27 – Supplementary information on financial instruments

27.1 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. Long and short positions in the same currency are offset against each other.

The sensitivity analysis is conducted by simulating a 10% appreciation of the respective functional currency against the other currencies. The effect on BASF’s income before taxes and minority interests would have been minus €300 million as of December 31, 2016, and minus €340 million as of December 31, 2015. The effect from the items designated under hedge accounting would have increased the equity of the shareholders of BASF SE before income taxes by €24 million as of December 31, 2016 (2015: increase of €52 million). This only refers to transactions in U.S. dollars. The foreign currency risk exposure amounted to €2,113 million as of December 31, 2016 and €2,201 million as of December 31, 2015.

Exposure and sensitivity by currency (million €)

 

 

December 31, 2016

December 31, 2015

 

 

Exposure

Sensitivity

Exposure

Sensitivity

USD

 

1,849

(241)

2,057

(260)

Other

 

264

(35)

144

(28)

Total

 

2,113

(276)

2,201

(288)

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 €2,447 million (2015: minus €2,786 million). An increase in all relevant interest rates by one percentage point would have raised income before taxes and minority interests by €1 million as of December 31, 2016, and raised income before taxes and minority interests by €7 million as of December 31, 2015. The effect from the items designated under hedge accounting would have increased the equity of the shareholders of BASF SE before income taxes by €16 million as of December 31, 2016 (2015: increase of €20 million).

Carrying amount of nonderivative interest-bearing financial instruments (million €)

 

 

December 31, 2016

December 31, 2015

 

 

Fixed
interest rate

Variable
interest rate

Fixed
interest rate

Variable
interest rate

Loans

 

208

610

258

744

Securities

 

105

568

69

58

Financial indebtedness

 

12,564

3,748

11,114

4,083

Nominal and fair values of interest rate swaps and combined interest and cross-currency swaps (million €)

 

 

December 31, 2016

December 31, 2015

 

 

Nominal value

Fair value

Nominal value

Fair value

Interest rate swaps

 

1,700

(27)

1,900

(31)

Thereof payer swaps

 

1,700

(27)

1,900

(31)

Combined interest and cross-currency swaps

 

2,745

45

2,047

315

Thereof fixed rate

 

2,476

121

1,856

297

Commodity price risks: Some of BASF’s divisions are exposed to strong fluctuations in raw material prices. These result primarily from raw materials (for example, naphtha, propylene, benzene, lauric oils, cyclohexane, methanol, natural gas, butadiene, LPG condensate and ammonia) as well as from 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 used commodity derivatives, primarily swaps on oil products, up to the completion of the asset swap with Gazprom in 2015. 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. This is mainly done using forward contracts which 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 sometimes 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 can 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 using forward contracts. The goal of these transactions is to benefit from market price differences. These deals are settled by physical delivery. As of December 31, 2016 as well as of December 31, 2015, there were no deals outstanding.

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. 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. Besides value at risk, BASF sets volume-based limits as well as exposure and stop-loss limits.

Exposure to commodity derivatives (million €)

 

 

December 31, 2016

December 31, 2015

 

 

Exposure

Value at Risk

Exposure

Value at Risk

Crude oil, oil products and natural gas

 

6

1

58

2

Precious metals

 

5

1

23

1

Emission certificates

 

10

1

Agricultural commodities

 

(40)

0

0

0

Total

 

(29)

2

91

4

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 other financial obligations subject to default risk 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.

27.2 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 due within one year. Therefore, the carrying amount of trade accounts payable equals the sum of future cash flows.

