✓ audited

26 – Supplementary information on financial instruments

26.1 – 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 €288 million as of December 31, 2012, and minus €243 million as of December 31, 2011. The effect from the items designated under hedge accounting would have increased the equity of the shareholders of BASF SE before income taxes by €89 million on December 31, 2012 (2011: a decrease of €5 million). This refers to transactions in U.S. dollars and British pounds. The currency exposure amounted to €1,848 million on December 31, 2012 (December 31, 2011: €1,574 million).

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Exposure and sensitivity by currency (million €)

 

Exposure 2012

Sensitivity 2012

Exposure 2011

Sensitivity 2011

U.S. dollar

1,540

(149)

1,706

(237)

Other

308

(50)

(132)

(11)

Total

1,848

(199)

1,574

(248)

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 €3,787 million as of December 31, 2012, compared with minus €4,070 million as of December 31, 2011. An increase in all relevant interest rates by one percentage point would have raised income before taxes and minority interests by €8 million as of December 31, 2012 and reduced income before taxes and minority interests by €10 million as of December 31, 2011. 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 €)

 

2012

 

2011

 

Fixed interest rate

Variable interest rate

 

Fixed interest rate

Variable interest rate

Loans

229

26

 

218

36

Securities

52

6

 

35

5

Financial indebtedness

10,743

2,612

 

11,012

1,992

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

 

2012

 

2011

 

Nominal
value

Fair
value

 

Nominal
value

Fair
value

Interest rate swaps

1,000

(41)

 

2,711

48

Thereof payer swaps

1,000

(41)

 

1,361

39

receiver swaps

 

1,350

9

Combined interest and cross currency swaps

797

94

 

722

34

Thereof fixed rate

797

94

 

722

34

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 €45 million would have resulted had the value of Styrolution been 10% higher as of December 31, 2012 (2011: €26 million). Had the company value been 10% lower as of December 31, 2012, increased earnings of €46 million would have resulted (2011: €33 million). Furthermore, in accordance with the valuation model, the value of the options is influenced by the multiples of the peer group as well as their volatility.

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. 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.
  • Furthermore, BASF utilizes electricity derivatives on a limited scale.

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, 2012, 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. 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 €)

 

2012

 

2011

 

Exposure

Value at Risk

 

Exposure

Value at Risk

Crude oil, oil products and natural gas

(212)

(2)

 

(259)

13

Precious metals

33

1

 

31

2

CO2 emission certificates

 

4

1

Electricity

24

.

 

Agricultural commodities

(148)

.

 

(209)

1

 

(303)

(1)

 

(433)

17

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.

26.2 – 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.

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Maturities of contractual cash flows from financial liabilities 2012 (million €)

Bonds and other
liabilities to the
capital market

Liabilities to credit institutions

Liabilities resulting from derivative financial instruments

Miscel-
laneous liabilities

Total

2013

3,127

1,585

182

919

5,813

2014

1,504

170

4

75

1,753

2015

2,323

1,145

2

21

3,491

2016

988

67

19

1,074

2017

896

44

1

17

958

2018 and thereafter

2,830

126

430

3,386

 

11,668

3,137

189

1,481

16,475

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Maturities of contractual cash flows from financial liabilities 2011 (million €)

Bonds and other
liabilities to the
capital market

Liabilities to credit institutions

Liabilities resulting from derivative financial instruments

Miscel-
laneous 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

26.3 – 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 under 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 both December 31, 2012 and December 31, 2011. They are included under the line item shares in other participations.

The carrying amount of financial indebtedness amounted to €13,355 million on December 31, 2012 (December 31, 2011: €13,004 million). The fair value of financial indebtedness amounted to €14,260 million at the end of 2012 (end of 2011: €13,819 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, 2012 (million €)

 

Carrying amount

Total carrying amount within scope of application of IFRS 7

Valuation category in accordance with IAS 39 2

Fair value

Thereof fair value level 1 3

Thereof fair value level 2 4

Thereof fair value level 3 5

Participations 1

590

590

Afs

1

1

Receivables from finance leases

21

21

n.a.

21

Loans

255

255

LaR

255

Accounts receivable, trade

10,138

10,138

LaR

10,138

Derivatives without hedging relationships

348

348

aFVtPL

348

11

336

1

Derivatives with hedging relationships

88

88

n.a.

88

88

Other receivables and miscellaneous assets 6

3,697

933

LaR

933

Securities

58

58

Afs

58

58

Cash and cash equivalents

1,777

1,777

LaR

1,777

1,777

Total assets

16,972

14,208

 

13,619

1,847

424

1

Bonds

9,106

9,106

AmC

10,011

Commercial paper

1,288

1,288

AmC

1,288

Liabilities to credit institutions

2,961

2,961

AmC

2,961

Liabilities from finance leases

73

73

n.a.

