1.2 – Changes in accounting principles

Accounting policies applied for the first time in 2017

Amendments to IAS 7 – Disclosure Initiative

The amendments aim to improve the information provided about changes to an entity’s liabilities arising from financing activities. They specify that an entity must disclose changes to financial liabilities and related financial assets for which payments received and payments made are shown under cash provided by/used in financing activities in the statement of cash flows.

Amendments to IAS 12 – Recognition of deferred tax assets for unrealized losses

The amendments to IAS 12 mainly aim to clarify how to account for deferred tax assets for unrealized losses related to assets measured at fair value. The application of the amendments has no material effect on BASF.

Annual Improvements to IFRSs (2014–2016): Three IFRSs were amended in the Annual Improvements to IFRSs (2014– 2016), of which only the following had to be applied in 2017: In IFRS 12, it was clarified that disclosures pursuant to IFRS 12 generally also apply to an entity’s interests in subsidiaries, joint ventures and associated companies that are classified as held for sale in accordance with IFRS 5, with the exception of the disclosures outlined in IFRS 12.B10–B16 (Financial Information). The clarification is not expected to have any material effect on BASF.

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 2017 were reviewed and are explained below.

IFRS 9 – Financial Instruments

The IASB published the final version of IFRS 9 – Financial Instruments on July 24, 2014. IFRS 9 contains new requirements for the classification and measurement of financial instruments, fundamental changes regarding the accounting treatment of impairments of certain assets, and a revised approach to hedge accounting. The European Union endorsed the standard on November 29, 2016. First-time adoption of IFRS 9 is effective in the first business year beginning on or after January 1, 2018. Consequently, BASF will apply IFRS 9 for the first time as of January 1, 2018.

IFRS 9 retains “amortized cost” and “fair value” as measurement paradigms for financial instruments, and continues to differentiate between changes in fair value recognized through profit or loss or other comprehensive income. Whether financial assets are measured at amortized cost or fair value will depend on the business model for managing financial asset portfolios, and on the cash flow condition (the solely payments of principle and interest criterion), that is, the contractual cash flow characteristics of an individual financial asset.

In the future, impairments are to be recognized for financial assets not measured at fair value through profit or loss considering expected credit losses based on the change in the default risk of the counterparties. The impairment approach generally adopts a three-stage model to calculate impairment losses. A simplified approach, which applies to certain financial instruments such as trade accounts receivable, uses a two-stage model to assess impairment losses.

IFRS 9 also contains new requirements for the application of hedge accounting to better present an entity’s risk management activities, in particular with respect to the management of nonfinancial risks.

The new requirements for classification and measurement can also have an impact on the accounting treatment of other shareholdings, which must be measured only at fair value in accordance with IFRS 9.B5.2.3 in the future.

With the introduction of the cash flow condition in IFRS 9, which must be considered in the classification of financial assets, it could happen that financial assets measured at amortized cost or at fair value through other comprehensive income according to IAS 39 are to be recognized at fair value through profit or loss in the future. At BASF, this will mainly impact securities that are currently classified as available-for-sale financial assets and thus measured at fair value through other comprehensive income.

In the future, expected losses on trade accounts receivable at BASF will largely be calculated on the basis of internal or external customer ratings and the associated probability of default.

Furthermore, the new impairment model is also to be used for further financial instruments, which are not recognized at fair value through profit or loss, such as bank deposits, loan receivables and miscellaneous receivables. Internal and external ratings for the respective counterparties will also be used as a basis for calculating impairments. Since individual valuation allowances were not calculated for the above assets under IAS 39, the first-time adoption of IFRS 9 will lead to additional impairments.

With regard to new hedge accounting regulations, BASF assumes that, in principle, all existing hedge accounting relationships can be continued under IFRS 9.

In the future, BASF will measure material other shareholdings at fair value in accordance with IFRS 9. This is not expected to lead to a material implementation effect.

The first-time adoption of IFRS 9 will take place using the modified retrospective method. BASF expects that this will result in a reduction of equity between €30 million and €40 million, which will be immediately recognized in equity on January 1, 2018. This is primarily due to the recognition of impairments to trade accounts receivable. The expected impact constitutes an estimate, which can deviate from the actual impact.

IFRS 15 – Revenues from Contracts with Customers

The IASB published the new standard on revenue recognition, IFRS 15, on May 28, 2014. The endorsement by the European Union was issued in the third quarter of 2016. The standard particularly aims to standardize existing regulations and thus improve transparency and comparability of financial information. 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. Sales revenue is measured at the amount the entity expects to receive in exchange for goods and services. The rules and definitions of IFRS 15 supersede the content of IAS 11, IAS 18, and IFRIC 13. The new standard will be effective for reporting periods beginning on or after January 1, 2018. The potential impact of the new standard, including the subseqent clarifications adopted, on BASF’s net assets, financial position and results of operations, was assessed. For this purpose, a Group-wide analysis was conducted.

Its analysis revealed that the balance sheet presentation of sales revenue from licenses, which is realized over a period of time, will change under IFRS 15. This is currently accounted for as deferred income. Under IFRS 15, this will be presented in a new balance sheet item, contract liabilities. A reclassification of approximately €100 million is expected as of January 1, 2018 in connection with the transition to IFRS 15.

Based on its analyses, BASF does not expect any further material effects on its results of operations or net assets. IFRS 15 will have a minor impact on BASF, as contracts with customers of BASF generally only give rise to a single performance obligation in each case, which is to be fulfilled at a certain point in time.

