1.2 – Changes in accounting principles

Change in presentation of joint operation sales in BASF Group Financial Statements

At its meeting on March 24, 2015, the IFRS Interpretation Committee determined that, according to IFRS 11.20(d), a joint operator’s share of the output purchased by another partner cannot be recognized as revenue as long as these sales correspond to the operator’s share of ownership interest in the joint operation. As a consequence of this determination, this portion of the joint operation’s sales to other partners ceased to be recognized as of January 1, 2015. Partners’ share of the output purchased in excess of their ownership interest will continue to be shown as sales to third parties in the BASF Group Financial Statements. Sales by the joint operation to BASF Group companies will also continue to be eliminated.

Sales revenue for 2014 contained sales of €415 million that, according to the new recognition method, would have been eliminated against cost of sales. If the recognition method had remained unchanged, sales and cost of sales for 2015 would each have been €76 million higher. A restatement of the prior-year figures was not necessary, as this change in recognition would have had no material impact on the presentation of the net assets, financial position and results of operations of the BASF Group in 2014.

Change in presentation of hedges for financial receivables and payables in the statement of cash flows

The presentation in the statement of cash flows of hedges for financial receivables and payables was adjusted as of January 1, 2015. Without changing cash provided by operating activities, hedging is now better reflected by offsetting adjustment effects from underlying transactions with changes in the market value of hedging transactions. The effects from hedging transactions were previously contained in the item “changes in receivables” and those from underlying transactions in the item “changes in pension provisions, defined benefit assets and other items.” The figures for 2014 have been adjusted accordingly.

In 2014, this led to an increase of €76 million in the line item changes in receivables and a decrease in the line item changes in pension provisions, defined benefit assets and other items in the amount of €76 million.

Changes in the measurement of emission right certificates granted free of charge

To improve the presentation of net assets and the financial position, the measurement of emission right certificates granted free of charge was conducted according to the net method for the first time as of December 31, 2015. According to this method, emission right certificates are no longer recognized at the applicable market prices (fair value) at the time they are credited to the electronic register run by the relevant governmental authority, but are recognized on the balance sheet with a value of zero. Accordingly, the counter items (deferred income and provisions for emission right certificates) are also reported with a value of zero. The conversion from gross method to the net method led to balance sheet contraction in the amount of €153 million with no effect on income.

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 2015 were reviewed and are explained below. Other new standards or interpretations and amendments of existing standards and interpretations have no material impact on the BASF Group. Early adoption of the standards before endorsement by the European Union is not planned.

IFRS 9 – Financial Instruments

On July 24, 2014, the IASB issued the final version of IFRS 9 – Financial Instruments, 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.

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 standard will be effective for reporting periods beginning on or after January 1, 2018. An endorsement by the European Union is still pending. The new requirements could have an impact on the accounting treatment of other shareholdings. The further potential impact on BASF is currently being analyzed.

IFRS 15 – Revenues from Contracts with Customers

The IASB published the new standard on revenue recognition, IFRS 15 – Revenues from Contracts with Customers, 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, IFRIC 15, IFRIC 18, and SIC 31.

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. The transfer of major risks and rewards of ownership of the goods is no longer the deciding factor. 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, whereby the contract with the customer and the individual performance obligations within the contract are initially identified. The transaction price is then determined and allocated to the performance obligations in the contract. Finally, sales are recognized for each performance obligation in the amount of the allocated portion of the transaction price as soon as the agreed-upon good or service has been provided or the customer receives control over it. Principles are set out for determining whether the good or service has been provided over time or at one point in time.

The new standard will be effective for reporting periods beginning on or after January 1, 2018. An endorsement by the European Union is still pending. The potential impact on BASF is currently being analyzed.

IFRS 16 – Leasing

The IASB published standard IFRS 16 Leases 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 new standard introduces a single lessee accounting model. It requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. As for the lessor, the new standard substantially carries forward the lessor accounting requirements of IAS 17. 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. The potential impact on BASF is currently being analyzed.

Disclosure Initiative (Amendments to IAS 1)

On December 18, 2014, the IASB issued amendments made to IAS 1. The revisions pertain to various disclosure requirements, and clarify that information needs to be disclosed in the notes only if it 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 income statement. 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 income statement. The changes will be effective for reporting periods beginning on or after January 1, 2016. An endorsement by the European Union was issued on December 19, 2015. The amendments are not expected to have a material effect on BASF.

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 will be effective for reporting periods beginning on or after January 1, 2016. The European Union’s endorsement was issued on December 3, 2015. The amendments are not expected to 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 11, 2013. The revisions clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. In addition, practical expedients are permitted if the amount of the contributions is independent of the number of years of service. 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 of the European Union must apply the changes for reporting periods beginning on or after February 1, 2015. The amendments are not expected to have a material effect on BASF.

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. The potential impact on BASF is currently being analyzed.

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 changes in 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 the accounting for business combinations according to IFRS 3. Furthermore, the disclosure requirements in IFRS 3 also apply in such cases. The changes will be effective for reporting periods beginning on or after January 1, 2016. An endorsement by the European Union was issued on November 25, 2015. The amendments are not expected to have a material effect on BASF.

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, 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 changes for reporting periods beginning on or after February 1, 2015. The amendments are not expected to have a material effect on 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 will be effective for reporting periods beginning on or after January 1, 2016. An endorsement by the European Union was issued on December 16, 2015. The amendments are not expected to have a material effect on BASF.