Maturities of contractual cash flows from financial liabilities as of December 31, 2016 (million €)

 

 

Bonds and other liabilities to the capital market

Liabilities
to credit
institutions

Liabilities resulting from derivative financial instruments

Miscella­neous liabilities

Total

2017

 

2,687

1,356

561

1,097

5,701

2018

 

2,025

128

15

88

2,256

2019

 

936

1,368

11

47

2,362

2020

 

1,475

10

13

53

1,551

2021

 

1,163

5

81

1,249

2022 and thereafter

 

7,269

4

60

305

7,638

Total

 

15,555

2,871

660

1,671

20,757

Maturities of contractual cash flows from financial liabilities as of December 31, 2015 (million €)

 

 

Bonds and other liabilities to the capital market

Liabilities
to credit
institutions

Liabilities resulting from derivative financial instruments

Miscella­neous liabilities

Total

2016

 

2,979

1,414

339

1,258

5,990

2017

 

1,738

145

8

47

1,938

2018

 

2,001

119

13

28

2,161

2019

 

910

1,351

8

18

2,287

2020

 

449

3

14

14

480

2021 and thereafter

 

6,497

8

43

315

6,863

Total

 

14,574

3,040

425

1,680

19,719

27.3 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. Shareholdings 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 under other financial assets.

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.

Carrying amounts and fair values of financial instruments as of December 31, 2016 (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

1

The difference between carrying amount and fair value results from shareholdings measured at acquisition cost, for which the fair value could not be reliably determined (2016: €468 million; 2015: €420 million).

2

Afs: available-for-sale (category: available-for-sale financial assets); LaR: loans and receivables (category: loans and receivables); aFVtPL: at-fair-value-through-profit-or-loss (category: financial assets and liabilities at fair value recognized in the income statement); AmC: amortized cost (category: financial liabilities which are not derivatives); Htm: Held-to-maturity (category: financial assets held to maturity); 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

Shareholdings1

 

468

468

Afs

Receivables from finance leases

 

34

34

n.a.

34

Accounts receivable, trade

 

10,952

10,952

LaR

10,952

Derivatives – no hedge accounting

 

346

346

aFVtPL

346

14

332

Derivatives – with hedge accounting

 

172

172

n.a.

172

172

Other receivables and other assets6

 

3,736

1,370

LaR

1,370

Securities

 

672

672

Afs

672

672

Securities

 

1

1

Htm

Cash and cash equivalents

 

1,375

1,375

LaR

1,375

1,375

Total assets

 

17,756

15,390

 

14,921

2,061

504

Bonds

 

12,424

12,424

AmC

13,144

Commercial paper

 

1,033

1,033

AmC

1,033

Liabilities to credit institutions

 

2,855

2,855

AmC

2,855

Liabilities from finance leases

 

106

106

n.a.

106

Accounts payable, trade

 

4,610

4,610

AmC

4,610

Derivatives – no hedge accounting

 

623

623

aFVtPL

623

0

623

Derivatives – with hedge accounting

 

26

26

n.a.

26

26

Other liabilities6

 

2,968

1,367

AmC

1,367

Total liabilities

 

24,645

23,044

 

23,764

0

649

Carrying amounts and fair values of financial instruments as of December 31, 2015 (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

1

The difference between carrying amount and fair value results from shareholdings measured at acquisition cost, for which the fair value could not be reliably determined (2016: €468 million; 2015: €420 million).

2

Afs: available-for-sale (category: available-for-sale financial assets); LaR: loans and receivables (category: loans and receivables); aFVtPL: at-fair-value-through-profit-or-loss (category: financial assets and liabilities at fair value recognized in the income statement); AmC: amortized cost (category: financial liabilities which are not derivatives); Htm: Held-to-maturity (category: financial assets held to maturity); 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

Shareholdings1

 

420

420

Afs

0

0

Receivables from finance leases

 

41

41

n.a.

41

Accounts receivable, trade

 

9,516

9,516

LaR

9,516

Derivatives – no hedge accounting

 

650

650

aFVtPL

650

42

608

Derivatives – with hedge accounting

 

208

208

n.a.

208

208

Other receivables and other assets6

 

3,916

1,508

LaR

1,508

Securities

 

127

127

Afs

127

127

Securities

 

Htm

Cash and cash equivalents

 

2,241

2,241

LaR

2,241

2,241

Total assets

 

17,119

14,711

 

14,291

2,410

816

Bonds

 

10,487

10,487

AmC

11,109

Commercial paper

 

1,714

1,714

AmC

1,714

Liabilities to credit institutions

 

2,996

2,996

AmC

2,996

Liabilities from finance leases

 

82

82

n.a.

