Management Report & Annexes | Report on Future Perspectives and on Opportunities and Risks

20.3 Opportunity and Risk Report

  • Opportunity and risk management integral to Bayer’s Group-wide corporate governance system
  • No risks currently identified that could endanger the Bayer Group’s continued existence

20.3.1 Group-wide Risk Management System

Corporate governance forms the basis for sustainable growth and economic success. One factor for corporate governance is the ability to systematically detect and take advantage of opportunities while identifying any risks to the company’s operations at an early stage.

The entrepreneurial decisions we make daily in the course of business processes are based on balancing opportunities and risks. We therefore regard risk management as an integral part of our business management system rather than the task of a specific organizational unit. The starting-point for our risk management is our strategy and planning processes, from which relevant external and internal opportunities are derived and risks of an economic, ecological or social nature are identified. ­Opportunities and risks are identified by observing and analyzing trends along with macroeconomic, ­industry-specific, regional and local developments. The identified opportunities and risks are subsequently incorporated into the subgroups’ strategic and operational planning. We attempt to avoid or mitigate risks by taking appropriate countermeasures, or to transfer them to third parties (such as ­insurers) to the extent possible and economically acceptable. We consciously accept and bear calculable and manageable risks commensurate with the anticipated opportunities. Opportunities and risks are continuously monitored using indicators so that changes in the economic or legal environment, for example, can be identified and suitable countermeasures initiated at an early stage if necessary.

To enable the Board of Management and the Supervisory Board to monitor material business risks as ­required by law, the following systems are also in place: an internal control system ensuring proper and effective financial reporting pursuant to Section 289 Paragraph 5 and Section 315 Paragraph 2 No. 5 of the German Commercial Code; a compliance management system; and a risk early warning system ­pursuant to Section 91 Paragraph 2 of the German Stock Corporation Act.

Differences exist among these management systems with regard to the processes, methods and IT systems used to identify, evaluate, manage, monitor and report risks depending on the type and level of risk and the time horizon. The principles underlying the various systems are documented in Group directives that are integrated into our central document control process (Margo) and accessible to all employees via the Bayer intranet. Depending on the system, responsibilities are assigned at the management level and coordinators are appointed in the subgroups, service companies and country companies and in the central functions of the Bayer Group. Overall responsibility for the effectiveness and appropriateness of the systems lies with the Chief Financial Officer.

The different systems are described below.

Internal control system for (Group) accounting and financial reporting

(report pursuant to Sections 289 Paragraph 5 and 315 Paragraph 2 No. 5 of the German Commercial Code)

Bayer has an internal control system (ICS) in place for the (Group) accounting and financial reporting process. This process comprises defined structures and workflows implemented throughout the organization. The purpose of our ICS is to ensure proper and effective accounting and financial reporting in accordance with Section 289 Paragraph 5 and Section 315 Paragraph 2 No. 5 of the German Commercial Code.

The ICS is designed to guarantee timely, uniform and accurate accounting for all business processes and transactions based on applicable statutory regulations, accounting and financial reporting standards and the internal Group directives that are binding upon all consolidated companies.

The ICS is based on the COSO I (Committee of the Sponsoring Organizations of the Treadway Commission) and COBIT (Control Objectives for Information and Related Technology) frameworks and addresses misreporting risks in the consolidated financial statements. Risks are identified and evaluated, and steps are taken to counter them. Mandatory ICS standards such as system-based and manual reconciliation processes and functional separation have been derived from these frameworks and promulgated throughout the Group by the Group Accounting and Controlling unit of Bayer AG.

The management of each Group company holds responsibility for implementing the ICS standards at the local level. Using the Group’s own shared service centers, the Group companies prepare their financial statements locally and transmit them with the aid of a data model that is standardized throughout the Group and based on the Group accounting directive. This ensures the regulatory compliance of the consolidated financial statements.