73

Accounts payable, trade

4,696

4,696

AmC

4,696

Derivatives without hedging relationships

370

370

aFVtPL

370

5

129

236

Derivatives with hedging relationships

51

51

n.a.

51

51

Other liabilities 6

2,984

1,585

AmC

1,585

Total liabilities

21,529

20,130

 

21,035

5

180

236

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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 39 2

Fair value

Thereof fair value level 1 3

Thereof fair value level 2 4

Thereof fair value level 3 5

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 (2012: €589 million; 2011: €553 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

Participations 1

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 assets 6

3,759

1,433

LaR

1,433

Securities

59

59

Afs

59

59

Cash and cash equivalents

2,048

2,048

LaR

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 liabilities 6

3,360

1,781

AmC

1,781

Total liabilities

22,303

20,724

 

21,539

49

548

161

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 December 31, 2012, the market value of these options amounted to minus €235 million and to minus €147 million as of December 31, 2011. The resulting difference of €88 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 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 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 losses from loans and receivables relate primarily to results from the translation of foreign currencies.

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Net gains and losses from financial instruments (million €)

 

2012

2011

Loans and receivables

(445)

399

Thereof interest result

87

121

Available-for-sale financial assets

1

871

Thereof interest result

2

4

Liabilities measured at amortized cost

(636)

(822)

Thereof interest result

(529)

(556)

Financial instruments at fair value through profit or loss

190

(193)

26.4 – 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 share 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. 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. 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 €)

 

2012

2011

Foreign currency forward contracts

99

(264)

Foreign currency options

78

64

Foreign currency derivatives

177

(200)

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

47

6

Interest rate swaps

(41)

48

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

9

Combined interest and cross currency swaps

94

34

Interest derivatives

53

82

Options for disposal of participations

(235)

(147)

Commodity derivatives

14

68

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

(10)

(25)

Derivative financial instruments

9

(197)

Thereof natural gas trading disposal group

(6)

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.

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. This hedging is attributable to the disposal group for the natural gas trading business.

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

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 2014 and 2015. In 2012, effective changes in the fair value of hedging instruments of minus €4 million (2011: minus €26 million) were recognized in the equity of the shareholders of BASF SE. In 2012, €16 million was derecognized from the equity of shareholders of BASF SE and recorded as an expense in cost of sales. In 2011, there was a gain of €5 million in this regard. The ineffective part in the change in value of the hedge amounted to less than €1 million in 2012 (2011: minus €4 million). This amount was reported in the income statement in cost of sales, in other operating income and in other operating expenses.

In 2004 and 2005, fair value changes from forward interest-rate 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 was due in 2012. Over the maturity of the bond, the changes in fair value of interest rate swaps recognized in the equity were reclassified proportionally from equity of the shareholders of BASF SE to the consolidated statement of income. In 2012, €3 million (2011: €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. These effects are attributable to the disposal group for the natural gas trading business. The impact on earnings from the underlying transactions occurs primarily in 2013, with a smaller impact in the period between 2014 and 2015. In 2012, the effective change in values of the hedges was minus €46 million (2011: €10 million), which was recognized in the equity of the shareholders of BASF SE. In 2012, the amounts derecognized from the equity of shareholders of BASF SE increased cost of sales by €49 million (2011: decrease of €16 million). There were no ineffective parts.

Since 2012, cash flow hedge accounting has also been used for some planned sales denominated in U.S. dollars. The impact on earnings from the underlying transactions will occur in 2013. In 2012, the effective change in values of the hedges was €25 million and was recognized in the equity of the shareholders of BASF SE. A total of €4 million was derecognized from the equity of shareholders of BASF SE and was booked in expenses from foreign currency transactions. There were no ineffective parts.

Fair value hedge accounting

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) into a variable-rate bond using interest rate swaps. The bond and the derivatives were designated as a fair value hedge. The bond and the hedge both matured in October 2012. In 2011, a gain of €8 million resulted from the hedging instrument. The book value of the bond was adjusted in 2011 for €8 million of interest rate-related losses. These effects were completely reversed in 2012.

Hedge of a net investment in a foreign operation

The currency translation risk from an investment in a foreign operation was hedged using foreign currency forward contracts. Due to a capital reduction during the reporting year, the hedging relationship was ended. Hedging resulted in a loss of €2 million, which was recorded in expenses from foreign currency transactions. In the previous year, the hedge was completely effective and increased the equity of the shareholders of BASF SE by €5 million.