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 2009:

  • Fresenius Medical Care
  • Fresenius Kabi
  • Fresenius Helios
  • Fresenius Vamed

Fresenius Medical Care is the world’s leading provider of dialysis products anddialysis care for the life-saving treatment of patients with chronic kidney failure. Fresenius Medical Care treats 195,651 patients in its 2,553 own dialysis clinics.

Fresenius Kabi is a globally active company, providing infusion therapies, intravenously administered generic drugs, clinical nutrition and the related medical devices. The products are used for the therapy and care of critically and chronically ill patients in and outside the hospital. In Europe, Fresenius Kabi is the market leader in infusion therapies and clinical nutrition, in the US, the company is a leading provider of intravenously administered generic drugs.

Fresenius Helios is one of the largest private hospital operators in Germany.

Fresenius Vamed offers engineering and services for hospitals and other health care facilities.

Fresenius SE owned 36.05 % of the ordinary voting shares of Fresenius Medical Care AG & Co. KGaA (FMC-AG & Co. KGaA) and 35.58 % of the total subscribed capital of FMC-AG & Co. KGaA at the end of the fiscal year 2009. Fresenius Medical Care Management AG, the general partner of FMC-AG & Co. KGaA, is a wholly-owned subsidiary of Fresenius SE. Therefore, 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) as well as Fresenius Helios and Fresenius Vamed (both held through Fresenius ProServe GmbH) on December 31, 2009. 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 under € 1 million after rounding are marked with “–”.

II . Basis of presentation

The accompanying consolidated financial statements have been prepared in accordance with the United States Generally Accepted Accounting Principles (US GAAP).

On July 1, 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (originally issued as Statement No. 168), the Codification, which became the exclusive authoritative reference for nongovernmental US GAAP for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for Securities and Exchange Commission (SEC) rules and interpretive releases, which are also authoritative GAAP for SEC registrants. This divides nongovernmental US GAAP into the authoritative Codification and guidance that is nonauthoritative. The contents of the Codification carries the same level of authority, eliminating the four-level GAAP hierarchy previously set forth in Statement No. 162, which has been superseded by the Codification. The Codification supersedes all existing non-SEC accounting and reporting standards.

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 readability, various items are aggregated in the consolidated statement of financial position and statement of income. These items are shown separately in the notes to provide useful information to the readers of the consolidated financial statements.

The consolidated statement of financial position 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.

III . 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 by offsetting investments in subsidiaries against the underlying revaluated 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.

Associated companies (usually 20 % to 50 % of voting rights) are consolidated under the equity method. Investments that are not classified as in associated companies are recorded at acquisition costs.

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.

Noncontrolling interest comprises the interest of noncontrolling shareholders in the consolidated equity of Group entities. Profits and losses attributable to the noncontrolling 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.

Fresenius Medical Care entered into various arrangements with certain dialysis clinics to provide management services, financing and product supply. A group of these clinics has negative equity and is unable to provide its own funding, therefore Fresenius Medical Care has agreed to fund its operations for at least a six year period.

The funding carries no interest but Fresenius Medical Care is entitled to a prorata share of profits, if any, and has a right of first refusal in the event the owners sell the business or assets. These clinics are VIEs in which Fresenius Medical Care has been determined to be the primary beneficiary and which therefore have been fully consolidated. They generated approximately
€ 63 million (US$ 88 million) and € 60 million (US$ 89 million) in revenue in 2009 and 2008, respectively. Relating to the VIEs, Fresenius Medical Care consolidated assets in an amount of € 49 million (US$ 70 million), liabilities in an amount of € 20 million (US$ 29 million) and € 29 million (US$ 41 million) in equity. The interest held by the other shareholders in these consolidated VIEs is reported as noncontrolling interest in the consolidated statement of financial position at December 31, 2009.