The effectiveness of the ICS processes for accounting and financial reporting is evaluated based on a ­cascaded self-assessment system that starts with the persons directly involved in the processes, then involves the principal responsible managers and ends with the Group Management Board. The system also makes use of internal and external audits. An IT system in use throughout the Group ensures uniform and audit-proof documentation and transparent presentation of all ICS-relevant business processes along with the relevant risks, controls and effectiveness evaluations.

The Group Management Board has confirmed the effective functioning of the internal control system for accounting and financial reporting and the relevant criteria for the 2013 business year. However, it should be noted that an internal control system, irrespective of its design, cannot provide absolute ­assurance that material misstatements in the accounting will be avoided or identified.

Compliance management system

Our compliance management system aims to encourage and ensure lawful, responsible and sustainable conduct by our employees. It is designed to identify potential violations in advance and systematically prevent their occurrence. The compliance management system thus contributes significantly to the integration of compliance into our operating units and their processes.

In light of the Bayer Group’s diversified structure and international alignment, we are active in different industry sectors, markets and geographical regions worldwide, each of which has its own local legislation and industry codes. All significant compliance risks are identified by evaluating cases reported around the world and performing a trend analysis on this basis. New tools were also developed and communicated in 2013 together with the subgroups to enhance the systematic, preventive identification and assessment of risks. Risk identification will be carried out both bottom-up via the country organizations and top-down via the global functions, taking global, local and business-specific aspects into account. In addition, the Corporate Auditing department performed compliance program audits for the first time beginning in mid-2013. These audits proactively evaluate the implementation of the Corporate Compliance Policy in the country organizations.

Risk early warning system pursuant to Section 91 Paragraph 2 of the German Stock Corporation Act

A process known as BayRisk has been established to enable the early identification of developments that could endanger the company’s continued existence, thus satisfying the legal requirements regarding an early warning system for corporate risks pursuant to Section 91 Paragraph 2 of the German Stock Corporation Act. A central unit within the Corporate Center establishes the framework and standards for the design of the Group’s early warning system.

The BayRisk process is decentrally organized, with each subgroup, service company or central function being originally responsible for identifying, evaluating, managing and reporting at an early stage any ­potential developments or events that could prevent our company from sustainably increasing its value. It not only includes risks that could immediately impact our financial targets, but also those that could affect the achievement of qualitative objectives. In the Life Science subgroups, the information required for the BayRisk process is supported by separate enterprise risk management systems. Risk officers are appointed to evaluate, manage and monitor the identified risks according to both financial and non-financial criteria.

Risks are evaluated using estimates of the likelihood that they will materialize, the potential impact and/or their relevance for our external stakeholders. The following matrix illustrates the financial criteria for rating a risk as high, medium or low.

Assessment Matrix According to Financial Criteria [Table 3.20.3]
Likelihood of occurrence based on a ten-year period
Unlikely Possible Very likely
(<10%) (10–70%) (>70%)
Accumulated impact (€ million)
>1,250 H H H
500–1,250 M M H
<500 L L L
* H = high risk, M = medium risk, L = low risk

All significant risks and the respective countermeasures are documented in a Group-wide database. The risk portfolio is reviewed three times a year. Significant changes must be quickly entered in the database and reported directly to the Group Management Board. Details of the risk portfolio form part of a management information system accessible to the members of the Group Leadership Circle. A report on the risk portfolio is submitted to the Audit Committee of the Supervisory Board once a year.

Process-independent monitoring

The effectiveness of our management systems is monitored and evaluated by Bayer’s internal audit department (Corporate Auditing) at regular intervals. Corporate Auditing performs an independent and objective audit function that is designed to verify compliance with laws and directives. The unit also supports the company in achieving its goals by systematically and deliberately evaluating the efficiency and effectiveness of governance and control environments, management systems and the implemented controls, and helping to improve them. The selection of audit targets follows a risk-based approach. Corporate Auditing performs its tasks according to internationally recognized standards and delivers reliable audit outcomes. This is confirmed by a quality assessment undertaken in 2012 by the American Institute of Internal ­Auditors (IAA). A report is presented annually to the Audit Committee of the Supervisory Board on the internal control system and its effectiveness.

