25 – Supplementary information on financial instruments

25.1 – Financial risks

Market risks

Foreign currency risks: Changes in exchange rates could lead to negative changes in the value of financial instruments and adverse changes in future cash flows from planned transactions. Foreign currency risks from financial instruments result from the translation at the closing rate of financial receivables, loans, securities, cash, and financial liabilities into the functional currency of the respective Group company. Foreign currency contracts in a variety of currencies are used to hedge foreign exchange risks from primary financial instruments and planned transactions.

The foreign currency risk exposure corresponds to the net amount of the nominal volume of the primary and the derivative financial instruments which are exposed to currency risks. In addition, planned purchase and sales transactions of the respective following year are included, if they fall under the currency risk management system. Opposite positions in the same currency are offset against each other.

The sensitivity analysis is conducted by simulating a 10% depreciation in all currencies against the respective functional currency. The effect on BASF’s income before taxes and minority interests would have been minus €243 million as of December 31, 2011, and minus €157 million as of December 31, 2010. The effect from the items designated under hedge accounting would have decreased the equity of the shareholders of BASF SE before income taxes by €5 million on December 31, 2011 (December 31, 2010: an increase of €11 million). This refers to transactions in U.S. dollars and British pounds. The currency exposure amounted to €1,574 million on December 31, 2011 (December 31, 2010: €1,058 million).

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Exposure and sensitivity by currency (million €)
	Exposure 2011	Sensitivity 2011		Exposure 2010	Sensitivity 2010
U.S. dollar	1,706	(237)		1,141	(132)
Other	(132)	(11)		(83)	(14)
Total	1,574	(248)		1,058	(146)

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Carrying amount of non-derivative interest-bearing financial instruments (million €)
	2011			2010
	Fixed interest rate	Variable interest rate		Fixed interest rate	Variable interest rate
Loans	218	36		169	75
Securities	35	5		28	5
Financial indebtedness	11,012	1,992		13,309	1,730

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Nominal and fair value of interest rate and combined interest and cross currency swaps (million €)
	2011			2010
	Nominal value	Fair value		Nominal value	Fair value
Interest rate swaps	2,711	48		1,061	52
Thereof payer swaps	1,361	39		1,061	52
receiver swaps	1,350	9		–	–
Combined interest and cross currency  swaps	722	34		928	60
Thereof fixed rate	722	34		920	61
variable rate	–	–		8	(1)

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Exposure to commodity derivatives (million €)
	2011			2010
	Exposure	Value at Risk		Exposure	Value at Risk
Crude oil, oil products and natural gas	(259)	13		(230)	6
Precious metals	31	2		4	1
CO2 emissions certificates	4	1		3	.
Agricultural commodities	(209)	1		(95)	.
	(433)	17		(318)	7

For more information regarding financial risks and BASF’s risk management, see BASF Management’s Analysis, Opportunities and risks report

Default and credit risk

Default and credit risks arise when counterparties do not fulfill their contractual obligations. BASF regularly analyzes the creditworthiness of each significant debtor and grants credit limits on the basis of this analysis. Due to the global activities and diversified customer structure of the BASF Group, there is no significant concentration of default risk. The carrying amount of all receivables, loans and interest-bearing securities plus the nominal value of contingent liabilities excluding potential warranty obligations represents the maximum default risk for BASF.

For more information on credit risks, see Note 16

Liquidity risks

BASF promptly recognizes any risks from cash flow fluctuations as part of the liquidity planning. BASF has ready access to sufficient liquid funds from our ongoing commercial paper program and confirmed lines of credit from banks.

25.2 – Maturity analysis

The interest and principal payments as well as other payments for derivative financial instruments are relevant for the presentation of the maturities of the contractual cash flows from financial liabilities. Future cash flows are not discounted here.

Derivatives are included using their net cash flows, provided they have a negative fair value and therefore represent a liability. Derivatives with positive fair values are assets and are therefore not considered.

