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. 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 €286 million as of December 31, 2013, and minus €296 million as of December 31, 2012. The effect from the items designated under hedge accounting would have increased the equity of the shareholders of BASF SE before income taxes by €93 million on December 31, 2013 (2012: €89 million). This refers to transactions in U.S. dollars and British pounds. The currency exposure amounted to €1,905 million on December 31, 2013 (December 31, 2012: €1,910 million).

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Exposure and sensitivity by currency (million €)

 

Exposure 2013

Sensitivity 2013

Exposure 2012

Sensitivity 2012

U.S. dollar

1,231

(121)

1,602

(157)

Other

674

(72)

308

(50)

Total

1,905

(193)

1,910

(207)

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 €2,666 million as of December 31, 2013, compared with minus €3,340 million as of December 31, 2012. An increase in all relevant interest rates by one percentage point would have raised income before taxes and minority interests by €6 million as of December 31, 2013, and raised income before taxes and minority interests by €13 million as of December 31, 2012. The effect from the items designated under hedge accounting would have increased the equity of the shareholders of BASF SE before income taxes by €19 million on December 31, 2013. In 2012, the sensitivity of the equity of the shareholders of BASF SE to changes in interest rates was not material.

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

 

2013

 

2012

 

Fixed
interest rate

Variable
interest rate

 

Fixed
interest rate

Variable
interest rate

Loans

1,012

122

 

227

32

Securities

24

6

 

43

6

Financial indebtedness

12,004

2,403

 

10,718

2,080

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

 

2013

 

2012

 

Nominal value

Fair value

 

Nominal value

Fair value

Interest rate swaps

1,800

(20)

 

1,000

(41)

Thereof payer swaps

1,800

(20)

 

1,000

(41)

Combined interest and cross-currency swaps

1,667

30

 

797

94

Thereof fixed rate

1,667

30

 

797

94

Options for disposal of shareholdings: BASF and INEOS have agreed upon options for BASF’s withdrawal from the shareholding in 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 €31 million would have resulted had the value of Styrolution been 10% higher as of December 31, 2013 (2012: €45 million). Had the company value been 10% lower as of December 31, 2013, increased earnings of €35 million would have resulted (2012: €46 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 longterm 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. As of December 31, 2013, there were no deals outstanding.

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, 2013 as well 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 €)

 

2013

 

2012

 

Exposure

Value at Risk

 

Exposure

Value at Risk

Crude oil, oil products and natural gas

3,291

29

 

(212)

(2)

Precious metals

42

1

 

33

1

Electricity

 

24

.

Agricultural commodities

(133)

1

 

(148)

.

Total

3,200

31

 

(303)

(1)

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.

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.

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Maturities of contractual cash flows from financial liabilities 2013 (million €)

Bonds
and other
liabilities to the
capital market

Liabilities to credit institutions

Liabilities resulting from derivative financial instruments

Miscel­laneous liabilities

Total

2014

2,894

815

171

921

4,801

2015

2,506

1,029

28

79

3,642

2016

1,285

20

2

49

1,356

2017

976

2

25

1,003

2018

1,934

2

22

1,958

2019 and thereafter

5,539

9

425

5,973

Total

15,134

1,877

201

1,521

18,733

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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

Miscel­laneous liabilities

Total

2013

3,127

1,429

188

1,293

6,037

2014

1,504

58

4

75

1,641

2015

2,323

1,029

2

21

3,375

2016

988

3

19

1,010

2017

896

2

1

17

916

2018 and thereafter

2,830

9

429

3,268

Total

11,668

2,530

195

1,854

16,247

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 carrying amount of shareholdings which are traded on an active market and therefore recognized at fair value amounted to €1 million as of both December 31, 2013 and December 31, 2012. They are included under the line item shares in other shareholdings.

The carrying amount of financial indebtedness amounted to €14,407 million on December 31, 2013 (December 31, 2012: €12,798 million). The fair value of financial indebtedness amounted to €14,918 million at the end of 2013 (end of 2012: €13,703 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, 2013 (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

Shareholdings1

598

598

Afs

1

1

Receivables from finance leases

29

29

n.a.

29

Accounts receivable, trade

9,376

9,376

LaR

9,376

Derivatives – no hedge accounting

327

327

aFVtPL

327

7

320

.

Derivatives – with hedge accounting

72

72

n.a.

72

72

Other receivables and miscellaneous assets6

4,078

1,710

LaR

1,710

Securities

49

49

Afs

49

49

Cash and cash equivalents

1,815

1,815

LaR

1,815

1,815

Total assets

16,344

13,976

 

13,379

1,872

392

.

Bonds

11,363

11,363

AmC

11,874

Commercial paper

1,232

1,232

AmC

1,232

Liabilities to credit institutions

1,812

1,812

AmC

1,812

Liabilities from finance leases

85

85

n.a.

85

Accounts payable, trade

4,505

4,505

AmC

4,505

Derivatives – no hedge accounting

229

229

aFVtPL

229

3

110

116

Derivatives – with hedge accounting

84

84

n.a.

84

84

Other liabilities6

2,941

1,585

AmC

1,585

Total liabilities

22,251

20,895

 

21,406

3

194

116

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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 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 (2013: €597 million; 2012: €577 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

Shareholdings1

578

578

Afs

1

1

Receivables from finance leases

21

21

n.a.

21

Accounts receivable, trade

9,506

9,506

LaR

9,506

Derivatives – no hedge accounting

343

343

aFVtPL

343

11

331

1

Derivatives – with hedge accounting

88

88

n.a.