Risks in the areas of occupational health and safety, plant safety, hazard prevention, environmental protection and product quality are assessed through specific HSEQ (health, safety, environment and quality) audits.

In addition, the external auditor, as part of its audit of the annual financial statements, assesses the basic suitability of the early warning system for identifying at an early stage any risks that could endanger the company’s continued existence. The auditor regularly reports to the Group Management Board and the Supervisory Board on the identification of any weaknesses in the internal control system.

Audit outcomes are taken into account in the continuous enhancement of our management processes.

20.3.2 Opportunities and Risks

As a global enterprise with a diversified portfolio, the Bayer Group is constantly exposed to a wide range of internal or external developments or events that could significantly impact the achievement of our financial and non-financial objectives.

This chapter outlines both opportunities and risks. Only those risks that are classified in our risk matrix as “medium” or “high” are included. The risks are more highly aggregated here than in our internal documentation. The sequence in which the risks are listed does not imply any order of significance. The opportunities and risks described apply to all subgroups unless otherwise indicated.

Environment

Ethical conduct is a matter of essential importance for society. Many stakeholders evaluate companies according to whether they conduct themselves not just “legally” – but also “legitimately.” The Bayer Group is dedicated to sustainable development in all areas of its business activity. Any violations of this voluntary commitment and the resulting adverse media reporting or negative public perception of the company may damage the reputation of the Bayer brand. We counter this risk through responsible corporate governance that is geared toward generating not only economic but also ecological and social benefit.

In the Emerging Markets – particularly Asia and Latin America, and prospectively in Africa – we see ­opportunities arising out of increasing affluence and the associated growth in demand for pharmaceutical products, for example. Bayer is therefore systematically expanding its business in these regions in particular.

At the same time, however, the risk exists that our growth could be impeded by increasing global cost pressure on health systems. Pharmaceutical products are subject to regulatory price controls in many markets, and government reimbursement systems often favor less expensive generic medicines over branded products. In addition, in some markets, major suppliers in the health care sector can exert substantial pressure on prices. Price controls and pricing pressure reduce earnings from our pharmaceutical products and may occasionally make the market launch of a new product unprofitable. We expect the current extent of regulatory controls and market pressures on pricing to persist or increase. Changes with respect to price development and governmental price controls in our key markets are continuously monitored. Where necessary, we adjust our business model depending on the extent of such price controls and the pressure on prices.

Further opportunities and risks may also result if actual market developments vary from those we predict in Chapter 20.1 “Economic Outlook.” Where macroeconomic developments deviate from forecasts, this may either positively or negatively impact our sales and earnings expectations.

For MaterialScience, an economic downturn, changes in competitors’ behavior or the market entry of new competitors can lead to a more intense competitive situation characterized by overcapacities and increased pressure on prices.

Continuous analysis of the business environment and of economic forecasts enables us to pursue the opportunities we identify and mitigate risks. We respond to fluctuations in demand by adjusting our capacities.

Innovation

Innovation is the key driver of Bayer’s future growth.

The trends described below not only pose challenges, but also offer opportunities for us to develop and market innovative solutions to overcome them.

Increase in life expectancy

Certain diseases, such as cancer or chronic cardiovascular disorders, are on the rise as a consequence of higher life expectancy. HealthCare is responding to the increased demand for innovative health care products to treat age-related diseases by focusing its R&D activities on therapeutic areas such as oncology and cardiology.

Shortage of arable land, increasing demand for food

The growing world population poses one of the principal challenges to the sustainable supply of food, particularly in view of the reduction in arable land caused by increasing urbanization and extreme weather events associated with climate change. Increasing affluence in the emerging countries is boosting the demand for animal-based food products. We expect there to be an increasing need for high-value seed and crop protection products to allow sufficient food and animal feed to be produced to satisfy ­rising demand despite limited acreages. For example, CropScience is developing processes to better protect crops against climate and environmental stresses.