Trade accounts payable are generally interest free and are due within one year. Therefore the carrying amount of trade accounts payable equals the sum of future cash flows.

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Maturities of contractual cash flows from financial liabilities 2011 (million €)
	Bonds and other liabilities to the capital markets	Liabilities to credit institutions	Liabilities resulting from derivative financial instruments	Miscellaneous liabilities	Total
2012	3,410	1,117	532	973	6,032
2013	1,805	750	18	83	2,656
2014	1,516	119	6	21	1,662
2015	2,324	745	22	22	3,113
2016	956	59	–	22	1,037
2017 and thereafter	1,840	125	–	425	2,390
	11,851	2,915	578	1,546	16,890

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Maturities of contractual cash flows from financial liabilities 2010 (million €)
	Bonds and other liabilities to the capital markets	Liabilities to credit institutions	Liabilities resulting from derivative financial instruments	Miscellaneous liabilities	Total
2011	3,616	795	437	942	5,790
2012	3,396	235	62	80	3,773
2013	1,799	686	1	14	2,500
2014	1,518	53	–	11	1,582
2015	2,320	382	–	12	2,714
2016 and thereafter	2,819	102	7	388	3,316
	15,468	2,253	507	1,447	19,675

25.3 – Classes and categories of financial instruments

For trade accounts receivable, other receivables and miscellaneous assets, loans, cash and cash equivalents, as well as trade accounts payable and other liabilities, the carrying amount approximates the fair value. Participations which are not traded on an active market and whose fair value could not be reliably determined are recognized at amortized cost and are reported in “other financial assets”.

The carrying amount of participations which are traded on an active market and therefore recognized at fair value amounted to €1 million as of December 31, 2011 (December 31, 2010: €1,116 million). They are included in the item “shares in other participations.” The decline is due to the sale of the shares in K+S Aktiengesellschaft.

For more information, see Note 14

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Carrying amounts and fair values of financial instruments as of December 31, 2011 (million €)
	Carrying amount	Total carrying amount within scope of application of IFRS 7	Valuation category in accordance with IAS 392	Fair value	Thereof fair value level 13	Thereof fair value level 24	Thereof fair value level 35
Participations1	554	554	Afs	1	1	–	–
Receivables from finance leases	22	22	n.a.	22	–	–	–
Loans	254	254	LaR	254	–	–	–
Accounts receivable, trade	10,886	10,886	LaR	10,886	–	–	–
Derivatives without hedging relationships	526	526	aFVtPL	526	91	421	14
Derivatives with hedging relationships	35	35	n.a.	35	–	35	–
Other receivables and miscellaneous assets6	3,759	1,433	LaR	1,433	–	–	–
Securities	59	59	Afs	59	59	–	–
Cash and cash equivalents	2,048	2,048	Afs	2,048	2,048	–	–
Total assets	18,143	15,817		15,264	2,199	456	14
Bonds	10,300	10,300	AmC	11,115	–	–	–
Commercial paper	–	–	AmC	–	–	–	–
Liabilities to credit institutions	2,704	2,704	AmC	2,704	–	–	–
Liabilities from finance leases	60	60	n.a.	60	–	–	–
Accounts payable, trade	5,121	5,121	AmC	5,121	–	–	–
Derivatives without hedging relationships	713	713	aFVtPL	713	49	503	161
Derivatives with hedging relationships	45	45	n.a.	45	–	45	–
Other liabilities6	3,360	1,781	AmC	1,781	–	–	–
Total liabilities	22,303	20,724		21,539	49	548	161

