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March 1, 2012
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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)

Due to the use of options to hedge currency risks, the sensitivity analysis is not a linear function of the assumed changes in exchange rates.

Interest rate risks: Interest rate risks result from changes in prevailing market interest rates, which can cause a change in the fair value of fixed-rate instruments, and changes in the interest payments of variable-rate instruments. To hedge these risks, interest rate swaps and combined interest rate and currency derivatives are used. While these risks are relevant to the financing activities of BASF, they are not of material significance for BASF’s operating activities.

The variable interest exposure, which also includes fixed-rate bonds set to mature in the following year, amounted to minus €4,070 million at the end of 2011, compared with minus €3,658 million at the end of 2010. An increase in all relevant interest rates by one percentage point would have lowered income before taxes and minority interests by €10 million as of December 31, 2011 and €23 million as of December 31, 2010. The sensitivity of the equity of the shareholders of BASF SE to changes in interest rates is not material.

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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)

Equity price risks: BASF holds shares in listed companies and mutual stock funds as a vehicle for investing liquid funds and, to a limited extent, with a view to taking strategic stakes in companies. They are included under participations, long-term and short-term securities, and are classified as available-for-sale in the BASF Group. A decline in all relevant share prices by 10% would have lowered equity by €6 million on December 31, 2011 (December 31, 2010: €117 million), before taking income taxes into consideration. The significant decline in sensitivity is due to the sale of the shares in K+S Aktiengesellschaft.

Options for disposal of participations: BASF and INEOS have agreed upon options for BASF’s withdrawal from the joint venture Styrolution. These options are classified as derivatives according to IAS 39. A significant risk variable which is decisive for the valuation of both options is the value of the company. An additional negative impact on earnings of €26 million would have resulted had the value of Styrolution been 10% higher as of December 31, 2011. Had the company value been 10% lower as of December 31, 2011, increased earnings of €33 million would have resulted.

Commodity price risks: Some of BASF’s divisions are exposed to strong fluctuations in raw material prices. These result primarily from the following raw materials: naphtha, propylene, benzene, lauric oils, titanium dioxide, cyclohexane, methanol, natural gas, butadiene, LPG condensate, ammonia and precious metals. BASF takes the following measures to reduce price risks associated with the purchase of raw materials:

  • BASF uses commodity derivatives to hedge the risks from the volatility of raw material prices. These are primarily options and swaps on crude oil, oil products and natural gas.
  • In order to secure margins, the Oil & Gas segment uses commodity derivatives, primarily swaps on oil products, in the Natural Gas Trading business sector. Risks to margins arise in volatile markets when purchase and sales contracts are priced differently.
  • The Catalysts division enters into both short-term and long-term purchase contracts with precious metal producers. It also buys precious metals on spot markets from a variety of business partners. The price risk from precious metals purchased to be sold on to third parties, or for use in the production of catalysts, is hedged using derivative instruments. Forward contracts are primarily used and they are settled by either entering into offsetting contracts or by delivering the precious metals.
  • In the Crop Protection division, the sales prices of products are partially coupled to the price of certain agricultural commodities. To hedge the resulting risks, derivatives on agricultural commodities are concluded.

In addition, BASF holds limited unhedged precious metal and oil product positions, which could also include derivatives, for trading on its own account. The value of these positions is exposed to market price volatility and is subject to constant monitoring.

In connection with CO2 emissions trading, various types of CO2 certificates are purchased and sold forward. The goal of these transactions is to benefit from market price differences. These deals are settled by physical delivery.

By holding commodity derivatives and precious metal trading positions, BASF is exposed to price risks. The valuation of commodity derivatives and precious metal trading positions at fair value means that adverse changes in market prices could negatively affect the earnings and equity of BASF.

BASF performs value-at-risk analyses for all commodity derivatives and precious metals trading positions. Using the value-at-risk analysis, we continually quantify market risk and forecast the maximum possible loss within a given confidence interval over a defined period. The value-at-risk calculation is based on a confidence interval of 95% and a holding period of one day. A confidence interval of 95% means that there is a 95% probability that the maximum loss does not exceed the value at risk within a one-day period. The value-at-risk calculation for precious metals is based on a confidence interval of 99%. BASF uses the variance-covariance approach.

BASF uses value-at-risk as a supplement to other risk management tools and also sets volume-based, exposure and stop loss limits.

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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

The exposure corresponds to the net amount of all long and short positions of the respective commodity category.

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.

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.

The carrying amount of financial indebtedness amounted to €13,004 million on December 31, 2011 (December 31, 2010: €15,039 million). The fair value of financial indebtedness amounted to €13,819 million at the end of 2011 (end of 2010: €15,995 million). The fair value of financial indebtedness is determined on the basis of interbank interest rates. The difference between carrying amounts and fair values results primarily from changes in market interest rates.

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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

Derivatives whose fair value is calculated using parameters not observable on the market (level 3) only include the options agreed upon with INEOS regarding the sale of BASF’s share in Styrolution Holding GmbH. The sale and purchase options are shown on the balance sheet under other long-term receivables or other long-term liabilities. As of October 1, 2011, the market value of these options amounted to minus €139 million and to minus €147 million as of December 31, 2011. The resulting difference of €8 million was recorded in the financial result.

Net gains and losses of financial instruments comprise the results of valuations, the amortization of discounts, the recognition and derecognition of impairment losses, results from the translation of foreign currencies as well as interest, dividends and all other effects on the earnings resulting from financial instruments. The item “financial instruments at fair value through profit or loss” contains only those gains and losses from instruments which are not designated as hedging instruments as defined by IAS 39. Net gains or net losses from available-for-sale financial assets contain income from write-downs/write-ups, interest, dividends and the reclassification of valuation effects from equity on the sale of the securities and participations.

The net loss from loans and receivables, and net gains from financial liabilities measured at amortized cost relate primarily to results from the translation of foreign currencies.

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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).

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