Conserving natural resources and protecting the climate

The finite nature of certain natural resources and efforts to protect the climate are boosting the demand for innovative products and technologies that reduce resource consumption and lead to lower emissions. This trend is being reinforced by increasingly stringent regulatory requirements and growing consumer awareness for the need to use resources sustainably. MaterialScience is therefore developing new materials that help to raise energy efficiency and reduce emissions. For example, polyurethane from MaterialScience is used in the construction industry for thermal insulation, giving a positive energy balance, while its polycarbonate is used in the automotive industry to reduce vehicle weight.

Our activities concentrate on the development of innovative solutions to address these trends and global challenges. To strengthen our innovation capability, we place special importance on networking and ­cooperation both within and outside of our company. Of particular significance here is interdisciplinary research at the interface between human, animal and plant health, which is being driven forward by Nimbus, a joint project of our two Life Science subgroups. Substantial research synergies can be achieved in this way and new mechanisms of action investigated that could lead to the development of new products in the long term. Our strategy also encompasses research projects with outside partners from academia and industry that give us access to complementary technologies and external innovation potential.

For further information, see Chapter 5 “Research, Development, Innovation” and Chapter 3 “Strategies of the Subgroups.”

Despite all our efforts, we cannot assure that all of the products we are currently developing or will develop in the future will achieve planned approval/registration or commercial success, if, for example, a drug candidate fails to meet trial endpoints. The Bayer Group pursues a holistic portfolio management strategy in order to estimate the probability of success and prioritize its development projects. Furthermore, the expectations of the public and the regulatory authorities with regard to the safety and efficacy of chemical and pharmaceutical products are constantly rising. Against this background, we continue to anticipate increasing regulatory requirements for clinical or (eco)toxicological studies, for example. This increases product development costs and the time it takes to obtain registration or marketing approval. Special projects are set up to coordinate the successful implementation of new regulations.

Where it appears strategically advantageous, we may supplement our organic growth through acquisitions of companies or businesses. Failure to successfully integrate a newly acquired business or unexpectedly high integration costs could jeopardize the achievement of qualitative or quantitative targets and adversely impact earnings. Teams of experts therefore manage both the due diligence process and the integration itself. Due diligence includes reviewing risk-relevant factors such as compliance with applicable environmental regulations and occupational health and safety standards at production sites.

Patent protection

Patents guarantee the protection of our intellectual property. In the event of successful commercialization, profits can be invested to enable continued, sustainable research and development. Due to the long period of time between the patent application and the market launch of a product, Bayer generally only has a few years in which to earn an adequate return on its intellectual property. This makes effective and reliable patent protection all the more important.

A large proportion of our products, especially in our Life Science businesses, is protected by patents. Generic manufacturers and others attempt to contest patents prior to their expiration. Sometimes a ­generic version of a product may even be launched “at-risk” prior to the issuance of a final patent decision. We are currently involved in legal proceedings to enforce patent rights relating to our products. Details of these proceedings are given in Note [32] to the consolidated financial statements. When a patent defense is unsuccessful, or if one of our patents expires, our prices are likely to come under pressure because of increased competition from generic products entering the market. Legal action by third parties for alleged infringement of patent or proprietary rights by Bayer may impede or even halt the development or manufacturing of certain products or require us to pay monetary damages or ­royalties to third parties. Our patents department regularly reviews the patent situation in conjunction with the respective operating units and watches for potential patent infringements so that legal action can be taken if necessary.

Products and product stewardship

Bayer assesses the potential health and environmental risks of a product along the entire value chain – from research and development through production, marketing and use by the customer to disposal.

Despite extensive studies prior to approval or registration, it is possible that products could be partially or completely withdrawn from the market due to the occurrence of adverse side effects or other factors. Such a withdrawal may be voluntary or result from legal or regulatory measures. The possibility that unwanted trace amounts of genetically modified organisms may occur in agricultural products and/or foodstuffs cannot be entirely excluded. Potential payments of damages in connection with the above risks may materially diminish our earnings.

