Sales revenues are derived primarily from product deliveries. Total reported net sales increased by EUR 4,105 million or 17.6 percent from 2004, to EUR 27,383 million. Contributing to this expansion were a EUR 109 million, or 0.5 percent, increase in volumes along with a EUR 279 million, or 1.2 percent, positive impact of shifts in exchange rates. Changes in selling prices contributed EUR 1,647 million, or 7.0 percent, to the growth in business. Portfolio changes boosted sales by EUR 2,070 million. Acquisitions and divestitures during 2005 and 2004 affected the comparison between the two years’ sales figures by the following amounts:

¹ A trading relationship now exists between the Bayer Group and the LANXESS Group as separate enterprises following the spin-off of what was previously the LANXESS subgroup of Bayer. The relevant agreements are concluded on an arm’s-length basis. Under these agreements, the Bayer Group supplies goods and services to the LANXESS Group. Some of the transactions relate to products, such as chlorine or caustic soda solution, that are supplied to LANXESS by the MaterialScience subgroup. Others are service transactions in the areas of IT systems development and application support, IT infrastructure, site services and engineering services. Prior to the spin-off, the resulting revenues were recorded as intragroup sales and eliminated in the consolidation.
 
Breakdowns of net sales by segment and by region are given in the table Key Data by Segment and Region.

9. Selling expenses
Selling expenses include EUR 621 million in shipping and handling costs in 2005 (2004: EUR 569 million). They also include advertising and promotion costs, expensed in the period in which they are incurred. These costs amount to EUR 1,222 million (2004: EUR 963 million).

10. Research and development expenses
Because of their importance in the Bayer Group, research and development expenses are recognized separately alongside the cost of goods sold, selling expenses and general administration expenses.

11. Other operating income

In July 2005, it was decided to modify several of Bayer’s largest pension plans in the United States, replacing the current defined-benefit plans with purely defined-contribution plans. The resulting reduction in pension obligations yielded one-time income of EUR 294 million in fiscal 2005, which is included in other operating income. In the previous year, income of EUR 116 million was realized from a restructuring of global pension obligations. Further information on the accounting for pension provisions is given in Note [28].

12. Other operating expenses

Other operating expenses include EUR 106 million incurred in connection with the termination of the co-promotion agreement with GlaxoSmithKline for Levitra®. EUR 162 million (2004: minus EUR 129 million) was spent on restructuring. Further details of restructuring expenses are given in Note [29.3].

13. Costs by type

13.1 Cost of materials
The total cost of materials amounted to EUR 9,726 million (2004: EUR 8,871 million), comprising EUR 8,896 million (2004: EUR 7,948 million) in expenses for raw materials, supplies and goods purchased for resale, and EUR 830 million (2004: EUR 923 million) in expenses for purchased services. The cost of materials is allocated to the cost of goods sold or the respective operating expense items.

13.2 Personnel expenses/employees

Personnel expenses declined by EUR 114 million to EUR 5,912 million in 2005 (2004: EUR 6,026 million). Of this decrease, EUR 38 million was due to currency translations. Personnel expenses are allocated to the cost of goods sold or the respective operating expense items. The personnel expenses shown here do not include the interest portion of personnel-related provisions (particularly pension provisions), which is included in the non-operating result as other non-operating expense (see Note [15.3]).

In July 2005, it was decided to modify several of Bayer’s largest pension plans in the United States, replacing these current defined-benefit plans with a purely defined-contribution plan. The resulting reduction in pension obligations yielded a one-time reduction of EUR 294 million in expenses for retirement pensions in fiscal 2005. Pension expense in fiscal 2004 was diminished by one-time income of EUR 116 million resulting mainly from changes in the basic conditions for the plan covering health care costs in the United States. These changes require participating employees to assume a greater share of the costs through higher copayments and proportionate contributions. In addition, a ceiling was introduced for the annual contributions payable by companies.
 
The average number of employees, classified by corporate functions, was as follows:

The employees of joint ventures are included in the above figures in proportion to Bayer’s interests in the respective companies. The total number of people employed by joint ventures in 2005 was 65 (2004: 31).

13.3 Other taxes
Other taxes amounting to EUR 248 million (2004: EUR 201 million) are included in the cost of production, selling expenses, research and development expenses or general administration expenses. These are mainly taxes related to property, as well as taxes on electricity and other utilities.

14. Operating result (EBIT)
In December 2004 the IASB issued an amendment to IAS 19 (Employee Benefits) that permits actuarial gains and losses arising in defined-benefit pension plans to be recognized directly in equity without affecting the income statement. Further information on the accounting for pension provisions is given in Note [28].
 
The Group Management Board decided to follow the recommendation of the IASB and implement the above change as of January 1, 2005 in order to enhance the transparency of reporting. The previous year’s figures have been restated accordingly. This reporting change leads to a EUR 48 million improvement in the 2004 operating result from continuing operations. In view of its immateriality to 2004 EBIT of the segments, the gain has been reflected solely in the reconciliation column of the segment table.
 
Breakdowns of the operating result by segment and by region are given in the table Key Data by Segment and Region.

15. Non-operating result

The non-operating result, comprising the income statement items equity-method loss, non-operating income and non-operating expenses, may be apportioned among the following categories.

15.1 Loss from investments in affiliated companies – net
The components of this item are as follows:

The loss from investments in affiliated companies mainly comprises an equity-method loss of EUR 47 million (2004: EUR 131 million) from two production joint ventures with Lyondell. Further details of the companies included at equity in the Group financial statements are given in Note [21].

15.2 Interest expense – net
This item comprises:

This item mainly comprises interest expense for financial liabilities, value adjustments relating to interest-rate hedging transactions, and interest income from investments.
 
Finance leases are capitalized under property, plant and equipment in compliance with IAS 17 (Leases). The interest portion of the lease payments, amounting to minus EUR 18 million (2004: minus EUR 21 million), is reflected in interest expense.
 
Interest expense incurred to finance the construction phase of major investment projects is not included here. Such interest expense, amounting in 2005 to EUR 4 million (2004: EUR 3 million), is capitalized as part of the cost of acquisition or construction of the property, plant or equipment concerned, based on an average capitalization rate of 4 percent (2004: 4 percent).

15.3 Other non-operating expense – net
This item comprises:

To enhance the transparency of reporting, the procedure for the treatment of actuarial gains and losses relating to defined-benefit pension obligations has been altered as of January 1, 2005. Under the new method of post-employment benefit accounting, unrealized actuarial gains and losses, instead of being gradually amortized according to the corridor method and recognized in income, are offset in their entirety against stockholders’ equity. This reporting change reduced the interest expense for provisions for continuing operations by EUR 78 million in fiscal 2004. Further information on the accounting for pension provisions is given in Note [28].