresenius Group considers the degree of probability of an unfavorable outcome and its ability to make a reasonable estimate of the amount of loss.
The filing of a suit or formal assertion of a claim, or the disclosure of any such suit or assertion, does not necessarily indicate that an accrual of a loss is appropriate.
c) Allowance for doubtful accounts
Trade accounts receivable are a significant asset and the allowance for doubtful accounts is a significant estimate made by the Management. Trade accounts receivable were € 2,159 million and € 2,088 million in 2007 and 2006, respectively, net of allowance. Approximately two thirds 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 US Medicare and Medicaid health care programs with 13% as well as private insurers in the US with 17% at December 31, 2007. Other than that, the Fresenius Group has no significant risk concentration, due to its international and heterogenous customer structure.
The allowance for doubtful accounts was € 223 million and € 218 million as of December 31, 2007 and December 31, 2006, respectively.
Sales are invoiced at amounts estimated to be receivable under reimbursement arrangements with third party payors. Estimates for the allowance for doubtful accounts are mainly based on historic collection experience, taking into account the aging of accounts receivable and the contract partners. The Fresenius Group believes that these analyses result in a well-founded estimate of allowances for doubtful accounts. From time to time, the Fresenius Group reviews changes in collection experience to ensure the appropriateness of the allowances.
Deterioration in the ageing of receivables and collection difficulties could require that Fresenius Group increases the estimates of allowances for doubtful accounts. Additional expenses for uncollectible receivables could have a significant negative impact on future operating results.
d) Self-insurance programs
Under the insurance programs for professional, product and general liability, auto liability and worker’s compensation claims, the largest subsidiary of the Fresenius Group, located in North America, is partially self-insured for professional liability claims. For further details regarding the accounting policies for self-insurance programs, please see Note 1.IV.y, Summary of significant accounting policies.