Our Life Science businesses counter these risks through a holistic organizational structure and process organization in the areas of pharmaceutical and crop protection product safety and testing. In addition, a comprehensive product stewardship program is in place at CropScience. For further information, see Chapter 10 “Product Stewardship.”

Another risk we face is that of illegal trading of counterfeit medicines and crop protection products by criminal third parties. In most cases, the composition and quality of counterfeit products is inferior to that of the original products. No local regulatory authority assures the quality of the manufacturing or distribution process, so product recall is not possible. Products originating from illegal third-party manufacturing not only endanger patients, users, animals and the environment, but also jeopardize the good reputation of our company and our products and undermine our competitiveness.

Bayer actively cooperates with authorities’ efforts to combat product counterfeiting through preventive measures and the prosecution of offenders.

Procurement and production

Our Supplier Code of Conduct sets forth our sustainability principles and explains what we expect from our partners along the value chain. The Code requires, among other things, that our suppliers observe environmental regulations, occupational health and safety rules, human rights and other provisions – such as forgoing all forms of child labor. Violations of the Code may harm our company’s reputation. Through supplier assessments and audits, we verify that our partners along the supply chain actually ­implement and adhere to our Code of Conduct (see Chapter 8 “Procurement and Production”).

The Bayer Group requires significant quantities of energy and petrochemical feedstocks for its production processes. Procurement prices for energy and raw materials may fluctuate significantly. Experi­ence has shown that higher production costs cannot always be passed on to our customers through price adjustments. This applies especially at MaterialScience.

We place great importance not only on product safety and compatibility but also on protecting our employees and the environment. Risks associated with the manufacturing, filling, storage or shipping of products are mitigated through integrated quality, health, environmental protection and safety management. The materialization of such risks may result in personal injury, property damage, environmental contamination, loss of production, business interruptions and/or liability for compensation payments.

Operations at our sites may be disrupted by natural disasters, fires or explosions, sabotage or supply shortages for our principal raw materials or intermediates. This applies particularly to the biotech products of HealthCare because of the highly complex manufacturing processes. If we are unable to meet demand, structural sales declines may occur, particularly in our Pharmaceuticals business. We counter this risk by distributing production for certain products among multiple sites or by building up safety stocks. Furthermore, the Bayer Emergency Response System (BayErs) was developed for our production sites as a mandatory component of our HSEQ management. It is aimed at protecting employees, neighbors, the environment and production facilities from the risks described. The Group Regulation “Safety and Crisis Management” forms the basis for this.

Increased ecological awareness creates opportunities for MaterialScience in two ways. On the one hand, market potential results from the development of innovative materials for our customers (see Chapter 5 “Research, Development, Innovation”). On the other hand, if we succeed in increasing the efficiency of our production processes, this benefits the environment and reduces our costs at the same time. By developing new production technologies and applying internationally recognized energy management systems, we aim to help meet increasingly stringent environmental regulations, further reduce emissions and waste, and increase energy efficiency. In this way we not only contribute to sustainable climate protection and the conservation of natural resources, but also achieve cost and competitive advantages.

Employees

Skilled and dedicated employees are essential for the company’s success. Particularly in the Emerging ­Markets of Asia and Latin America, the number of people with the technical and language skills needed to meet the demanding requirements of an international enterprise remains relatively small. Accordingly, those who possess these skills are highly sought after by locally based companies. If we are unable to recruit a sufficient number of employees in these countries and retain them within Bayer, this could have significant adverse consequences for the company’s future development.

We aim to convince our target groups of the benefits offered by our company through comprehensive human resources marketing. These include competitive compensation with performance-related components as well as an extensive range of training and development opportunities. We also pursue a ­diversity-based human resources policy to tap the full potential of the employment market. Our human resources policy is based on the principles of our Human Rights Position, corporate values and Corporate Compliance Policy.

For more information see Chapter 7 “Employees.”

