Risk Report Audited

Risk and opportunity management

Merck is part of a complex, global business world and is therefore exposed to a multitude of external and internal influences. Every business decision is therefore based on the associated risks and opportunities. Through our risk management activities, we recognize, assess and manage risks early on and implement appropriate measures to minimize them. Opportunity management is conducted in the operating units on the basis of the corporate strategy. More information can be found in the Report on Expected Developments.

Within the context of the Group-wide risk management process, the division heads, managing directors and CFOs of Merck subsidiaries, and the heads of Group functions are specified as employees with responsibility for risks. Every six months, these executives assess their active risk status and report their entire risk portfolio to Risk Management. Risks are assessed based on their potential impact on EBIT and cash flow, and the likelihood of their occurrence. Significant changes in the assessment of already known risks as well as new, significant risks are reported at all times and communicated to the corporate bodies on an ad hoc basis. For the standard process, a lower limit for risk reporting is set at a value of € 5 million, and for the ad hoc process at a value of € 25 million. Risks below these limits are steered independently in the units. Within the scope of audits, Group Internal Auditing reviews, among other things, the performance of risk management processes within the units and, at the same time, the communication of relevant risks to Group Risk Management. In addition to the aforementioned bottom-up processes, Risk Management addresses potential risks and risk areas top-down. This process is based on independent analyses of both internal and external information. Moreover, assessing the effectiveness of risk-minimizing measures gained further importance in 2012. Key measures are monitored by Risk Management with regard to the planned implementation timeframe and the assumed risk-minimizing effect. Risk Management uses this information to determine the current risk portfolio for the Merck Group, reporting this to the Executive Board, the Supervisory Board and the Finance Committee twice a year.

Internal control system for the consolidated accounting process

The objective of the internal control system for accounting is to implement controls that provide assurance that the financial statements are prepared in compliance with the relevant accounting laws and standards. It covers measures designed to ensure the complete, correct and timely transfer and presentation of information that is relevant for the preparation of the consolidated financial statements and the management report of the Merck Group.

The control system is subject to continuous further development and is an integral component of the accounting and financial reporting processes in all relevant local units and Merck Group functions. With respect to the accounting process, the internal control system measures are intended to minimize the risk of material false statements in the consolidated accounting process of the Merck Group.

Key tools

The internal control system is geared to ensuring the accuracy of the consolidated accounting process and the preparation of compliant financial statements. The Group function Accounting & Subsidiaries centrally steers the preparation of the consolidated financial statements of Merck KGaA as the parent company of the Merck Group. This Group function defines the reporting requirements that all the Merck subsidiaries must meet as a minimum requirement. At the same time, this function steers and monitors the scheduling and process-related requirements of the consolidated financial statements. The Group-wide accounting guidelines form the basis for the preparation of the statutory financial statements of the parent company as well as of the German and foreign subsidiaries; the guidelines are adapted to reflect changes in the financial regulatory environment and are updated in accordance with internal reporting requirements. One of the requirements of the Group-wide guidelines is to present Group-internal business processes as the basis for proper settlement of intercompany balances. Additional controls have been implemented in the consolidation process.

Accounting & Subsidiaries also ensures the timely central management of changes to the equity holding structure and correspondingly adapts the Merck Group’s scope of consolidation. The individual companies have a local internal control system. Where finance processes are handled by a Shared Service Center, the internal control system of the Shared Service Center is additionally applied. They ensure that accounting complies with IFRS (International Financial Reporting Standards) and with the Merck Group accounting guidelines.

Accounting & Subsidiaries provides support to the local contacts and ensures a consistently high quality of reporting throughout the entire reporting process.

The accounting process is designed at all levels to ensure a clearly defined segregation of duties and assignment of responsibilities to the units involved in the accounting process at all times within the scope of continuous dual control.

For the assessment of balance sheet items, Accounting & Subsidiaries closely cooperates with Group Risk Management in order to correctly reflect potential balance sheet risks. For special issues, such as the evaluation of intangible assets and pension obligations, external experts are additionally involved where necessary. For the Group accounting process, Merck uses in most countries a standard SAP software tool. Via a detailed authorization concept to limit user rights on a need-to-have basis, the system contains both single entity reporting and the consolidated financial statements.

The effectiveness of Merck’s internal control system with regard to accounting and the compliance of financial reporting of the individual companies is confirmed by both the local managing director and the Chief Financial Officer by signing the single entity reporting. All the structures and processes described are subject to constant review by Group Internal Auditing based on an annual audit plan specified by the Executive Board. The results of these audits are dealt with by the Executive Board, the Supervisory Board and the Finance Committee.

The internal control system at Merck makes it possible to lower the risk of materially false accounting statements to a minimum. However, no internal control system – regardless of its design – can prevent a residual risk.

Management assessment of the overall risk situation

Currently no risks can be identified that could jeopardize the continued existence of the Merck Group. This is the finding of this Risk Report, which was prepared in accordance with German Accounting Standard 5.