Significant accounting policies

There were no significant changes in accounting policies applied by us in these condensed consolidated interim financial statements compared to those used in the most recent annual consolidated financial statements of 31 December 2018, except for the adoption of new standards and interpretations described below and the application of accounting policies that were previously not yet disclosed.

• IFRS 16 Leases (applicable for annual periods beginning on or after 1 January 2019)

The nature and the effect of these changes were taken into consideration, and the above amendments affected the condensed consolidated interim financial statements as follows:

We adopted IFRS 16 on 1 January 2019, in accordance with the transitional provisions of IFRS 16, using the modified retrospective approach. Consequently, the cumulative effect of adopting IFRS 16 was recognized as an adjustment to the opening balance of retained earnings as at 1 January 2019, with no restatement of the comparative figures.

On adoption of IFRS 16, we recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under IAS 17. These liabilities were measured at the present value of the remaining lease payments and discounted using our incremental borrowing rate as of 1 January 2019. Our weighted average incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 1.55%.

The differences between our total operating lease commitments as reported in note 25 of our consolidated financial statements of 31 December 2018 and the total lease liabilities recognized in our statement of financial position as at 1 January 2019 are summarized below.

The change in accounting policy affected the statement of financial position as at 1 January 2019 as follows:

We applied the following practical expedients, as permitted by IFRS 16, on transition date:

• Reliance on the previous definition of a lease (as provided by IAS 17) for all contracts that existed on the date of initial application;
• The use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
• Reliance on previous assessments on whether leases are onerous instead of performing an impairment review;
• The accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases.

Other new standards and interpretations applicable for the annual period beginning on 1 January 2019 did not have any impact on our condensed consolidated interim financial statements.

We have not early adopted any other standard, interpretation, or amendment that has been issued but is not yet effective.

Change in accounting policies with effect from 1 January 2019 as a result of the adoption of IFRS 16:

Whereas until the end of 2018, we made a distinction between finance leases (presented on the balance sheet) and operating leases (off-balance sheet commitments), we recognized as from 1 January 2019 right-of-use assets on the balance sheet and corresponding lease liabilities (measured on a present value basis). These liabilities reflect the expected lease payments to be made in the future, estimated at the commencement date of the leases. After initial recognition, these lease liabilities are measured at amortized cost.

The right-of-use assets (mainly comprising the initial lease liability) are measured at cost and depreciated over their useful life on a straight-line basis. The right-of-use assets are presented in the statement of financial position under the caption “Property, plant and equipment” and the lease liabilities are presented as current and non-current lease liabilities.

Each lease payment is allocated between the lease liability and financial expenses.

New accounting policies as a result of recent transactions:

Financial instruments: derivative assets/liabilities

Financial assets and financial liabilities are recognized on our balance sheet when we become a party to the contractual provisions of the instrument.

Derivative assets and liabilities are initially measured at fair value. After initial measurement we will measure the derivatives at fair value through profit or loss.

These accounting policies are also expected to be reflected in our consolidated financial statements as at and for the year ending 31 December 2019.

Management judgments and estimates

Preparing interim financial statements in compliance with IFRS requires management to make judgments and estimates and to use assumptions that may significantly influence the reported amounts of assets and liabilities, the notes on contingent assets and liabilities on the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results may differ from these estimates. We refer to our annual report 2018, except for the judgments and estimates as a result of the application of IFRS 16 and the judgments made as a consequence of accounting for the Option, License and Collaboration agreement, the revised collaboration agreement for filgotinib and the equity subscription agreement, each signed with Gilead, as described below.

Critical judgments in applying accounting policies

Accounting for warrant A and warrant B

As the issuance of warrants A and B is subject to the approval of our shareholders, management came to the judgmental view that a financial instrument as defined under IAS 32 shall not be recognized until such an approval is voted. The issuance of warrant A and initial warrant B will be on the agenda of the extraordinary general meeting of shareholders that will take place on 22 October 2019. On the closing date of the transaction (23 August 2019) we however received from Gilead the upfront payment that implicitly includes a premium for the future issuance of the warrants. In accordance with IFRS 15, management took the view that the expected value of the warrants to be issued shall be treated as a contract liability ("warrant issuance liability") reducing the transaction price. At the date the shareholders approve the issuance of the warrants, the contract liability becomes a financial liability (derivative) measured at fair value through profit or loss in accordance with IFRS 9.