BASF will apply IFRS 15 for the first time from January 1, 2018. The modified retrospective method will be used for first-time adoption. The introduction of the new standard will lead to changes in the balance sheet in the form of the new balance sheet items “contract assets” and “contract liabilities,” as well as additional quantitative and qualitative disclosures in the notes.

IFRS 16 – Leases

The IASB published the new standard on leasing, IFRS 16, 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 standard requires an accounting model for a lessee that recognizes all right-of-use assets and liabilities from lease agreements in the balance sheet, unless the term is twelve months or less or the underlying asset is of low value (up to $5,000). As for the lessor, the new standard substantially carries forward the accounting requirements of IAS 17 – Leases. The European Union endorsed the new standard in the fourth quarter of 2017. The new standard will be effective for reporting periods beginning on or after January 1, 2019. BASF does not plan on an early adoption of these amendments.

BASF has started to analyze the potential effects on its Consolidated Financial Statements and plans to make use of the practical expedients. However, it is assumed that a significant number of leasing agreements that today represent operating leases are to be reported in the balance sheet. As well as increasing BASF’s total assets, the type of expenses associated with operating leases will change, as IFRS 16 replaces the straight-line expenses for operating leases with a depreciation charge for right-of-use assets and interest expenses on liabilities arising from the lease. BASF plans to recognize the adjustments arising from the transition to IFRS 16 using the modified retrospective method as a cumulative effect directly in other retained earnings as of January 1, 2019 without a restatement of comparative information.

Annual Improvements to IFRSs (2014–2016): Three IFRSs were amended in the Annual Improvements to IFRSs (2014– 2016) of which both the following amendments are mandatory as of January 1, 2018: In IAS 28, it was clarified that the election to measure an investment in an associated company or a joint venture held by an entity that is a venture capital organization or other qualifying entity, can be exercised on an investment-by-investment basis. The short-term exemptions in IFRS 1, Appendix E (IFRS 1.E3–E7) for first-time IFRS users were deleted. The amendments were endorsed by the European Union in the first quarter of 2018. They are not expected to have any material effect on BASF.

Amendments to IAS 28 – Long-term interests in associates and joint ventures

On October 12, 2017, the IASB published amendments to IAS 28 on long-term interests in associated companies and joint ventures. These amendments clarify that IFRS 9 is to be applied to long-term interests in associated companies or joint ventures that are not accounted for using the equity method. The amendment – subject to E.U. endorsement – is mandatory as of January 1, 2019. The effects are explained under IFRS 9 – Financial Instruments in Note 1.2: Changes in accounting principles.

The IASB issued further amendments to standards and interpretations whose application is not yet mandatory and is still subject to E.U. endorsement. These amendments are unlikely to have a material impact on the reporting of BASF SE. BASF does not plan on early adoption of these amendments.

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.

IASB has postponed the effective date of the changes indefinitely.

Amendments to IFRS 2 – Classification and Measurement of Share-Based Payment Transactions: The amendments involve a number of individual issues pertaining to the accounting of cash-settled share-based payment transactions. The amendments relate to the calculation of fair value of obligations arising from share-based payment transactions. The amendments are – pending E.U. endorsement – to be applied to compensation granted or changed in business years beginning on or after January 1, 2018.

Amendments to IFRS 9 – Financial assets with a prepayment feature with negative compensation:

The amendments pertain to a limited adjustment of the relevant criteria for the classification of financial assets. Financial assets with a prepayment feature with negative compensation may be recognized under certain conditions at amortized cost or at fair value through other comprehensive income instead of at fair value through profit and loss.

The amendments are – subject to E.U. endorsement – effective on January 1, 2019.

Supplementary information on IFRIC 22 – Foreign Currency Transactions and Advance Consideration: IFRIC 22 addresses an application question for IAS 21 – The Effects of Changes in Foreign Exchange Rates. It clarifies the point in time for determining the exchange rate used to translate foreign-currency transactions containing advance payments that have been made or received. The underlying asset, income or expense is translated using the relevant exchange rate on the date on which the asset or liability resulting from the prepayment was first recognized. The interpretation is – pending E.U. endorsement – to be applied in the first reporting period of a business year beginning on or after January 1, 2018.

IFRIC 23 – Uncertainty over Income Tax Treatments: IFRIC 23 expands on the requirements in IAS 12 on how to account for uncertainties surrounding the income tax treatment of circumstances and transactions. IFRIC 23 is – subject to E.U. endorsement – effective for reporting periods beginning on or after January 1, 2019.

Annual Improvements to IFRSs (2015–2017): Four IFRSs were amended in the Annual Improvements to IFRSs (2015–2017).

In IFRS 3, it was clarified that when a party to a joint arrangement obtains control of a business that is a joint operation and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a business combination achieved in stages. The acquirer shall therefore apply the requirements for a business combination achieved in stages, including remeasuring its previously held interest in the joint operation.

In IFRS 11, it was clarified that when an entity obtains joint control of a business that is a joint operation and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the previously held interest in that business is not to be remeasured.

IAS 12 was amended to the extent that all income tax effects of dividend payments must be considered in the same way as the income on which the dividends are based.

Finally, in IAS 23, it was determined that when entities borrow funds in general for the acquisition of qualifiying assets that those costs for borrowed capital specifically for the acquisition of qualifying assets should not be considered in the determination of the financing rate until their completion.

The amendments are – subject to E.U. endorsement – to be applied for the first time in the reporting period beginning on or after January 1, 2019.