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Carrying amounts and fair values of financial instruments as of December 31, 2010 (million €)
1 The difference between carrying amount and fair value results from participations measured at acquisition cost, for which the fair value could not be reliably determined (2011: €553 million, 2010: €556 million). 2 Afs: Available-for-sale; LaR: Loans and receivables; aFVtPL: at-fair-value-through-profit-or-loss; AmC: Amortized Cost; a more detailed description of the categories can be found in Note 1. 3 Determination of the fair value based on quoted, unadjusted prices on active markets. 4 Determination of the fair value based on parameters for which directly or indirectly quoted prices on active markets are available. 5 Determination of the fair value based on parameters for which there is no observable market data. 6 Not including separately shown derivatives as well as receivables and liabilities from finance leases; the categorization for the 2010 fiscal year has been adjusted for purposes of comparison.
	Carrying amount	Total carrying amount within scope of application of IFRS 7	Valuation category in accordance with IAS 392	Fair value	Thereof fair value level 13	Thereof fair value level 24	Thereof fair value level 35
Participations1	1,672	1,672	Afs	1,116	1,116	–	–
Receivables from finance leases	18	18	n.a.	18	–	–	–
Loans	244	244	LaR	244	–	–	–
Accounts receivable, trade	10,167	10,167	LaR	10,167	–	–	–
Derivatives without hedging relationships	396	396	aFVtPL	396	34	362	–
Derivatives with hedging relationships	28	28	n.a.	28	–	28	–
Other receivables and miscellaneous assets6	4,094	1,218	LaR	1,218	–	–	–
Securities	53	53	Afs	53	53	–	–
Cash and cash equivalents	1,493	1,493	Afs	1,493	1,493	–	–
Total assets	18,165	15,289		14,733	2,696	390	–
Bonds	11,520	11,520	AmC	12,476	–	–	–
Commercial paper	1,384	1,384	AmC	1,384	–	–	–
Liabilities to credit institutions	2,135	2,135	AmC	2,135	–	–	–
Liabilities from finance leases	59	59	n.a.	59	–	–	–
Accounts payable, trade	4,738	4,738	AmC	4,738	–	–	–
Derivatives without hedging relationships	424	424	aFVtPL	424	58	366	–
Derivatives with hedging relationships	26	26	n.a.	26	–	26	–
Other liabilities6	3,194	1,589	AmC	1,589	–	–	–
Total liabilities	23,480	21,875		22,831	58	392	–

The gains and losses from the valuation of securities and participations recognized in the equity of the shareholders of BASF SE are shown in the Consolidated statements of recognized income and expense

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Net gains and losses from financial instruments (million €)
	2011	2010
Loans and receivables	399	(320)
Thereof interest result	121	65
Available-for-sale financial assets	871	7
Thereof interest result	4	2
Liabilities measured at amortized cost	(822)	(910)
Thereof interest result	(556)	(603)
Financial instruments at fair value through profit or loss	(193)	302

25.4 – Derivative instruments and hedge accounting

The use of derivative instruments

The Company is exposed to foreign currency, interest rate and commodity price risks during the normal course of business. In addition, publicly listed financial assets are also exposed to equity price risks. These risks are hedged through a centrally determined strategy employing derivative instruments. In addition, derivative instruments are used to replace primary financial instruments, such as fixed-interest securities. Hedging is only employed for underlying positions from the operating business, cash investments, financing and the net investment in a foreign operation as well as for planned sales and raw material purchases. The risks from the underlying transactions and the derivatives are constantly monitored. Where derivatives have a positive market value, the Company is exposed to credit risks in the event of nonperformance of their counterparts. This credit risk is minimized by trading contracts exclusively with creditworthy banks and partners within predefined credit limits.

To ensure effective risk management, risk positions are centralized at BASF SE and certain Group companies. Contracting and execution of derivative financial instruments for hedging purposes is conducted according to internal guidelines, and is subject to strict control mechanisms.

The fair values of derivative financial instruments are calculated using valuation models which use input parameters observable on the market. Exceptions to this are some commodity derivatives, whose valuation is based directly on market prices and the options agreed upon with INEOS, whose fair values are determined based on parameters not observable on the market.