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 based on the cash flow analysis of the involved parties. The project entities generated approximately € 32 million in revenue in 2009 (2008: € 42 million). The VIEs finance themselves mainly through debt, profit participation rights and investment grants. Assets and liabilities relating to the VIEs are not material. Fresenius Vamed made no payments to the VIEs other than contractually stipulated. 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 2009 include, in addition to Fresenius SE, 136 (2008: 132) German and 912 (2008: 898) foreign companies.

The composition of the Group changed as follows:

  Germany Abroad Total
December 31, 2008 132 898 1,030
Additions 11 71 82
of which newly founded 2 37 39
of which acquired 5 28 33
Disposals 7 57 64
of which no longer consolidated 4 27 31
of which merged 3 30 33
December 31, 2009 136 912 1,048

  Germany Abroad Total
December 31, 2008 132 898 1,030
Additions 11 71 82
of which newly founded 2 37 39
of which acquired 5 28 33
Disposals 7 57 64
of which no longer consolidated 4 27 31
of which merged 3 30 33
December 31, 2009 136 912 1,048

10 companies (2008: 16) 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 2009, the following fully consolidated German subsidiaries of the Fresenius Group applied the exemption provided in Sections 264 (3) and 264b, respectively, of the German Commercial Code (HGB):

Name of the company Registered office
Corporate / Other  
Fresenius Biotech GmbH Gräfelfing
Fresenius Biotech Beteiligungs GmbH Frankfurt am Main
Fresenius Immobilien-Verwaltungs-GmbH & Co. Objekt St. Wendel KG Bad Homburg v. d. H.
Fresenius Immobilien-Verwaltungs-GmbH & Co. Objekt Schweinfurt KG Bad Homburg v. d. H.
Fresenius Netcare GmbH Berlin
Fresenius ProServe GmbH Bad Homburg v. d. H.
FPS Immobilien Verwaltungs GmbH & Co. Reichenbach KG Bad Homburg v. d. H.
ProServe Krankenhaus Beteiligungsgesellschaft mbH & Co. KG München
Fresenius Kabi  
Fresenius HemoCare GmbH Bad Homburg v. d. H.
Fresenius HemoCare Beteiligungs GmbH Frankfurt am Main
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  
D.i.a.-Solution GmbH Erfurt
HELIOS Agnes Karll Krankenhaus GmbH Bochum
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 Klinik Lengerich GmbH Lengerich
HELIOS Kliniken GmbH Berlin
HELIOS Kliniken Breisgau-Hochschwarzwald GmbH Müllheim
HELIOS Kliniken Leipziger Land GmbH Borna
HELIOS Klinikum Bad Saarow GmbH Bad Saarow
HELIOS Klinikum Erfurt GmbH Erfurt
HELIOS Klinikum Wuppertal GmbH Wuppertal
HELIOS Privatkliniken GmbH Bad Homburg v. d. H.
HELIOS Schlossbergklinik Oberstaufen GmbH Oberstaufen
HELIOS Service GmbH Berlin
HELIOS Versorgungszentren GmbH Berlin
HELIOS Versorgungszentrum Bad Saarow GmbH Frankfurt a. d. Oder
HELIOS Vogtland-Klinikum Plauen GmbH Plauen
HUMAINE Kliniken GmbH Berlin
Poliklinik am HELIOS Klinikum Buch GmbH Berlin
Senioren- und Pflegeheim Erfurt GmbH Erfurt
St. Josefs-Hospital GmbH Bochum

