14 | Intangible assets

Purchased intangible assets such as patents, trademarks and software are measured at cost and amortized on a straight-line basis over their useful lives. Intangible assets are generally amortized over a period of five years. Additional write-downs are made for permanent impairment. If the reasons for impairment no longer apply, write-downs are reversed accordingly.

In accordance with IAS 22 (Business Combinations), goodwill arising upon consolidation and acquired goodwill reported in the single-entity financial statements of Group companies are capitalized and amortized on a straight-line basis over a useful life of 5 to a maximum of 20 years. Goodwill is regularly tested for impairment and is written down as required.

Goodwill from capital consolidation arising prior to January 1, 1995 is not capitalized, but instead is charged directly to equity.

15 | Property, plant, and equipment

Property, plant, and equipment is carried at cost and reduced by straight-line depreciation over the assets’ useful lives. Production costs of internally manufactured items of property, plant, and equipment are calculated as the direct costs plus an appropriate share of attributable overheads. Interest on borrowings is recognized as current expense in accordance with IAS 23 (Borrowing Costs). Repair and maintenance costs for property, plant, and equipment are expensed as incurred. They are capitalized in exceptional cases where the measures result in the extension of, or a significant improvement to, the asset concerned. Third-party grants and subsidies reduce the historical cost.

Property, plant, and equipment is depreciated on a straight-line basis. The following useful lives are generally applied:

16 | Financial assets

Investments in unconsolidated affiliated companies and other investments are carried at cost in line with the principle of individual valuation. Write-downs are charged where there is evidence of permanent impairment. If the reasons for impairment no longer apply, write-downs are reversed accordingly. Interest-free or low-interest loans are carried at their present value; other securities and loans are carried at their fair value. Changes in fair value are recognized directly in a separate component of equity after deduction of deferred taxes.

17 | Inventories

Inventories are carried at the lower of cost or net realizable value in accordance with IAS 2 (Inventories). They are measured using the first-in, first-out (FIFO) or weighted average cost methods. The cost of inventories is calculated as the direct costs plus an appropriate allocation of materials and production overheads, including productionrelated depreciation of assets. They also include the proportionate costs of company pension arrangements and voluntary social benefits, as well as production-related administrative expenses.

18 | Receivables and other assets

Receivables and other assets are carried at their nominal value. Bills receivable and interest-free or low-interest loans are carried at their present value. Appropriate allowances have been made for identifiable individual risks, and the overall risk is provided for by an allowance for doubtful accounts. Other assets include the positive fair value of derivatives (€9 million), short-term loans (€1 million), and other receivables.

19 | Cash and cash equivalents

Marketable securities largely comprise short-term investments.

Cash balances comprise bank balances, cash-on-hand and checks. A lien of €550 million has been granted on the cash balances as collateral for financing the share buyback program.

20 | Deferred taxes

Deferred taxes result primarily from temporary differences between the carrying amounts in the IFRS financial accounts and in the tax accounts of the individual Group companies, and from consolidation adjustments. Further information can be found under note 10, Taxes on income.

21 | Prepaid expenses

A large portion of the prepaid expenses is expected to be utilized in 2004.

22 | Share capital

The share capital amounts to €215,040,000.
84 million no-par value bearer shares had been issued at the balance sheet date.

23 | Authorized capital

The Annual General Meeting on June 20, 2000 authorized the Executive Board, with the approval of the Supervisory Board, to increase the share capital in the period until June 19, 2005 by up to a total of €87 million (Authorized Capital I: €45 million; Authorized Capital II: €21 million; Authorized Capital III: €21 million) by issuing new bearer shares on one or several occasions. For this purpose, the dividend rights for new shares may be determined differently to the provisions of § 60 (2) Aktiengesetz (German Stock Corporation Act).

Shareholders shall be granted preemptive rights. However, the Executive Board is authorized, with the approval of the Supervisory Board, to exclude the preemptive rights in the following cases:

1. to eliminate fractions created as a result of capital increases against cash contributions (Authorized Capital I, II, III);

2. to the extent necessary to grant the holders/creditors of convertible bonds or bonds with warrants issued by Beiersdorf AG, or companies in which it holds a direct or indirect majority interest, preemptive rights to new shares in the amount to which they would be entitled after exercising their conversion rights or options, or after fulfilling their conversion obligation (Authorized Capital I, II, III);

3. to issue new shares at an issue price that is not materially lower than the quoted market price of existing listed shares at the time when the issue price is finalized, which should be as near as possible to the time the shares are placed (Authorized Capital II);

4. in the case of capital increases against non-cash contributions, for the purpose of acquiring enterprises or equity interests in businesses (Authorized Capital III).