82

Accounts payable, trade

 

4,020

4,020

AmC

4,020

Derivatives – no hedge accounting

 

334

334

aFVtPL

334

22

312

Derivatives – with hedge accounting

 

29

29

n.a.

29

29

Other liabilities6

 

2,944

1,371

AmC

1,371

Total liabilities

 

22,606

21,033

 

21,655

22

341

Offsetting of financial assets and financial liabilities as of December 31, 2016 (million €)

 

 

Amounts which can be offset

Amounts which cannot be offset

 

 

 

Gross amount

Amount offset

Net amount

Due to global netting agreements

Relating to financial collateral

Potential net amount

Derivatives with positive fair values

 

491

(46)

445

(101)

(124)

220

Derivatives with negative fair values

 

515

(46)

469

(101)

(47)

321

Offsetting of financial assets and financial liabilities as of December 31, 2015 (million €)

 

 

Amounts which can be offset

Amounts which cannot be offset

 

 

 

Gross amount

Amount offset

Net amount

Due to global netting agreements

Relating to financial collateral

Potential net amount

Derivatives with positive fair values

 

710

(22)

688

(134)

(296)

258

Derivatives with negative fair values

 

348

(22)

326

(134)

(7)

185

The table “Offsetting of financial assets and financial liabilities” shows the extent to which financial assets and financial liabilities are offset in the balance sheet, as well as potential effects from the offsetting of instruments subject to a legally enforceable global netting agreement or similar agreement. For positive fair values of combined interest and cross-currency swaps, the respective counterparties provided cash collaterals in corresponding amounts to the outstanding fair values.

Deviations from the derivatives with positive fair values and derivatives with negative fair values reported in other receivables and other liabilities at the end of 2016 and 2015 arose from derivatives not subject to any netting agreements as well as embedded derivatives and are therefore not included in the table above.

Net gains and losses from financial instruments comprise the results of valuations, the amortization of discounts, the recognition and reversal of impairments, results from the translation of foreign currencies as well as interest, dividends and all other effects on the earnings resulting from financial instruments. The line 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 and expenses from write-downs/write-ups, interest, dividends and the reclassification of valuation effects from equity on the sale of the securities and shareholdings.

Net gains and losses from financial instruments (million €)

 

 

2016

2015

Loans and receivables

 

(166)

(31)

Thereof interest result

 

74

105

Available-for-sale financial assets

 

22

10

Thereof interest result

 

2

0

Financial liabilities measured at amortized cost

 

(124)

(1,127)

Thereof interest result

 

(390)

(375)

Financial instruments at fair value through profit or loss

 

(558)

595

The decrease in net losses from financial liabilities measured at amortized cost primarily related to currency translation of financing-related liabilities denominated in foreign currencies, which resulted in a translation gain in 2016 and a translation loss in 2015. Countering this was a net loss in 2016 from financial instruments measured at fair value through profit or loss. This development is primarily due to realized and unrealized results from derivatives to hedge the liabilities previously stated.

27.4 Derivative instruments and hedge accounting

The use of derivative instruments

BASF is exposed to foreign-currency, interest-rate and commodity-price risks during the normal course of business. These risks are hedged through a centrally determined strategy employing derivative instruments. Hedging is only employed for underlying items from the operating business, cash investments, and financing as well as for planned sales, raw material purchases and capital measures. The risks from the underlying transactions and the derivatives are constantly monitored. Where derivatives have a positive market value, BASF is exposed to credit risks from derivative transactions in the event of nonperformance of the other party. To minimize the default risk on derivatives with positive market values, transactions are exclusively conducted with creditworthy banks and partners and are subject to predefined credit limits.

To ensure effective risk management, risk positions are centralized at BASF SE and certain Group companies. The contracting and execution of derivative financial instruments for hedging purposes are conducted according to internal guidelines, and 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.