Name of the company Registered office
Corporate / Other  
Fresenius Biotech GmbH Gräfelfing
Fresenius Biotech Beteiligungs GmbH Frankfurt am Main
Fresenius Immobilien-Verwaltungs-GmbH & Co. Objekt St. Wendel KG Bad Homburg v. d. H.
Fresenius Immobilien-Verwaltungs-GmbH & Co. Objekt Schweinfurt KG Bad Homburg v. d. H.
Fresenius Netcare GmbH Berlin
Fresenius ProServe GmbH Bad Homburg v. d. H.
FPS Immobilien Verwaltungs GmbH & Co. Reichenbach KG Bad Homburg v. d. H.
ProServe Krankenhaus Beteiligungsgesellschaft mbH & Co. KG München
Fresenius Kabi  
Fresenius HemoCare GmbH Bad Homburg v. d. H.
Fresenius HemoCare Beteiligungs GmbH Frankfurt am Main
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  
D.i.a.-Solution GmbH Erfurt
HELIOS Agnes Karll Krankenhaus GmbH Bochum
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 Klinik Lengerich GmbH Lengerich
HELIOS Kliniken GmbH Berlin
HELIOS Kliniken Breisgau-Hochschwarzwald GmbH Müllheim
HELIOS Kliniken Leipziger Land GmbH Borna
HELIOS Klinikum Bad Saarow GmbH Bad Saarow
HELIOS Klinikum Erfurt GmbH Erfurt
HELIOS Klinikum Wuppertal GmbH Wuppertal
HELIOS Privatkliniken GmbH Bad Homburg v. d. H.
HELIOS Schlossbergklinik Oberstaufen GmbH Oberstaufen
HELIOS Service GmbH Berlin
HELIOS Versorgungszentren GmbH Berlin
HELIOS Versorgungszentrum Bad Saarow GmbH Frankfurt a. d. Oder
HELIOS Vogtland-Klinikum Plauen GmbH Plauen
HUMAINE Kliniken GmbH Berlin
Poliklinik am HELIOS Klinikum Buch GmbH Berlin
Senioren- und Pflegeheim Erfurt GmbH Erfurt
St. Josefs-Hospital GmbH Bochum

c) Classifications

Certain items in the consolidated financial statements of 2008 have been reclassified to conform with the presentation in 2009.

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 for long-term production contracts are recognized using the percentage of completion (PoC) method when the accounting conditions are met. 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 (e. g. sales tax) is excluded from revenues and reported on a net basis.

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 expenses are expensed as incurred.

g) Impairment

The Fresenius Group reviews the carrying amounts of its property, plant and equipment, its intangible assets 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. 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. 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. For the fiscal years 2009 and 2008, interest of € 8 million and € 6 million, based on an average interest rate of 5.56 % and 5.52 %, respectively, was recognized as a component of the cost of assets.

i) Deferred 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 attributable to Fresenius SE. Deferred tax assets also include claims to future tax reductions which arise from the more likely than not expected usage of existing tax losses available for carryforward.

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 date of the statement of financial position, are not considered.

The recoverability of the carrying amount of a deferred tax asset is reviewed at each date of the statement of financial position. In assessing the recoverability of deferred tax assets, the Management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment.

If it is no longer more likely than not that sufficient taxable income will be available to allow the benefit of part or of the entire deferred tax asset to be utilized, the carrying amount of the deferred tax asset is reduced to that certain extent. The reduction is reversed to the date and extent that it becomes probable that sufficient taxable profit will be available.

j) Unrecognized tax benefits

The recognition and measurement of all tax positions taken or expected to be taken in a tax return requires a two step approach. The enterprise must determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the threshold is met, the tax position is measured at the largest amount of benefit that is greater than 50 % likely of being realized upon ultimate settlement and is recognized in the financial statements.

k) Earnings per ordinary share and preference share

Basic earnings per ordinary share is computed by dividing net income attributable to Fresenius SE 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.

l) 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.

m) 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.

n) Inventories

Inventories comprise all assets which are held for sale in the normal course of business (finished goods), in the process of production for such sale (work in process) or consumed in the production process or in the rendering of services (raw materials and purchased components).

Inventories are stated at the lower of acquisition and 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.

o) Property, plant and equipment

Property, plant and equipment are stated at acquisition and manufacturing cost less accumulated depreciation. Significant improvements are capitalized; repairs 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 16 years) and 3 to 15 years for machinery and equipment (with a weighted-average life of 10 years).

p) Intangible assets with finite useful lives

Intangible assets with finite useful lives, for example patents, product and distribution rights, non-compete agreements, technology and licenses to manufacture, distribute and sell pharmaceutical drugs are amortized using the straight-line method over their respective useful lives to their residual values and reviewed for impairment (see note 1. III G, Impairment). The useful life of patents, product and distribution rights ranges from 5 to 20 years. Non-compete agreements with finite useful lives have useful lives ranging from 2 to 25 years with an average useful life of 8 years. The useful life of management contracts with finite useful lives ranges from 5 to 40 years. Technology has a useful live of 15 years. Licenses to manufacture, distribute and sell pharmaceutical drugs are amortized over the contractual license period based upon the annual estimated units of sale of the licensed product. All other intangible assets are amortized over their individual estimated useful lives between 3 and 15 years.