The Executive Board was also authorized, with the approval of the Supervisory Board, to determine the further details of the capital increase and its implementation.

24 | Contingent capital

The Annual General Meeting on June 20, 2000 also resolved to contingently increase the share capital by up to a total of €40 million. In accordance with the resolution by the Annual General Meeting, the contingent capital increase will be implemented only if:

1. the holders or creditors of conversion rights and/or options attached to convertible bonds and/or bonds with warrants issued in the period until June 19, 2005 by Beiersdorf AG, or companies in which it holds a direct or indirect majority interest, choose to exercise their conversion or option rights, or

2. the holders or creditors of convertible bonds giving rise to a conversion obligation issued in the period until June 19, 2005 by Beiersdorf AG, or companies in which it holds a direct or indirect majority interest, comply with such obligation.

The new shares carry dividend rights from the beginning of the fiscal year in which they are created via the exercise of conversion rights or options, or as a result of compliance with conversion obligations.

25 | Additional paid-in capital

Additional paid-in capital comprises the premium arising from the issue of shares by Beiersdorf AG.

26 | Retained earnings

Retained earnings contain the undistributed profits generated in prior periods by companies included in the Group financial statements, changes in consolidation adjustments, and other changes recognized directly in equity.

Changes in the value of financial derivatives totaling €-4 million were recorded directly in equity.

27 | Minority interests

Minority interests include adjustments for the interests of non-Group shareholders in the equity of fully-consolidated affiliates. This primarily relates to Nivea-Kao Co., Ltd., Japan, PT. Beiersdorf Indonesia, Beiersdorf India Limited, and Bode Chemie GmbH & Co., Hamburg.

28 | Provisions for pensions and other postemployment benefits

The Group provides for post-employment benefits for entitled employees either directly or through legally independent pension and welfare funds (at Beiersdorf AG, this refers to TROMA Alters- und Hinterbliebenenstiftung, Hamburg). The benefits vary depending on the legal, economic, and tax situation in the country in question, and are generally based on length of service, salary, and the position held within the Company. The direct and indirect obligations comprise obligations arising from existing pensions, as well as future pension and retirement obligations.

The pension obligations covered by the legally independent foundation TROMA Altersund Hinterbliebenenstiftung, Hamburg, include the assets of this foundation. These assets include 3 % of the shares of Beiersdorf AG. Group companies provide retirement benefits under defined contribution and defined benefit plans. The related expenses are included in the costs of the respective functions. Interest expense on obligations acquired in previous years, the return on plan assets, and the amortization of unrealized actuarial gains and losses are reported in the income statement under interest income.

In accordance with IAS 19 (Employee Benefits), pension obligations under defined benefit plans are calculated using the projected unit credit method. The expected benefits are spread over the entire length of service of the employees. There was no extraordinary income or expense from the termination of pension plans or the curtailment and transfer of pension benefits in the year under review.

Pension obligations are calculated on the basis of market rates of interest and projected wage/salary and pension growth. The following assumptions were applied in measuring pension obligations for the German Group companies:

For foreign Group companies, these rates vary depending on specific local conditions.

The total expense for commitments under defined benefit plans can be broken down as follows:

The pension provision is calculated as follows:

Actuarial gains and losses are recognized only to the extent that they exceed the greater of 10 % of the present value of the obligations or of the fair value of plan assets. Where this is the case, the excess amount is amortized over the average remaining working lives of the employees beginning the following year.

Pension plan assets and obligations are measured at regular intervals, at least every three years. Actuarial valuations are performed annually for all major pension plans.

Obligations of individual Group companies, particularly in the USA, to provide postemployment medical benefits for employees are also disclosed in provisions for pensions, as they are similar in character to pension obligations.

Similar obligations also include obligations for severance pay and early retirement benefits. These are calculated in accordance with actuarial principles on the basis of the standard local rates of interest.

