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 €351 million as of December 31, 2014, and minus €286 million as of December 31, 2013. The effect from the items designated under hedge accounting would have increased the equity of the shareholders of BASF SE before income taxes by €48 million on December 31, 2014 (2013: increase of €93 million). This refers to transactions in U.S. dollars and British pounds. The currency exposure amounted to €2,009 million on December 31, 2014 (December 31, 2013: €1,905 million).

Exposure and sensitivity by currency (in million €)

 

 

Exposure
Dec. 31, 2014

Sensitivity
Dec. 31, 2014

Exposure
Dec. 31, 2013

Sensitivity
Dec. 31, 2013

USD

 

1,767

(261)

1,231

(121)

Other

 

242

(42)

674

(72)

Total

 

2,009

(303)

1,905

(193)

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 €3,343 million as of December 31, 2014, compared with minus €2,666 million as of December 31, 2013. An increase in all relevant interest rates by one percentage point would have raised income before taxes and minority interests by €12 million as of December 31, 2014, and raised income before taxes and minority interests by €6 million as of December 31, 2013. The effect from the items designated under hedge accounting would have increased the equity of the shareholders of BASF SE before income taxes by €30 million on December 31, 2014 (2013: increase of €19 million).

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

 

 

December 31, 2014

December 31, 2013

 

 

Fixed
interest rate

Variable
interest rate

Fixed
interest rate

Variable
interest rate

Loans

 

264

760

1,012

122

Securities

 

33

42

24

6

Financial indebtedness

 

11,673

3,711

12,004

2,403

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

 

 

December 31, 2014

December 31, 2013

 

 

Nominal value

Fair value

Nominal value

Fair value

Interest rate swaps

 

1,900

(31)

1,800

(20)

Thereof payer swaps

 

1,900

(31)

1,800

(20)

Combined interest and cross-currency swaps

 

1,979

142

1,667

30

Thereof fixed rate

 

1,979

142

1,667

30

Options for disposal of shareholdings: BASF and INEOS had agreed upon options for BASF’s withdrawal from the shareholding in Styrolution. These options were classified as derivatives according to IAS 39. A significant risk variable which was decisive for the valuation of both options is the value of the company. In June 2014, BASF and Ineos agreed on a sales transaction that was successfully concluded in November 2014; because of the transaction, these options no longer exist as of December 31, 2014.

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. 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, 2014 as well as of December 31, 2013, there were no deals outstanding. Furthermore, BASF utilizes emission certificate derivatives on a limited scale.

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.

Exposure to commodity derivatives (in million €)

 

 

December 31, 2014

December 31, 2013

 

 

Exposure

Value at risk

Exposure

Value at risk

Crude oil, oil products and natural gas

 

959

22

3,291

29

Precious metals

 

61

1

42

1

Emission certificates

 

14

1

Agricultural commodities

 

120

0

(133)

1

Total

 

1,154

24

3,200

31

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 through its 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, 2014 (in million €)

 

 

Bonds and other liabilities to the capital market

Liabilities to credit institutions

Liabilities resulting from derivative financial instruments

Miscella­neous liabilities

Total

2015

 

2,748

1,197

821

877

5,643

2016

 

1,178

57

33

40

1,308

2017

 

1,680

24

6

37

1,747

2018

 

1,995

3

12

12

2,022

2019

 

905

1,572

3

11

2,491

2020 and thereafter

 

6,484

8

44

624

7,160

Total

 

14,990

2,861

919

1,601

20,371

Maturities of contractual cash flows from financial liabilities as of December 31, 2013 (in 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

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 less than €1 million as of December 31, 2014 and €1 million as of December 31, 2013. They are included in other financial assets.

The carrying amount of financial indebtedness amounted to €15,384 million on December 31, 2014 (December 31, 2013: €14,407 million). The fair value of financial indebtedness amounted to €16,194 million at the end of 2014 (end of 2013: €14,918 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.

Carrying amounts and fair values of financial instruments as of December 31, 2014 (in 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

 

462

462

Afs

0

0

Receivables from finance leases

 

43

43

n.a.

43

Accounts receivable, trade

 

10,385

10,385

LaR

10,385

Derivatives – no hedge accounting

 

772

772

aFVtPL

772

23

749

Derivatives – with hedge accounting

 

61

61

n.a.

61

61

Other receivables and other assets6

 

4,654

1,965

LaR

1,965

Securities

 

97

97

Afs

97

97

Cash and cash equivalents

 

1,718

1,718

LaR

1,718

1,718

Total assets

 

18,192

15,503

 

15,041

1,838

810

Bonds

 

12,424

12,424

AmC

13,234

Commercial paper

 

124

124

AmC

124

Liabilities to credit institutions

 

2,836

2,836

AmC

2,836

Liabilities from finance leases

 

90

90

n.a.

90

Accounts payable, trade

 

4,861

4,861

AmC

4,861

Derivatives – no hedge accounting

 

622

622

aFVtPL

622

13

609

Derivatives – with hedge accounting

 

614

614

n.a.