Information technology

Business and production processes and the internal and external communications of the Bayer Group are increasingly dependent on global IT systems.

A significant technical disruption or failures of IT systems could severely impair our business and production processes. Technical precautions such as data recovery and continuity plans are defined and continuously evolved together with our internal IT service provider.

The confidentiality of internal and external data is of fundamental importance to us. A loss of data confidentiality, integrity or authenticity could lead to manipulation and/or the uncontrolled outflow of data and know-how. We have measures in place to counter this risk, including a comprehensive authorization concept.

A Group-wide committee has been established to determine the fundamental strategy, architecture and safety measures for the Bayer Group. The measures are now being implemented by the subgroups and service companies in conjunction with this central organization.

Law and compliance

The Bayer Group is exposed to numerous legal risks from legal disputes or proceedings to which we are currently a party or which could arise in the future, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax assessments and environmental protection.

Investigations of possible legal or regulatory violations, such as potential infringements of antitrust law or certain marketing and/or distribution methods, may result in the imposition of civil or criminal ­penalties – including substantial monetary fines – and/or other adverse financial consequences, harm Bayer’s reputation and ultimately detract from the company’s success.

To encourage and ensure the observance of laws and regulations, Bayer has established a global compliance management system that forms part of its corporate culture (see Chapter 18.3 “Compliance”).

Legal proceedings currently considered to involve material risks are described in Note [32] to the ­consolidated financial statements.

Financial opportunities and risks

The Bayer Group has financial opportunities at its disposal in the form of the market prices it can ­command for its products, and is exposed to financial risks in the form of liquidity, credit and market price risks, as well as risks resulting from pension obligations.

The management of financial opportunities and risks takes place using established, documented processes. One component is financial planning, which serves as the basis for determining the liquidity risk and the future foreign currency and interest-rate risks and covers all Group companies that are relevant from a cash-flow perspective. Financial planning comprises a planning horizon of 12 months and is regularly updated.

The following paragraphs provide details of these and other financial opportunities and risks and how they are managed.

Further information is provided in Chapter 16.7 “Financial Management of the Group.”

Liquidity risk

Liquidity risks result from the possible inability of the Bayer Group to meet current or future payment obligations due to a lack of cash or cash equivalents. The liquidity risk is determined and managed by the central finance department as part of our same-day and medium-term liquidity planning.

Payment obligations from financial instruments are explained according to their maturity in Note [30.2] to the consolidated financial statements.

The Group holds sufficient liquidity to ensure the fulfillment of all planned payment obligations at maturity. In addition, a reserve is maintained for unbudgeted shortfalls in cash receipts or unexpected disbursements. The amount of this liquidity reserve is regularly reviewed and adjusted as necessary according to circumstances.

Liquid assets are held mainly in the form of overnight and term deposits. Credit facilities also exist with banks. These include, in particular, a €3.5 billion syndicated credit facility, which is undrawn.

Credit risks

Credit risks arise from the possibility that the value of receivables or other financial assets of the Bayer Group may be impaired because counterparties cannot meet their payment or other performance obligations. The Bayer Group does not conclude master netting arrangements with its customers for non-derivative financial instruments. Here, the total value of the financial assets represents the maximum credit risk exposure. In the case of derivatives, positive and negative market values may be netted under certain conditions.

To manage credit risks from trade receivables, the respective invoicing companies appoint credit managers who regularly analyze customers’ creditworthiness. Some of these receivables are collateralized, and the collateral is used according to local conditions. It includes credit insurance, advance payments, letters of credit and guarantees. Reservation of title is generally agreed with our customers. Credit limits are set for all customers. All credit limits for debtors where total exposure is €10 million or more are evaluated by local credit management and submitted to the Group’s Central Financial Risk Committee.

Credit risks from financial transactions are managed centrally in the finance department. To minimize risks, financial transactions are only conducted within predefined exposure limits and with banks and other partners that preferably have investment-grade ratings. All risk limits are based on methodical models. Adherence to the risk limits is continuously monitored.