Losses in value of a lasting nature are impaired.

q) Goodwill and other intangible assets with indefinite useful lives

The Fresenius Group identified intangible assets with indefinite useful lives because, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which those assets are expected to generate net cash inflows for the Group. The identified intangible assets with indefinite useful lives such as trade names and certain qualified management contracts acquired in a purchase method business combination are recognized and reported apart from goodwill. 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 and determined their carrying amount by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. A reporting unit is usually defined one level below the segment level according to regions or legal entities. Five reporting units were identified in the segment Fresenius Medical Care (Europe, Latin America, Asia-Pacific, North American Renal Therapy Group, North American Fresenius Medical Services). In the segment Fresenius Kabi exists one reporting unit for the region North America and one reporting unit for the business outside of North America. According to the regional organizational structure, the segment Fresenius Helios consists of seven reporting units, which are managed by a central division. The segment Fresenius Vamed consists of two reporting units (Project business and Service business). 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 amounts. 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 statement of financial position was verified. As a result, the Fresenius Group did not record any impairment losses in 2009 and 2008.

r) Leases

Leased assets assigned to the Fresenius Group based on the risk and rewards approach (finance leases) are recognized as property, plant and equipment and measured on receipt date at the 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.

s) Financial instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. The following categories (according to International Accounting Standard 39, Financial Instruments: Recognition and Measurement) are relevant for the Fresenius Group: loans and receivables, financial liabilities measured at amortized cost as well as financial liabilities / assets measured at fair value. Other categories are immaterial or not existing in the Fresenius Group. According to their character, the Fresenius Group classifies its financial instruments into the following classes: cash and cash equivalents, assets recognized at carrying amount, liabilities recognized at carrying amount, derivatives designated as hedging instruments as well as assets recognized at fair value and liabilities recognized at fair value.

The relationship between classes and categories as well as the reconciliation to the statement of financial position is shown in tabular form in note 30, Financial instruments).

Derivative financial instruments which primarily include foreign currency forward contracts and interest rate swaps are recognized at fair value as assets or liabilities in the statement of financial position. 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 until the secured underlying transaction is realized (see note 30, Financial instruments). The non-effective portion of cash flow hedges is recognized in earnings immediately. Changes in the fair value of derivatives that are not designated as hedging instruments are recognized periodically in earnings.

t) 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.

u) Legal contingencies

In the ordinary course of Fresenius Group’s operations, the Fresenius Group is involved in litigation, arbitration, administrative procedure 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.

v) Other accrued expenses

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.

w) 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. 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 when realized.

x) Debt issuance costs

Debt issuance costs are amortized over the term of the related obligation.

y) Stock option plans

In line with the standard for share-based payment, the Fresenius Group uses the modified prospective transition method. Under this transition method, compensation cost recognized in 2008 and in 2009 include applicable amounts of: (a) compensation cost of all stock-based payments granted prior to, but not yet vested as of, January 1, 2006; (b) compensation cost for all stock-based payments subsequent to January 1, 2006 (based on the grant-date fair value estimated).

z) 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.

aa) Foreign currency translation

The reporting currency is the euro. Substantially all assets and liabilities of the foreign subsidiaries are translated at mid-closing rate on the date of the statement of financial position, 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. In the fiscal year 2009, only immaterial gains resulted out of this transaction.

