1.2 – Changes in accounting principles
Accounting policies applied for the first time in 2016
Amendments to IAS 1 – Disclosure Initiative
On December 18, 2014, the IASB issued amendments made to IAS 1. The amendments pertain to various disclosure requirements. It is made clear that information needs to be disclosed in the notes only if this is material for the company. This explicitly applies if a standard calls for a list of minimum disclosures. Explanations are moreover provided on the aggregation and disaggregation of line items in the balance sheet and statement of comprehensive income. Furthermore, the revised standard clariﬁes how an entity’s share of the other comprehensive income of equity-accounted companies is to be presented in the statement of comprehensive income. The changes are effective for reporting periods beginning on or after January 1, 2016. An endorsement by the European Union was issued on December 19, 2015. Due to the recent revision of IAS 1, the contributions of companies accounted for using the equity method are now shown separately in the Statement of Comprehensive Income. In addition, noncontrolling interests have been distributed among the subitems under the separate “minority interests” column.
Amendments to IAS 16 and IAS 38 – Clariﬁcation of Acceptable Methods of Depreciation and Amortization
The IASB issued amendments to IAS 16 and IAS 38 on May 12, 2014. These revisions provide further guidance on determining an acceptable method of depreciation and amortization. Revenue-based methods are not permissible for property, plant and equipment and are only permissible for intangible assets in speciﬁc exceptional cases (rebuttable presumption of inappropriateness). The changes are effective for reporting periods beginning on or after January 1, 2016. The European Union’s endorsement was issued on December 3, 2015. The amendments did not have a material effect on BASF.
Amendments to IAS 19 – Employee Contributions to Deﬁned Beneﬁt Plans
The IASB issued amendments to IAS 19 on November 21, 2013. The amendments clarify requirements dealing with the allocation to service periods of employee or third-party contributions in cases where these are linked to the service period. Furthermore, practical expedients were made for cases where contributions are independent from the number of service years. The European Union endorsed the changes on January 9, 2015. In a deviation from the IASB’s effective date (reporting periods beginning on or after July 1, 2014), IFRS-based ﬁnancial statements in the European Union must apply the amendments for reporting periods beginning on or after February 1, 2015. The application of the amendments did not materially affect BASF.
Amendments to IFRS 11 – Accounting for Acquisitions of Interests in Joint Operations
The IASB issued amendments to IFRS 11 on May 6, 2014. IFRS 11 includes regulations on the recognition of assets and liabilities and gains or losses of joint ventures and joint operations. Whereas joint ventures are accounted for using the equity method, joint operations, according to IFRS 11, are recognized in a similar fashion to proportional consolidation. With the amendment to IFRS 11, IASB regulates the accounting for the acquisition of shares in a joint operation, which constitutes a business according to IFRS 3 – Business Combinations. In such cases, the acquirer shall apply the principles of accounting for business combinations according to IFRS 3. Furthermore, the disclosure requirements in IFRS 3 also apply in such cases. The amendments are effective for reporting periods beginning on or after January 1, 2016. An endorsement by the European Union was issued on November 25, 2015. BASF did not acquire shares in a joint operation in 2016.
IFRS Annual Improvements Cycle 2010–2012
Under its Annual Improvement Project, the IASB issued amendments to several standards on December 12, 2013. The affected standards are IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38. The amendments address details of the recognition, measurement and disclosure of business transactions or serve to standardize terminology. The European Union endorsed the changes on January 9, 2015. In a deviation from the IASB’s effective date (reporting periods beginning on or after July 1, 2014), IFRS-based ﬁnancial statements in the European Union must apply the amendments for reporting periods beginning on or after February 1, 2015. The application of the amendments did not materially affect BASF.
IFRS Annual Improvements Cycle 2012–2014
Under its Annual Improvement Project, the IASB issued amendments to several standards on September 25, 2014. The affected standards are IAS 19, IAS 34, IFRS 5 and IFRS 7. The amendments address details of the recognition, measurement and disclosure of business transactions or serve to standardize terminology. The changes are effective for reporting periods beginning on or after January 1, 2016. An endorsement by the European Union was issued on December 16, 2015. The application of the amendments did not materially affect BASF.
IFRSs and IFRICs not yet to be considered
The effects on the BASF Group ﬁnancial statements of the IFRSs and IFRICs not yet in force or not yet endorsed by the European Union in 2016 were reviewed and are explained below.
IFRS 9 – Financial Instruments
On July 24, 2014, the IASB issued the ﬁnal version of IFRS 9, concluding the multiyear project to replace IAS 39 – Financial Instruments: Recognition and Measurement. IFRS 9 contains new requirements for the classiﬁcation and measurement of ﬁnancial instruments, fundamental changes regarding the accounting treatment of ﬁnancial asset impairments, and a reformed approach to hedge accounting. The new standard will be effective for reporting periods beginning on or after January 1, 2018. The European Union endorsed the standard in the fourth quarter of 2016.
IFRS 9 retains “amortized cost” and “fair value” as the criteria for measuring financial instruments. Whether ﬁnancial assets are measured at amortized cost or fair value will depend on two factors: the entity’s business model for managing the portfolio to which the ﬁnancial asset belongs and the contractual cash ﬂow characteristics of the ﬁnancial asset.
