14 – Intangible assets

The goodwill of BASF is allocated to 21 cash-generating units (2014: 23), which are defined either on the basis of business units or on a higher level.

Annual impairment testing took place in the fourth quarter of the year on the basis of the cash-generating units. Recoverable amounts were determined in each case using the value in use. This was done using plans approved by company management and their respective cash flows, generally for the next five years. For the time period after the fifth year, a terminal value was calculated using a forward projection from the last detailed planning year as a perpetual annuity. The planning is based on experience, current performance and management’s best possible estimates on the future development of individual parameters, such as raw material prices and profit margins. The oil price is also among the main input parameters that provide the basis for the forecast of cash inflows in the current financial plans. Market assumptions regarding, for example, economic development and market growth are included based on external macroeconomic sources as well as sources specific to the industry.

The weighted average cost of capital rate after tax required for impairment testing is determined using the Capital Asset Pricing Model. It comprises a risk-free rate, a market risk premium, and a spread for credit risk based on the respective industry-specific peer group. The calculation also takes into account capital structure and the beta factor of the respective peer group as well as the average tax rate of each cash-generating unit. Impairment tests were conducted assuming a weighted average cost of capital rate after taxes between 6.04% and 7.67% (2014: between 6.60% and 7.76%). This represents a weighted average cost of capital rate before taxes between 7.77% and 10.81% (2014: between 8.19% and 10.30%). For the Exploration & Production business sector in the Oil & Gas segment, a cost of capital rate after taxes of 10.93% (2014: 9.46%) or before taxes of 16.66% (2014: 17.72%) was applied, taking country-specific risks into account.

In determining the value in use for the great majority of cash-generating units, BASF generally anticipates that a reasonably possible deviation from the key assumptions will not lead to the carrying amount of the units exceeding their respective recoverable amounts. For the goodwill of the Construction Chemicals division and the cash-generating units Pigments (in the Dispersions & Pigments division), Catalysts (excluding battery materials), and Exploration & Production (in the Oil & Gas segment), this is not the case.

In the 2015 business year, the recoverable amount of the Construction Chemicals unit exceeded the carrying amount by around €397 million. Earnings in the Construction Chemicals division are influenced by the growth of the construction industry. The weighted average cost of capital rate after taxes used for impairment testing was 7.67% (2014: 7.76%). The recoverable amount would equal the unit’s carrying amount if the cost of capital rate increased by 0.96 percentage points (2014: by 0.5 percentage points) or if income from operations of the last detailed planning year – as the basis for the terminal value – were lower by 16.65% (2014: by 9.10%).

The weighted average cost of capital rate after taxes used for impairment testing for Pigments was 6.07% (2014: 6.64%). In 2015, the recoverable amount of this unit exceeded the carrying amount by €15 million, so that even slightly unfavorable changes in the assumptions would lead to an impairment. An increase of 0.5% in the cost of capital rate would result in impairments amounting to €163 million; a 10% decrease in income from operations of the last detailed planning year – used as the basis for the terminal value – would result in impairments of €143 million.

In 2015, the recoverable amount of Catalysts (excluding battery materials) exceeded the carrying amount by €708 million. The weighted average cost of capital rate after taxes used for the impairment testing of this unit was 7.66% (2014: 7.75%). The recoverable value of the unit would equal the carrying amount if the cost of capital rate increased by 0.73 percentage points or if income from operations of the last detailed planning year – as the basis for the terminal value – were 14.52% lower.