The exchange rates of the main currencies affecting foreign currency translation developed as follows:

  Year-end exchange rate1 Average exchange rate
  Dec 31, 2009 Dec 31, 2008 2009 2008
1 Mid-closing rate on the date of the statement of financial position
US-Dollar per € 1.4406 1.3917 1.3948 1.4713
Pound sterling per € 0.8881 0.9525 0.8909 0.7961
Swedish krona per € 10.2520 10.8700 10.6191 9.6138
Chinese renminbi per € 9.8350 9.4956 9.5277 10.2287
Japanese yen per € 133.16 126.14 130.34 152.47

  Year-end exchange rate1 Average exchange rate
  Dec 31, 2009 Dec 31, 2008 2009 2008
1 Mid-closing rate on the date of the statement of financial position
US-Dollar per € 1.4406 1.3917 1.3948 1.4713
Pound sterling per € 0.8881 0.9525 0.8909 0.7961
Swedish krona per € 10.2520 10.8700 10.6191 9.6138
Chinese renminbi per € 9.8350 9.4956 9.5277 10.2287
Japanese yen per € 133.16 126.14 130.34 152.47

bb) Fair value hierarchy

The three-tier fair value hierarchy defined in Accounting Standards Codification 820, Fair Value Measurements and Disclosures, classifies assets and liabilities recognized at fair value based on the inputs used in estimating the fair value. Level 1 is defined as observable inputs, such as quoted prices in active markets. Level 2 is defined as inputs other than quoted prices in active markets that are directly or indirectly observable. Level 3 is defined as unobservable inputs for which little or no market data exists, therefore requiring (the company) to develop its own assumptions. The three-tier fair value hierarchy is used in note 25, Pensions and similar obligations and in note 30, Financial instruments.

cc) 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.

dd) 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 19 % and 21 % of 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 2009 and 2008, respectively.

ee) Recent pronouncements, applied

The Fresenius Group has prepared its consolidated financial statements at December 31, 2009 in conformity with the Financial Accounting Standards (FAS) that have to be applied for fiscal years beginning on January 1, 2009 or FAS that can be applied earlier on a voluntary basis.

The Fresenius Group applied the following standards, as far as they are relevant for Fresenius Group’s business, for the first time in 2009:

In January 2010, the FASB issued Accounting Standards Update 2010-06 (ASU 2009-06), an update for ASC 820-10, Fair Value Measurements and Disclosures, resulting in new disclosure requirements regarding the following areas:

  • fair value measurements are to be disaggregated by class, as opposed to the current disclosure requirement of by major category,
  • disclosure of significant transfers of assets and liabilities in and / or out of Level 1 and Level 2, in addition to transfers in and / or out of the Level 3 category,
  • purchases, sales, issuances, and settlements of Level 3 assets and liabilities are to be disclosed separately,
  • disclosure of the valuation techniques and inputs used to determine fair value for Level 2 and Level 3 fair value measurements, as well as changes in valuation techniques used and the reasons for the changes.

The disclosures required under ASU 2010-06 are effective for reporting periods beginning after December 15, 2009, with the exception of the disclosures about purchases, sales, issuances, and settlements in the roll forward of Level 3 activity, which are effective for fiscal years beginning after December 31, 2010, and for interim periods within those fiscal years. Early adoption is permitted for the additional disclosures. The Company adopted all disclosures required under this update as of December 31, 2009.

As of January 1, 2009, the Fresenius Group adopted Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB No. 51 (FAS 160). The requirements of FAS 160 are included in Financial Accounting Standards Board Accounting Standards Codification (ASC) 810, Consolidation. FAS 160 establishes a framework for the reporting of noncontrolling or minority interests. The main changes are the extended disclosures about noncontrolling interests in the statement of income and the statement of financial position.

Furthermore, the Fresenius Group adopted Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (FAS 161) as of January 1, 2009. ASC 815, Derivatives and Hedging, contains the requirements of FAS 161. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The extended disclosure requirements are implemented in note 30, Financial instruments.

On December 30, 2008, the FASB issued final staff position FSP FAS 132R-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP 132R-1). FSP 132R-1 requires more disclosure about pension plan assets mainly regarding the following areas:

  • how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies,
  • the major categories of plan assets,
  • the inputs and valuation techniques used to measure the fair value of plan assets,
  • the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and
  • significant concentrations of risk within plan assets.