614

614

Other liabilities6

 

3,435

1,952

AmC

1,952

Total liabilities

 

25,006

23,523

 

24,333

13

1,223

Carrying amounts and fair values of financial instruments as of December 31, 2013 (in 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 (2014: €462 million; 2013: €610 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); 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

 

611

611

Afs

1

1

Receivables from finance leases

 

29

29

n.a.

29

Accounts receivable, trade

 

10,233

10,233

LaR

10,233

Derivatives – no hedge accounting

 

347

347

aFVtPL

347

7

340

Derivatives – with hedge accounting

 

72

72

n.a.

72

72

Other receivables and other assets6

 

4,143

1,746

LaR

1,746

Securities

 

49

49

Afs

49

49

Cash and cash equivalents

 

1,827

1,827

LaR

1,827

1,827

Total assets

 

17,311

14,914

 

14,304

1,884

412

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

 

5,153

5,153

AmC

5,153

Derivatives – no hedge accounting

 

275

275

aFVtPL

275

3

156

116

Derivatives – with hedge accounting

 

84

84

n.a.

84

84

Other liabilities6

 

3,040

1,658

AmC

1,658

Total liabilities

 

23,044

21,662

 

22,173

3

240

116

Derivatives whose fair value is calculated using parameters not observable on the market (level 3) comprised exclusively in the previous year the options agreed upon with INEOS regarding the sale of BASF’s share in Styrolution Holding GmbH. The sale and purchase options were shown on the balance sheet under other noncurrent receivables or other noncurrent liabilities. As of December 31, 2013, the market value of these options amounted to minus €116 million. Until the announcement of the sales agreement with INEOS in June 2014, the fair value of the options in the reporting year led to an expense of minus €42 million, which was recognized in the financial result. Upon conclusion of the divestiture of Styrolution in November 2014, the fair value of the options amounting to minus €158 million was derecognized against disposal gains.

Offsetting of financial assets and financial liabilities as of December 31, 2014 (in 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

 

788

(4)

784

(293)

(6)

485

Derivatives with negative fair values

 

1,201

(4)

1,197

(297)

(77)

823

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

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 at the end of 2013 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 to both reporting years for embedded derivatives as well as derivatives which are not subject to netting agreements.

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 financial liabilities measured at amortized cost primarily relates to the results from the translation of foreign currencies.

Net gains and losses from financial instruments (in million €)

 

 

2014

2013

Loans and receivables

 

389

(295)

Thereof interest result

 

105

92

Available-for-sale financial assets

 

224

(28)

Thereof interest result

 

1

2

Financial liabilities measured at amortized cost

 

(1,056)

(115)

Thereof interest result

 

(421)

(450)

Financial instruments at fair value through profit or loss

 

(19)

22

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. 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, 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. Contracting and execution of derivative financial instruments for hedging purposes are conducted according to internal guidelines, and are 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 (in million €)

 

 

December
31, 2014

December
31, 2013

Foreign currency forward contracts

 

(104)

48

Foreign currency options

 

80

93

Foreign currency derivatives

 

(24)

141

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

 

(45)

38

Interest rate swaps

 

(31)

(20)

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

 

(30)

4

Combined interest and cross-currency swaps

 

142

30

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

 

39

(34)

Interest derivatives

 

111

10

Options for disposal of shareholdings

 

(116)

Commodity derivatives

 

(490)

25

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

 

(517)

(20)

Derivative financial instruments

 

(403)

60

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 is 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.

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 subsequent years. In 2014, effective changes in the fair value of hedging instruments of minus €322 million (2013: minus €9 million) was recognized in the equity of the shareholders of BASF SE. In 2014, effective changes in the fair value of hedging instruments of €19 million were derecognized from the equity of shareholders of BASF SE and recorded as an expense in cost of sales. In 2013, there was an expense of €9 million in this regard. The ineffective part in the change in value of the hedge amounted to minus €4 million in 2014 and €2 million in 2013. 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. In 2014, the effective change in values of the hedges was minus €110 million (2013: minus €32 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 €101 million (2013: €21 million).

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 2015. In 2014, the effective change in values of the hedges was minus €66 million (2013: minus €18 million), which was recognized in the equity of the shareholders of BASF SE. A total of €37 million (2013: €43 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 the reporting year (€300 million note 2014/2017) as well as the Floating Rate Notes issued in the previous year were hedged using interest rate swaps. The bonds and the interest rate swaps were designated in a hedging relationship. In 2014, the effective change in the fair value of the hedging instruments was minus €22 million (2013: 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 the previous year, was converted into euros using currency swaps. This hedge was designated as a cash flow hedge. The hedge was entirely effective. In 2014, the change in values recognized in the equity of the shareholders of BASF SE amounted to €38 million (2013: minus €7 million). In 2014, €110 million was derecognized from other comprehensive income and recorded as income in the financial result (2013: €14 million income in financial result).