For impairment testing in the Exploration & Production business sector in the Oil & Gas segment, assumptions regarding expected price development were adjusted to reflect the current oil price development. BASF now assumes an average oil price of $40 per barrel (Brent) in 2016, and expects this to rise again in subsequent years to over $100 per barrel (Brent) in determining the terminal value. The revised assumptions resulted in an impairment of goodwill for Exploration & Production in the amount of €137 million. The recoverable amount corresponds to the value in use of the unit, amounting to €8,746 million as of December 31, 2015. A decrease of $10 per barrel of Brent crude in the average oil price assumption would reduce income from operations by roughly €200 million each year. Such a reduction over the entire planning period would lead to an impairment of €1 billion in the Exploration & Production cash-generating unit. Irrespective of the price of oil, an increase in the cost of capital rate by 0.5% would lead to an additional impairment of €526 million. Impairments may be allocated to intangible assets, goodwill and property, plant and equipment depending on the nature, timing and size of changes in the individual parameters.

Besides goodwill, intangible assets also include acquired intangible assets as well as internally generated intangible assets. In addition, they include rights belonging to the Oil & Gas segment, which are amortized in accordance with the unit of production method. As of December 31, 2015, their acquisition costs amounted to €835 million and accumulated amortization to €246 million; amortization in 2015 amounted to €41 million.

Additions from acquisitions amounted to €136 million in 2015. Significant acquisitions concerned the purchase of a 66% share in a company to which TODA KOGYO CORP., Hiroshima, Japan, contributed its business, and the purchase of the polyurethane (PU) business from Polioles, S.A. de C.V., Lerma, Mexico. In connection with these transactions, additions to intangible assets amounted to €87 million. Moreover, BASF concluded an agreement with Lanxess on the acquisition and use of technologies and patents for the production of high-molecular-weight polyisobutene (HM PIB), which added €23 million to intangible assets.

Concessions for oil and gas production under the category product rights, licenses and trademarks with a net carrying amount of €480 million in 2015 authorize the exploration and production of oil and gas in certain areas. At the end of the term of a concession, the rights are returned. Aside from transfers to property, plant and equipment, transfers in 2015 included €54 million from the subsequent adjustments of the purchase price allocation for the acquisition of assets from Statoil.

Other rights and values under transfers also included derecognitions of €153 million resulting from the change in accounting to the net method for emission right certificates granted free of charge in 2015. Disposals of €17 million were attributable to the asset swap with Gazprom.

Related to this, goodwill of €173 million was derecognized, €32 million of which was reported under transfers.

In 2015, additions to accumulated amortization included impairments of €205 million. These primarily concerned the Oil & Gas segment. The revised assumptions for oil and gas prices led to €137 million in goodwill impairments as well as €27 million in impairments on a license in Norway. Furthermore, under the category know-how, patents and production technologies, a once-advantageous supply contract of €36 million in the Functional Materials & Solutions segment was fully impaired due to lower market prices.

In 2015, additions to accumulated amortization included write-ups of €2 million.

Besides goodwill, intangible assets also include acquired intangible assets as well as internally generated intangible assets. In addition, they include rights belonging to the Oil & Gas segment, which are amortized in accordance with the unit of production method. As of December 31, 2014, their acquisition costs amounted to €916 million and accumulated amortization to €235 million; amortization in 2014 amounted to €52 million.

In connection with the acquisition of assets from Statoil, Stavanger, Norway, €704 million was added to intangible assets in 2014. Of this amount, €121 million pertained to exploration rights and licenses and €583 million to goodwill.

Concessions for oil and gas production under the category product rights, licenses and trademarks with a net carrying amount of €579 million in 2014 authorize the exploration and production of oil and gas in certain areas. Some of these rights entail obligations to deliver a portion of the production output to local companies. At the end of the term of a concession, the rights are returned.

In other rights and values, the line item transfers includes additions and fair value adjustments of emission rights recognized directly in equity as of the balance sheet date.

Disposals were largely attributable to the sale of selected oil and gas investments in the North Sea to the Hungarian MOL Group.

Impairments of €56 million were recognized in 2014. Due to the weak development of the coal mining business in China, impairments of €40 million relating to distribution, supply and similar rights were recognized in the Construction Chemicals division. The recoverable amount equals the value in use, amounting to €10 million. The value in use was determined using a weighted average cost of capital rate before taxes of 11.02%.

In 2014, transfers included a write-up of €5 million.