IFRS 15 – Revenue recognition Gilead

Our critical judgments were as follows:

Determination of the total transaction price

• In connection with this agreement with Gilead, we recognized a deferred income and an offsetting short-term financial asset (derivative) of €85.6 million upon signing of the share subscription agreement with Gilead as required under IFRS 9. The deferred income has been added to the transaction price at inception of the agreement because it is considered to be part of the overall consideration received for the three performance obligations.
• We considered that the transaction price included a premium paid by Gilead (through the upfront payment) to acquire warrants (warrant A and warrant B) in the future, upon approval by the shareholders. We measured both warrants at fair value and recognized a liability at closing of the transaction for the same amount (as part of the current deferred income line). This liability is re-measured at each reporting period with a corresponding impact on the allocation of the transaction price to the performance obligation relating to the drug discovery platform. At 30 September 2019, the value of the warrants amounted to €44.8 million for warrant A and €5.5 million for warrant B.

Performance obligation: License on GLPG1690

• The transaction price allocated to this performance obligation reflects our assessment of the stand-alone selling price of this performance obligation and was valued based on a discounted cash flow approach including, amongst others, assumptions on the estimated market share and size, peak sales and probability of success.
• After granting the license for GLPG1690, we will share Phase 3 costs equally with Gilead. We consider this part of the contract as a collaboration between us and Gilead which is not in scope of IFRS 15.

Performance obligation: Filgotinib amendment

• Revenues are recognized over time through satisfaction of the performance obligation. Management determined the "cost-to-cost" input model, previously applied, remains appropriate, considering the new joint predetermined cost level, to measure the progress of the satisfaction of this performance obligation. The predetermined level of costs has increased and as a result, the percentage of completion has decreased leading to the recognition in revenue of a negative cumulative catch-up in the third quarter of 2019.

Performance obligation: Access rights to the drug discovery platform, option rights and R&D activities

• Management determined that Gilead's right to opt-in on drug discovery platform programs at the end of Phase 2 (including GLPG1972), to obtain co-exclusive development and commercialisation rights for the optioned program outside Europe, did not represent a material right as the amounts payable to exercise such rights are estimated to represent fair value when comparing the terms of the contract to previous contracts concluded at arm's length. Therefore none of the upfront payment was allocated to such rights.
• The revenue allocated to the drug discovery platform will be recognized over time as Gilead receives exclusive access to our drug discovery platform and option rights on our current and future pipeline as well as R&D activities during the collaboration term. We assessed that the granting of exclusive access and option rights delivered over the entire period is the predominant component of the transaction price. Moreover, no budget (amounts and spread) nor performance measures were agreed regarding the R&D activities as we remain free to conduct those activities and spend on those activities at our own discretion. Finally, R&D platform investments (inputs) are difficult to predict accurately over the collaboration period. Therefore, input methods were not retained and management concluded that an equal spread over the collaboration period is the most reliable and appropriate recognition method. We also considered that Gilead is more interested in obtaining access to the output of our R&D activities over the collaboration period than in the input (which is why the input is not being reported upon or agreed between the parties). We considered that innovation output is not directly linked to the extent of the input hence we have not retained a cost input method to measure the progress of this performance obligation. 

Critical accounting estimates

Recognition period for the performance obligation: Access rights to the drug discovery platform, option rights and R&D activities

Management assessed the appropriate period over which to recognize the drug discovery platform revenue to be 10 years. This is because we granted exclusive rights over a 10-year period. However, if at the end of the 10-year period, some programs in existence as of this time would have reached the clinic (i.e. IND filed with regulatory authorities), the rights for those specific programs may be extended, for a maximum of three years. We will re-assess this critical estimate at each year-end based on the evolution of our pipeline.