14 – Intangible assets

The goodwill of BASF is allocated to 24 cash-generating units (2016: 22), 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 materials prices and profit margins. Oil and gas prices are 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 required discounting of cash flows for impairment testing is calculated with the weighted average cost of capital rate after tax, which 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 5.69% and 8.2% (2016: between 5.07% and 8.01%). This represents a weighted average cost of capital rate before taxes of between 7.13% and 11.31% (2016: between 6.43% and 10.77%). A valuation model based on a field-related valuation approach has been used, for the unit Exploration & Production in the Oil & Gas segment since the business year 2016, which considers the expected cash flows as well as the tax payments in the individual countries. The period under consideration 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 7.92% and 12.85% (2016: between 7.5% and 13.76%) and before taxes between 11.32% and 20.07% (2016: between 10.96% and 37.68%).

After determining the recoverable amount of the cash-generating units, it was determined for the large majority of them that reasonable possible deviations from the key assumptions would not lead to the carrying amounts 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 Surface Treatment in the Coatings division, this is not the case.

In the 2017 business year, the recoverable amount of the Construction Chemicals unit exceeded the carrying amount by around €408 million. The weighted average cost of capital rate after taxes used for impairment testing was 8.2% (2016: 8.01%). The recoverable amount would equal the unit’s carrying amount if the weighted average cost of capital rate increased by 0.98 percentage points (2016: by 0.69 percentage points) or if income from operations of the last detailed planning year – as the basis for the terminal value – were lower by 15.97% (2016: by 12.0%).

In 2017, the recoverable amount of Pigments exceeded the carrying amount by €9 million. The weighted average cost of capital rate after taxes used for impairment testing was 6.05% (2016: 5.09%). The recoverable amount would equal the unit’s carrying amount if the weighted average cost of capital rate increased by 0.04 percentage points (2016: by 0.51 percentage points) or if income from operations of the last detailed planning year – as the basis for the terminal value – were lower by 0.81% (2016: by 13.78%).

An impairment test for the Surface Treatment unit in the Coatings division was carried out for the first time in the business year 2017 (acquisition in December 2016). In 2017, the recoverable amount of this unit exceeded the carrying amount by €100 million. The weighted average cost of capital rate after taxes used for the impairment testing of this unit was 8.19% (2016: –). The recoverable amount would equal the unit’s carrying amount if the weighted average cost of capital rate increased by 0.2 percentage points (2016: –) or if income from operations of the last detailed planning year – as the basis for the terminal value – were 6.1% lower (2016: –).

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, 2017, their acquisition costs amounted to €962 million and accumulated amortization to €312 million; amortization in 2017 amounted to €41 million.

Additions from acquisitions amounted to €235 million in 2017. Goodwill increased by €79 million as a result of the following significant acquisitions: Rolic AG headquartered in Allschwil, Switzerland; GRUPO Thermotek with headquarters in Monterrey, Mexico; the Henkel group’s western European building material business; and ZedX Inc., Bellefonte, Pennsylvania. A further addition to goodwill amounting to €18 million arose primarily from a retroactive purchase price payment for the acquisition of Chemetall from the previous year.

In connection with these transactions, further additions to intangible assets amounted to €138 million. These related predominantly to product rights, licenses and trademarks as well as know-how, patents and production technologies.

Concessions for oil and gas production under the category product rights, licenses and trademarks with a net carrying amount of €234 million in 2017 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.

Disposals of intangible assets amounting to €221 million were largely attributable to the derecognition of software fully written off as well as the sale of the production site for electrolytes in Suzhou, China, the sale of Bleaching Clay and Mineral Adsorbents businesses, and the transfer of the global leather chemicals business to the Stahl group. Related to this, goodwill of €28 million was derecognized.

The transfers largely concerned the confirmed oil and gas deposits in the Maria field in Norway to property, plant and equipment. Non-confirmed deposits in connection with acquired concessions are reported as intangible assets under product rights, licenses and trademarks.

In 2017, additions to accumulated amortization included impairments of €67 million. This mainly pertained to impairments of non-strategic know-how, patents and production technologies in the Functional Materials & Solutions segment and exploration potential for oil and gas production in Norway. Offsetting this, reversals of impairments of €7 million were included. These related primarily to selling rights in the Functional Materials & Solutions segment.

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 distribution rights in the Functional Materials & Solutions segment in the amount of €51 million.