14 – Intangible assets

The goodwill of BASF is allocated to 22 cash-generating units (2015: 21), 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 most cases 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. Thereafter, 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 flows 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 of the units (excluding Exploration & Production in the Oil & Gas segment) were conducted assuming a weighted average cost of capital rate after taxes between 5.07% and 8.01% (2015: between 6.04% and 7.67%). This represents a weighted average cost of capital rate before taxes between 6.43% and 10.77% (2015: between 7.77% and 10.81%). In the financial year 2016, a refined valuation model based on a field-related valuation approach was introduced, which considers the expected cash flows as well as the tax payments in the individual countries. The period under consideration now includes the planned license terms and the production profiles of the included oil and gas fields. Furthermore, instead of using a single weighted average cost of capital rate, the country risk and the specific tax rate is considered in each case: this leads to a more precise calculation of the recoverable amount. Considering these parameters, the capital rate after taxes varied between 7.5% and 13.76% and before taxes between 10.96% and 37.68%.

In determining the recoverable amount 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), as well as Catalysts (excluding battery materials), this is not the case.

In the 2016 business year, the recoverable amount of the Construction Chemicals unit exceeded the carrying amount by around €282 million. The weighted average cost of capital rate after taxes used for impairment testing was 8.01% (2015: 7.67%). The recoverable amount would equal the unit’s carrying amount if the weighted average cost of capital rate increased by 0.69 percentage points (2015: by 0.96 percentage points) or if income from operations of the last detailed planning year – as the basis for the terminal value – were lower by 12.0% (2015: by 16.65%).

In 2016, the recoverable amount of Pigments exceeded the carrying amount by €242 million. The weighted average cost of capital rate after taxes used for impairment testing was 5.09% (2015: 6.07%). The recoverable amount would equal the unit’s carrying amount if the weighted average cost of capital rate increased by 0.51 percentage points (2015: by 0.04 percentage points) or if income from operations of the last detailed planning year – as the basis for the terminal value – were lower by 13.78% (2015: by 0.92%).

In 2016, the recoverable amount of Catalysts (excluding battery materials) exceeded the carrying amount by €705 million. The weighted average cost of capital rate after taxes used for the impairment testing of this unit was 8.01% (2015: 7.66%). The recoverable amount would equal the unit’s carrying amount if the weighted average cost of capital rate increased by 0.82 percentage points (2015: by 0.73 percentage points) or if income from operations of the last detailed planning year – as the basis for the terminal value – were lower by 13.75% (2015: by 14.52%).

For impairment testing in the Exploration & Production business sector in the Oil & Gas segment, BASF assumes an average oil price of $55 per barrel of Brent crude oil in 2017. In comparison with the previous year, the long-term outlook for oil prices remained unchanged. The recoverable amount of the cash-generating unit Exploration & Production improved significantly compared against the impairment test of the previous year. This was mainly due to the expenditure and production profiles that were adapted to the price development.

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, 2016, their acquisition costs amounted to €1,029 million and accumulated amortization to €328 million; amortization in 2016 amounted to €19 million.

Additions from acquisitions amounted to €2,789 million in 2016. Significant acquisitions comprising the purchase of the global surface treatment provider Chemetall from Albemarle Corp., Charlotte, North Carolina, and the automotive refinishing business from Guangdong Yinfan Chemistry, Jiangmen, China, led to an increase of goodwill in the amount of €1,552 million. In connection with these transactions, additions to intangible assets amounted to €1,237 million. These were primarily related to customer relationships and production technologies.

Disposals of intangible assets in the amount of €21 million were largely attributable to the sale of the 25% share in the Byrding field to Statoil and the divestiture of the global photoinitiator business as well as the global polyolefin catalysts business. Related to this, goodwill of €64 million was derecognized.

Concessions for oil and gas production under the category product rights, licenses and trademarks with a net carrying amount of €466 million in 2016 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.

In 2016, additions to accumulated amortization included impairments of €61 million. This primarily affected impairments relating to production technologies and marketing and selling rights in the Functional Materials & Solutions segment in the amount of €51 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, 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.