29 | Other provisions

Other provisions include all identifiable future payment obligations, risks and uncertain obligations of the Group. They are carried at the likely amount of the liability incurred, and mostly have a residual maturity of less than one year.

Provisions for personnel expenses relate primarily to expenses for part-time schemes for employees approaching retirement, annual bonuses, vacation pay, severance agreements and anniversary payments.

Miscellaneous provisions relate largely to litigation risks and other risks.

30 | Liabilities

Liabilities are carried at the higher of their nominal value or redemption amount. Financial liabilities in the amount of €10 million (previous year: €3 million) are due after more than five years.

Financial liabilities include all of the Beiersdorf Group’s interest-bearing liabilities. These relate primarily to liabilities to banks. There are no securitized liabilities to banks. No bonds were issued.

Trade payables include liabilities on bills accepted and drawn in the amount of €1 million (previous year: €4 million).

31 | Contingent liabilities and other financial obligations

Beiersdorf has potential obligations arising from a legal action and from claims brought against the Company. Estimates of possible future expenses are subject to a large number of uncertainties. Beiersdorf does not expect any such expenses to have a material adverse effect on the Beiersdorf Group’s economic and financial situation. An obligation in connection with the buyback of 8,393,672 Beiersdorf shares at a price per share of €113.76, totaling €955 million, also existed at the balance sheet date.

32 | Derivative financial instruments

Derivative financial instruments are employed in the Beiersdorf Group to help manage current and future currency and interest rate risks. The instruments are used to hedge the Group’s underlying operating business and essential financial transactions. The Group is not exposed to any additional risks as a result. The transactions are performed exclusively using standard market instruments (e.g. forward transactions, swaps, options).

Currency hedges relate primarily to intragroup deliveries and loans, while interest rate hedges relate primarily to long-term financing.

The nominal values represent the total of all purchase and selling amounts for derivatives. The nominal values shown are not offset.

The fair values shown are calculated by valuing the outstanding items at market rates at the balance sheet date, ignoring any offsetting change in the fair value of the hedged items. Changes in fair value are recognized in the balance sheet under other receivables and other assets, or in other provisions. In the case of cash flow hedges, any gains and losses are deferred directly in equity after deduction of deferred taxes.

The positive fair values of derivatives include the default risk relating to the nonfulfillment of contractual obligations by counterparties. Beiersdorf’s counterparties are prime-rated banks; the default risk is therefore considered to be extremely low.

Cash flow disclosures

The cash flow statement presents the changes in the Beiersdorf Group’s cash and cash equivalents in the course of the year under review caused by the inflow and outflow of funds. It distinguishes between cash flows from operating, investing, and financing activities.

The cash and cash equivalents shown in the cash flow statement are composed of cash-on-hand, checks, and bank balances, as well as marketable securities.

The gross cash flow totaled €401 million in the year under review. Although EBIT increased by €12 million, higher income tax payments for prior years and a decrease in long-term provisions resulted in a gross cash flow which was €40 million below that of the previous year.

At €416 million, Beiersdorf’s net cash from operating activities was up €24 million on the previous year due to a reduction in inventories, a slight increase in trade receivables and other assets, and a clear increase in liabilities and short-term provisions. Net cash used in investing activities (€108 million) dropped below that of the previous year mainly as a result of lower investments in property, plant, and equipment and intangible assets. Overall, Beiersdorf generated a free cash flow of €308 million, €103 million above the previous year; this was primarily used to pay financing costs and a higher dividend of €118 million.

Cash and cash equivalents increased by a total of €120 million, to reach €842 million.

Segment reporting

Segment reporting in the Beiersdorf Group is based primarily on the products manufactured and sold by the divisions. The breakdown of the Group into the cosmed, medical, and tesa divisions reflects the internal organizational structure during the year under review. The classification by region shows the global breakdown of business activities in the Beiersdorf Group.

The divisions, as well as business developments in the divisions and the regions, are presented in the management report.

The net sales shown for the regions are based on the domiciles of the respective companies.

EBITDA represents the operating result (EBIT) before depreciation and amortization.

Capital employed consists of gross operating capital less operating liabilities. The following tables show the reconciliation of capital employed to the balance sheet items:

The EBIT return on capital employed is the ratio of the operating result (EBIT) to capital employed.

Gross cash flow is the excess of operating income over operating expenses before any further appropriation of funds.