In the future, the recognition of ﬁnancial asset impairments is based on expected losses according to IFRS 9. The general approach adopts a three-stage model to assess the provisions for risks. The model requires different degrees of impairment based on the credit default risk of the counterparties. For certain ﬁnancial instruments, such as trade accounts receivable, operational simpliﬁcations for recognizing impairment losses apply.
The IFRS 9 regulations on hedge accounting aim for a closer alignment of hedge accounting with the entity’s risk management strategy.
The new requirements for classification and measurement could have an impact on the accounting treatment of other shareholdings. BASF currently measures almost all of these shareholdings at amortized cost, in line with IAS 39.46c. Because IFRS 9 does not contain any comparable regulations, BASF is currently reviewing what represents the best metric for estimating fair value on a case-by-case basis. BASF will determine on an instrument-by-instrument basis whether measurement will take place at fair value through other comprehensive income or at fair value through profit or loss.
As IFRS 9 introduces a cash flow condition that needs to be considered in classifying financial assets, it is possible that financial assets measured at amortized cost or at fair value through other comprehensive income as per IAS 39 may, in the future, need to be measured at fair value through profit or loss. BASF will conduct this analysis in 2017. Impacts may especially be observed for securities that are currently classified as available-for-sale financial assets and thus measured at fair value through other comprehensive income. Depending on the cash flow characteristics of these financial instruments, measurement at fair value through profit or loss may be required in the future.
Recognition of expected losses for trade accounts receivable will largely take place on the basis of internal and external customer ratings and the associated probability of default.
Furthermore, the new impairment model is also to be used for other financial instruments measured at amortized cost, such as bank balances, loan receivables and miscellaneous receivables to the extent that they represent financial instruments. As no group-wise individual valuation allowances are currently calculated for such financial assets, the introduction of IFRS 9 will probably mean an increase in the risk provision. This effect cannot yet be reliably quantified.
With regard to new hedge accounting regulations, BASF assumes that, in principle, all existing hedge accounting relationships may be continued under IFRS 9. It has not yet been fully determined how the accounting choices concerning the designation of derivatives, as introduced by IFRS 9, will be exercised.
BASF has not opted for early application of the new standard. At the moment, BASF assumes that the new regulations can be applied prospectively to a large extent. The difference in the impairment amount that will arise upon transition to IFRS 9 will be recognized in equity at the beginning of the business year of the first-time adoption of the standard. Exceptions to the prospective application are the regulations on accounting for the time value of options if only the intrinsic value is designated, and the analysis of the cash flow condition that generally pertains to the point in time of the first recognition of each financial instrument.
IFRS 15 – Revenues from Contracts with Customers
The IASB published the new standard on revenue recognition, IFRS 15, on May 28, 2014. The revised standard particularly aims to standardize existing regulations and thus improve transparency and the comparability of ﬁnancial information. The rules and deﬁnitions of IFRS 15 supersede the content of IAS 11, IAS 18, IFRIC 13. The new standard will be effective for reporting periods beginning on or after January 1, 2018. BASF does not plan to adopt the standard early. The European Union endorsed the standard in 2016.
The new standard does not differentiate between different types of contracts and services, but rather introduces uniform criteria for the timing of revenue recognition. According to IFRS 15, sales revenue is recognized when control of the agreed-upon goods or services and the beneﬁts obtainable from them are transferred to the customer. Sales revenue is measured as the amount the entity expects to receive in exchange for goods and services.
The new model for the determination of revenue recognition is based on ﬁve steps:
- Step 1: Identify the contract(s) with a customer
- Step 2: Identify the performance obligations in the contract
- Step 3: Determine the transaction price
- Step 4: Allocate the transaction price to the performance obligations in the contract
- Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
The new standard’s potential impact on BASF’s net assets, financial position and results of operations is being assessed. A Group-wide analysis was conducted to investigate the extent to which BASF is affected by the new standard.
First, the major types of contracts were identified at an operating division level and analyzed with regard to the changes in accounting under IFRS 15. Based on the results, the need for adjustment is currently being assessed.
Analysis of the contracts showed that contracts with customers almost exclusively contain one service component or a number of similar service components and that these must be fulfilled by a certain point in time. Furthermore, contracts with customers were identified that could lead, according to IFRS 15, to a shift in time of revenue recognition. These are mainly contracts with several contractual obligations and revenues from issuing licenses. In such cases, revenue recognition according to IFRS 15 will take place at both an earlier and later point in time than it had been previously. BASF assumes that fulfillment of the new standard’s requirements will necessitate the introduction of the balance sheet items “contractual asset” and “contractual liability” as well as more comprehensive quantitative and qualitative disclosures in the Notes to the Consolidated Financial Statements. The analyses showed no grounds to expect material impact on BASF’s results of operations or net assets.
BASF is currently planning to apply IFRS 15 for the first time on January 1, 2018, by adjusting equity in the amount of the cumulative effect (modified retroactive application).