88

88

Other receivables and miscellaneous assets6

3,914

1,231

LaR

1,231

Securities

49

49

Afs

49

49

Cash and cash equivalents

1,647

1,647

LaR

1,647

1,647

Total assets

16,146

13,463

 

12,886

1,708

419

1

Bonds

9,106

9,106

AmC

10,011

Commercial paper

1,288

1,288

AmC

1,288

Liabilities to credit institutions

2,404

2,404

AmC

2,404

Liabilities from finance leases

72

72

n.a.

72

Accounts payable, trade

4,502

4,502

AmC

4,502

Derivatives – no hedge accounting

374

374

aFVtPL

374

5

133

236

Derivatives – with hedge accounting

51

51

n.a.

51

51

Other liabilities6

3,237

1,874

AmC

1,874

Total liabilities

21,034

19,671

 

20,576

5

184

236

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 noncurrent liabilities. As of December 31, 2013, the market value of these options amounted to minus €116 million and to minus €235 million as of December 31, 2012. The resulting difference of €119 million was recorded in the financial result.

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Offsetting of financial assets and financial liabilities as of December 31, 2013 (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

413

(24)

389

 

(63)

(32)

294

Derivatives with negative fair values

257

(24)

233

 

(87)

(15)

131

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Offsetting of financial assets and financial liabilities as of December 31, 2012 (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

444

(10)

434

 

(109)

(50)

275

Derivatives with negative fair values

191

(10)

181

 

(91)

(5)

85

The table “Offsetting 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. In accordance with IAS 32, financial assets and liabilities can only be offset if a company has a legal right of set-off and intends to settle on a net basis.

Deviations from the derivatives with positive and negative fair values reported in other receivables and other liabilities arose mainly from options for the disposal of shareholdings, since these are not subject to netting agreements and therefore are not included in the table above. The same applies for embedded derivatives as well as derivatives which are not subject to netting agreements. Derivatives which are reported in the disposal group natural gas trading, however, are 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 from write-downs/write-ups, interest, dividends and the reclassification of valuation effects from equity on the sale of the securities and shareholdings.

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 €)

 

2013

2012

Loans and receivables

(295)

(384)

Thereof interest result

92

86

Available-for-sale financial assets

(28)

1

Thereof interest result

2

2

Liabilities measured at amortized cost

(115)

(606)

Thereof interest result

(450)

(502)

Financial instruments at fair value through profit or loss

22

108

27.4 – 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. 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, and financing 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 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. 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 €)

 

2013

2012

Foreign currency forward contracts

48

99

Foreign currency options

93

69

Foreign currency derivatives

141

168

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

38

47

Interest rate swaps

(20)

(41)

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

4

Combined interest and cross currency swaps

30

94

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

(34)

Interest derivatives

10

53

Options for disposal of shareholdings

(116)

(235)

Commodity derivatives

25

14

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

(20)

(10)

Derivative financial instruments

60

.

Thereof natural gas trading disposal group

(26)

(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.

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

Cash flow hedge accounting is 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 have variable prices and the price formula is coupled with the oil price. This hedging is related to the disposal group for the natural gas trading business.

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 2015. In 2013, effective changes in the fair value of hedging instruments of minus €9 million (2012: minus €4 million) was recognized in the equity of the shareholders of BASF SE. In 2013, effective changes in the fair value of hedging instruments of €9 million were derecognized from the equity of the shareholders of BASF SE and recorded as an expense in cost of sales. In 2012, there was an expense of €16 million in this regard. The ineffective part in the change in value of the hedge amounted to €2 million in 2013 and less than €1 million in 2012. This amount was reported in the income statement in cost of sales, in other operating income and in other operating expenses.

BASF uses cash flow hedge accounting for derivatives used to hedge foreign currency risks from gas purchase and sales 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 2014, with a smaller impact in the period between 2015 and 2016. In 2013, the effective change in values of the hedges was minus €32 million (2012: minus €46 million), which was recognized in the equity of the shareholders of BASF SE. The amounts derecognized from the equity of shareholders of BASF SE increased cost of sales by €21 million (2012: €49 million). There were no ineffective parts.

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 2014. In 2013, effective changes in the fair value of the hedging instruments of minus €18 million (2012: €25 million) were recognized in the equity of the shareholders of BASF SE. A total of €43 million (2012: €4 million) was derecognized from the equity of shareholders of BASF SE and was booked in expenses from foreign currency transactions. The hedge was entirely effective.

The interest rate risk of the Floating Rate Notes issued by BASF SE in 2013 (€200 million note 2013/2016, €300 million note 2013/2018, €300 million note 2013/2020) was hedged using interest rate swaps. The bonds and the interest rate swaps were designated in a hedging relationship. In 2013, the effective change in the fair value of the hedging instruments was minus €10 million and was 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. It was entirely effective. In 2013, the change in values recognized in the equity of the shareholders of BASF SE amounted to minus €7 million. In 2013, €14 million was derecognized from other comprehensive income and recorded as interest income.

In 2004 and 2005, fair value changes from forward interest-rate swaps entered into 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 term 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 was derecognized from other comprehensive income and recorded as interest expense.

Fair value hedge accounting

In the previous year, 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 in order to hedge interest rate risks. The bond and the derivatives were designated as a fair value hedge. The bond and the hedge both matured in October 2012. in 2013, no hedging relationships were designated as fair value hedges.

Hedge of a net investment in a foreign operation

In the previous year, 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 year 2012, the hedging relationship had been ended. Hedging resulted in a loss of €2 million, which was recorded in expenses from foreign currency transactions. In 2013 there was no hedge of a net investment in a foreign operation.