Upon initial application, the provisions of this FSP are not required for prior periods that are presented for comparative purposes. ASC 715 contains the guidance, including the amendments in FSP 132R-1, on postretirement benefit plan assets. The Fresenius Group complies with the disclosure requirements of FSP 132R-1 in its report on its consolidated financial statements for fiscal year ended December 31, 2009. The implementation of the disclosure requirements is included in note 25, Pensions and similar obligations.

ff) Recent pronouncements, not yet applied

The FASB issued the following for the Fresenius Group relevant new standards, which are mandatory for fiscal years commencing on or after January 1, 2010:

In June 2009, the FASB issued Accounting Standards Update 2009-17 (ASU 2009-17) (originally issued as FASB Statement No. 167), ASC 810, Consolidations – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 requires reporting entities to evaluate former Qualifying Special Purpose Entities (QSPE) for consolidation and changes the approach to determining a Variable Interest Entity’s (VIE) primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest. In addition, ASU 2009-17 increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. ASU 2009-17 also requires additional year-end and interim disclosures about risks related to continuing involvement in transferred financial assets.

The amendments contained in ASU 2009-17 are effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 and for subsequent interim and annual reporting periods. All former QSPEs and other VIEs will need to be reevaluated under the amended consolidation requirements as of the beginning of the first annual reporting period that begins after November 15, 2009. Early adoption is prohibited. The Fresenius Group will implement the amendments prescribed by ASU 2009-17 as of January 1, 2010.

In June 2009, the FASB issued Accounting Standards Update 2009-16 (ASU 2009-16) (originally issued as FASB Statement No. 166), ASC 860, Transfers and Servicing-Accounting for Transfers of Financial Assets. ASU 2009-16 eliminates the QSPE concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. ASU 2009-16 also requires additional year-end and interim disclosures about risks related to VIEs.

ASU 2009-16 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009, and for subsequent interim and annual reporting periods. ASU 2009-16’s disclosure requirements must be applied to transfers that occurred before and after its effective date. Early adoption is prohibited. The Fresenius Group will adopt the provisions of ASU 2009-16 as of January 1, 2010.

The Fresenius Group does not generally adopt new accounting standards before compulsory adoption date.

IV. 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, product rights, tradenames and management contracts, represents a considerable part of the total assets of the Fresenius Group. At December 31, 2009 and December 31, 2008, the carrying amount of goodwill and non-amortizable intangible assets with indefinite useful lives was € 10,670 million and € 10,703 million, respectively. This represented 51 % and 52 %, respectively, of total 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 determine possible impairments of these assets, the fair value of the reporting units is compared to their 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 four to ten and a corresponding growth rate for all remaining years. Projections for up to ten years are possible due to the stability of Fresenius Group’s business, which is largely independent from the economic cycle. These growth rates are 0 % to 4 % for Fresenius Medical Care, 3 % for Fresenius Kabi and 1 % for Fresenius Helios and Fresenius Vamed. This discount factor is determined by the WACC of the respective reporting unit. Fresenius Medical Care’s WACC consisted of a basic rate of 6.45 % for 2009. This basic rate is then adjusted by a country-specific risk rate within each reporting unit. In 2009, WACC’s for the reporting units of Fresenius Medical Care ranged from 6.45 % to 12.05 %. In the business segments Fresenius Kabi, Fresenius Helios and Fresenius Vamed, the WACC was 6.61 %, 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 2009.

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 useful 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 29, 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 € 2,509 million and € 2,477 million in 2009 and 2008, 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 12 % as well as private insurers in the US with 14 % at December 31, 2009. Other than that, the Fresenius Group has no significant risk concentration, due to its international and heterogeneous customer structure.

The allowance for doubtful accounts was € 285 million and € 257 million as of December 31, 2009 and December 31, 2008, 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 the 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. III Z, Self-insurance programs.

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