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Fair value of derivative instruments (million €)
	2011	2010
Foreign currency forward contracts	(264)	(151)
Foreign currency options	64	109
Foreign currency derivatives	(200)	(42)
Thereof designated hedging instrument as defined by IAS 39 (Hedge accounting)	6	3
Interest rate swaps	48	52
Thereof designated hedging instrument as defined by IAS 39 (Hedge accounting)	9	–
Combined interest and cross currency swaps	34	60
Interest derivatives	82	112
Options for disposal of participations	(147)	–
Commodity derivatives	68	(96)
Thereof designated hedging instrument as defined by IAS 39 (Hedge accounting)	(25)	(1)
Derivative financial instruments	(197)	(26)

Cash flow hedge accounting

Some of the planned purchases of naphtha are hedged using swaps and options on oil and oil products. Some of these hedges were shown in the Consolidated Financial Statements of the BASF Group by means of cash flow hedge accounting, where gains and losses from hedges were initially recognized directly in equity. Gains and losses from hedges are included in cost of sales at the point in time at which the hedged item is recognized in the consolidated statements of income.

Cash flow hedge accounting is applied in the Natural Gas Trading business sector for swaps on crude oil concluded in order to hedge price risks from purchase contracts for natural gas. The purchase contracts have variable prices and the price formula is coupled with the oil price.

Furthermore, cash flow hedge accounting was used to a minor extent for natural gas purchases in 2011.

The majority of the planned transactions and their effect on earnings occur in the year following the balance sheet date. A small part relates to the period between 2013 and 2014. In 2011, effective changes in the fair value of hedging instruments of minus €26 million were recognized in the equity of the shareholders of BASF SE. In 2010, the effective changes in values across all subsidiaries balanced each other out in the equity of the shareholders of BASF SE. In 2011, €5 million was derecognized from the equity of the shareholders of BASF SE and recorded as a gain in cost of sales. In 2010, there was a gain of €11 million in this regard. The ineffective part in the change in value of the hedge was minus €4 million in 2011 (2010: €12 million). This amount was reported in the income statement in costs of sales, in other operating income and in other operating expenses.

In 2004 and 2005, fair value changes from forward interest swaps entered into to hedge interest-rate risks from the refinancing of an expiring bond were recognized directly in equity using cash flow hedge accounting. The hedge was closed in 2005 as a new bond was issued to refinance the expiring bond. The new bond is due in 2012. Over the maturity of the bond, the changes in fair value of interest rate swaps recognized in the equity are reclassified proportionally from equity of the shareholders of BASF SE to the consolidated statements of income. In both 2011 and 2010, €8 million was derecognized from other comprehensive income and recorded as interest expense.

Cash flow hedge accounting is applied for the effects of foreign currency derivatives contained in supply contracts. The impact on earnings from the underlying transactions occurs primarily in 2012, with a smaller impact in the period between 2013 and 2015. In 2011, the effective change in values of the hedges was €10 million (2010: minus €12 million), which was recognized in the equity of the shareholders of BASF SE. In 2011, the amounts derecognized from the equity of the shareholders of BASF SE reduced costs of sales by €16 million. In 2010 there was an increase of €16 million in this regard. There were no ineffective parts.

Fair value hedge accounting

In 2011, in order to hedge interest rate risks, BASF converted the 3.75% fixed-interest rate euro bond of BASF SE (nominal volume €1,350 million, maturity 2012) into a variable rate bond using interest rate swaps. The bond and the derivatives were designated as a fair value hedge.

In 2011, a gain of €8 million resulted from the hedging instrument. The book value of the bond was adjusted for €8 million of interest rate-related losses.

Hedge of a net investment in a foreign operation

The currency translation risk from an investment in a foreign operation is hedged using foreign currency forward contracts. The hedge was completely effective and increased the equity of the shareholders of BASF SE by €5 million (2010: a reduction of €7 million).