IFRS 16 – Leases
The IASB published the new standard on leasing, IFRS 16, on January 13, 2016. The rules and deﬁnitions of IFRS 16 supersede the content of IAS 17, IFRIC 4, SIC 15 and SIC 27. The standard requires an accounting model for a lessee that recognizes all assets and liabilities from leasing agreements in the balance sheet, unless the term is twelve months or less or the underlying asset is of low value. As for the lessor, the new standard substantially carries forward the lessor accounting requirements of IAS 17 – Leases. The new standard will be effective for reporting periods beginning on or after January 1, 2019. An endorsement by the European Union is still pending. BASF does not plan on early adoption and will likely recognize the cumulative adjustment effect in equity on January 1, 2019.
Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
The IASB issued amendments to IFRS 10 and IAS 28 on September 11, 2014. The amendments address a known inconsistency between the requirements of IFRS 10 and IAS 28 (2011) in the case of the sale of an asset to an associated company or a joint venture or the contribution of an asset to an associated company or a joint venture. According to IFRS 10, if the disposal of a subsidiary by a parent company results in a loss of control, it recognizes the gain or loss on the sale of the subsidiary in the full amount in the income statement. In contrast, the currently applicable IAS 28.28 requires that a gain on sales transactions between an investor and an investment accounted for using the equity method – whether it be an associated company or joint venture – is recognized only to the extent of the investor’s interests in the associated company or joint venture. In the future, the entire gain or loss arising from a transaction shall only be recognized when the assets sold or contributed constitute a business combination according to IFRS 3. This applies regardless of whether the transaction is a share or asset deal. Only a pro rata recognition of gain is permissible if the assets do not constitute a business combination. IASB has postponed the effective date of the changes indeﬁnitely.
IASB issued further amendments to standards and interpretations whose application is not yet mandatory and whose application also requires the endorsement of E.U. law. These amendments are unlikely to have a material impact on the reporting of BASF SE.
Amendments to IAS 7 – Statement of Cash Flows: The amendments pursue the objective that entities provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendments are – subject to E.U. endorsement – to be applied for the first time in the first reporting period of a business year beginning on or after January 1, 2017, although early adoption is permissible.
Amendments to IAS 12 – Income Taxes: The amendments to IAS 12 particularly aim to clarify how to account for deferred tax assets for unrealized losses related to assets measured at fair value, which are currently handled variously in practice. The amendments are – subject to E.U. endorsement – to be applied for the first time in the first reporting period of a business year beginning on or after January 1, 2017, although early adoption is permissible.
Amendments to IFRS 2 – Classification and Measurement of Share-Based Payment Transactions: The amendments involve a number of individual issues pertaining to the accounting of cash-settled share-based payment transactions. IFRS 2 now contains requirements on determining the fair value of obligations resulting from share-based payment transactions. The amendments are – pending E.U. endorsement – to be applied to compensation granted or changed in business years beginning on or after January 1, 2018. Early adoption is permissible.
Amendments to IFRS 4 – Insurance Contracts: The amendments aim to minimize the effects of various first-time application dates of IFRS 9, especially for entities with extensive insurance activities. The amendments are – pending E.U. endorsement – to be applied for the first time starting January 1, 2018.
Supplementary information on IFRS 15 – Revenues from Contracts with Customers: The amendments clarify various regulations in IFRS 15 and provide transition relief for the new standard. Beyond clarification, the changed standard also contains two additional practical expedients for reducing complexity and cost in the transfer to the new standard. These concern options for the presentation of contracts that are either concluded by the start of the earliest-presented period or that have been changed before the start of the earliest-presented period. The amendments are – pending E.U. endorsement – to be applied for the first time starting January 1, 2018.
Supplementary information on IFRIC 22 – Foreign Currency Transactions and Advance Consideration: IFRIC 22 addresses an application question for IAS 21 – The Effects of Changes in Foreign Exchange Rates. It clarifies the point in time for determining the exchange rate used to translate foreign-currency transactions containing advance payments that have been made or received. The date of the initial recognition of an asset or liability resulting from advance consideration is essential for determining the exchange rate for the underlying asset, income or expense. The interpretation is – pending E.U. endorsement – to be applied for the first time in the first reporting period of a business year beginning on or after January 1, 2018. Early adoption is permissible.
Annual Improvements to IFRSs (2014–2016): Three IFRSs were amended in the Annual Improvements to IFRSs (2014–2016). In IFRS 12, it was clarified that disclosures pursuant to IFRS 12 generally also apply to an entity’s interests in subsidiaries, joint ventures and associated companies that are classified as held for sale in accordance with IFRS 5, with the exception of the disclosures outlined in IFRS 12.B10–B16 ( Financial Information). In IAS 28, it was clarified that the election to measure an investment in an associated company or a joint venture held by an entity that is a venture capital organization or other qualifying entity, can be exercised on an investment-by-investment basis. The short-term exemptions in IFRS 1, Appendix E (IFRS 1.E3–E7) for first-time IFRS users were deleted. Pending E.U. endorsement, the amendments to IFRS 12 are to be applied for the first time in the first reporting period of a business year beginning on or after January 1, 2017. Early adoption is permissible.