Opportunities and risks resulting from market price changes

Opportunities and risks resulting from changes in market currency and interest rates are managed by the central finance department. Risks are eliminated or mitigated through the use of derivative ­financial instruments. Further details on derivatives are given in Note [30.3] to the consolidated financial statements.

The type and level of currency and interest-rate risks are explained in the following paragraphs using sensitivity analyses based on hypothetical changes in risk variables (such as interest curves) to determine the potential effects of market price fluctuations on equity and earnings. The assumptions used in the sensitivity analyses reflect our view of the changes in currency exchange and interest rates that are reasonably possible over a one-year period. These assumptions are regularly reviewed.

Foreign currencies

Foreign currency opportunities and risks for the Bayer Group result from changes in exchange rates and the related changes in the value of financial instruments (including receivables and payables) and of anticipated payment receipts and disbursements in the functional currency.

Receivables and payables in liquid currencies from operating activities and financial items are generally fully exchange-hedged through forward exchange contracts and cross-currency interest-rate swaps.

Anticipated payment receipts and disbursements are hedged according to the rules agreed between the Group Management Board, the finance department and the operating units. Hedging takes place through forward exchange contracts and currency options.

Sensitivities were determined based on a hypothetical adverse scenario in which the euro depreciates by 10% against all other currencies compared with the year-end exchange rates. Under this scenario, the estimated hypothetical loss of cash flows from derivative and non-derivative financial instruments would have diminished earnings and equity (other comprehensive income) as of December 31, 2013 by €250 million (December 31, 2012: €256 million). Of this amount, €122 million is related to the U.S. dollar, €35 million to the Japanese yen and €28 million to the Canadian dollar.

Derivatives used to hedge anticipated currency exposure that are designated for hedge accounting would have diminished other comprehensive income by €267 million.

Interest rates

Interest-rate opportunities and risks result for the Bayer Group through changes in capital market interest rates, which in turn could lead to changes in the fair value of fixed-rate financial instruments and changes in interest payments in the case of floating-rate instruments.

Interest-rate opportunities and risks are managed over a target duration established by management for Bayer Group debt. This target duration is subject to regular review. Interest-rate swaps are concluded to achieve the target structure for Group debt.

A sensitivity analysis based on our net floating-rate receivables and payables position at year end 2013, taking into account the interest rates relevant for our receivables and payables in all principal currencies, produced the following result: a hypothetical increase of 100 basis points, or 1 percentage point, in these interest rates (assuming constant currency exchange rates) as of January 1, 2013 would have raised our interest expense for the year ended December 31, 2013 by €33 million (December 31, 2012: €46 million).

Risk to pension obligations from capital market developments

The Bayer Group has obligations to current and former employees related to pensions and other post-employment benefits. Changes in relevant valuation parameters such as interest rates, mortality and rates of increases in compensation may raise the present value of our pension obligations. This may lead to increased costs for pension plans or diminish equity due to actuarial losses being recognized outside profit or loss. A large proportion of our pension and other post-employment benefit obligations is covered by plan assets including fixed-income securities, shares, real estate and other investments. Declining or even negative returns on these investments may adversely affect the future fair value of plan assets. This in turn may diminish equity, and/or it may necessitate additional contributions by the company. Further details are given in Note [25] to the consolidated financial statements.

We address the risk of market-related fluctuations in the fair value of our plan assets through prudent strategic investment, and we constantly monitor investment risks in regard to our global ­pension obligations.

Overall assessment of opportunities and risks

The risks reported above do not endanger the company’s continued existence. There are also no risks with mutually reinforcing dependencies that could combine to endanger the company’s continued existence.

Risks rated as “medium” or “high” did not change significantly compared with the previous year.

Based on our product portfolio, our know-how and our innovation capability, we are convinced that we can take advantage of the opportunities resulting from our entrepreneurial activity and successfully master the challenges resulting from the risks stated above.

Last updated: July 28, 2014  Copyright © Bayer AG
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