Fair value of derivative instruments (million €)

 

 

December 31,
2016

December 31,
2015

Foreign currency forward contracts

 

(163)

56

Foreign currency options

 

15

53

Foreign currency derivatives

 

(148)

109

Thereof designated hedging instruments as defined by IAS 39 (hedge accounting)

 

3

8

Interest rate swaps

 

(27)

(31)

Thereof designated hedging instruments as defined by IAS 39 (hedge accounting)

 

(21)

(27)

Combined interest and cross-currency swaps

 

45

315

Thereof designated hedging instruments as defined by IAS 39 (hedge accounting)

 

163

197

Interest derivatives

 

18

284

Commodity derivatives

 

(1)

102

Thereof designated hedging instruments as defined by IAS 39 (hedge accounting)

 

1

1

Derivative financial instruments

 

(131)

495

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 statement of income. Unlike the previous year, no hedging instruments were designated in 2016.

In the previous year up to the completion of the asset swap with Gazprom, cash flow hedge accounting was applied in the Natural Gas Trading business sector for crude oil swaps concluded in order to hedge price risks from purchase and sales contracts for natural gas. These contracts had variable prices and the price formula was coupled with the oil price.

Cash flow hedge accounting continued to be applied to a minor extent for natural gas purchases.

The planned transactions and their effect on earnings occur in the year following the balance sheet date. In 2016, effective changes in the fair value of hedging instruments of €1 million (2015: €35 million) was recognized in the equity of the shareholders of BASF SE. In 2016, effective changes in the fair value of hedging instruments of €1 million were derecognized from the equity of shareholders of BASF SE and recognized in other operating income. In 2015, this resulted in an expense of €174 million. The ineffective part in the change in value of the hedge amounted to minus €1 million in 2016 and minus €2 million in 2015. This amount was reported in the income statement in other operating expenses and in the previous year in cost of sales as well as in other operating income and in other operating expenses.

BASF applied cash flow hedge accounting for derivatives used to hedge foreign currency risks from gas purchase and sales contracts to the completion of the asset swap with Gazprom in 2015. In 2015 up to the completion date, the effective change in values of the hedges was minus €150 million, which was recognized in the equity of the shareholders of BASF SE. There were no ineffective parts. The amounts derecognized from the equity of shareholders of BASF SE increased cost of sales by €161 million to the completion date in 2015.

BASF also uses cash flow hedge accounting for some foreign currency derivatives to hedge planned sales denominated in U.S. dollars. The impact on earnings from the underlying transactions will occur in 2017. In 2016, the effective change in values of the hedges was €9 million (2015: minus €23 million), which was recognized in the equity of the shareholders of BASF SE. A total of €11 million (2015: expense of €29 million) was derecognized from the equity of shareholders of BASF SE and was recognized in income from foreign currency and hedging transactions. The hedge was entirely effective.

To hedge foreign currency risk which existed for a part of the US dollar-denominated purchase price for the acquisition of Chemetall, BASF used options and foreign currency forward contracts in 2016. These were designated as hedging instruments and led to effective changes in the amount of €97 million, which was recognized in the equity of the shareholders of BASF SE. Upon completion of the transaction in December 2016, this amount was derecognized from the equity of the shareholders of BASF SE reducing the purchase price accordingly and along with that the resulting goodwill arising from the transaction. The ineffective part of the fair value changes of the hedging instruments amounted to minus €10 million and was recognized in other operating expenses.

The interest rate risk of the floating rate notes issued by BASF SE in 2014 (€300 million variable-rate bond 2014/2017) as well as the floating rate notes issued in 2013 were hedged using interest rate swaps. The bonds and the interest rate swaps were designated in a hedging relationship. In 2016, the effective changes in the fair value of the hedging instruments amounting to €6 million (2015: €3 million) were recognized in the equity of the shareholders of BASF SE. There were no ineffective parts.

Furthermore, BASF SE’s fixed-rate U.S. private placement of $1.25 billion, issued in 2013, was converted into euros using currency swaps. This hedge was designated as a cash flow hedge. The hedge was entirely effective. In 2016, this resulted in changes in fair value of minus €33 million, which were recognized in the equity of the shareholders of BASF SE (2015: €157 million). In 2016, €38 million was derecognized from other comprehensive income and recorded as income in the financial result (2015: €119 million income in financial result).