Independent Auditor’s Report¹

To BASF SE, Ludwigshafen am Rhein

Report on the Audit of the Consolidated Financial Statements and of the Group Management Report

Opinions

We have audited the Consolidated Financial Statements of BASF SE and its subsidiaries (the Group), which comprise the balance sheet as at December 31, 2019, statement of income, statement of income and expense recognized in equity, statement of cash flows, statement of equity for the financial year from January 1, 2019 to December 31, 2019 and Notes to the Consolidated Financial Statements, including a summary of significant accounting policies. In addition, we have audited the Group Management Report of BASF SE for the financial year from January 1, 2019 to December 31, 2019. In addition, we have been instructed to express an opinion as to whether the Consolidated Financial Statements comply with full IFRS. In accordance with the German legal requirements we have not audited those parts of the Group Management Report which are described in section “Other Information” of our auditor’s report.

The Group Management Report contains cross-references which are not intended to use by law and are identified as unaudited. In accordance with the German legal requirements we have not audited the content of those cross-references and the related referenced information.

In our opinion, on the basis of the knowledge obtained in the audit,

• the accompanying Consolidated Financial Statements comply, in all material respects, with the IFRSs as adopted by the EU, the additional requirements of German commercial law pursuant to Section 315e (1) of the German Commercial Code (HGB) and full IFRS, and in compliance with these requirements, give a true and fair view of the assets, liabilities, and financial position of the Group as at December 31, 2019, and of its financial performance for the financial year from January 1, 2019 to December 31, 2019, and
• the accompanying Group Management Report as a whole provides an appropriate view of the Group’s position. In all material respects, this Group Management Report is consistent with the Consolidated Financial Statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development. Our opinion on the Group Management Report does not cover the content of those parts of the Group Management Report which are described in section “Other Information” of our auditor’s report. The Group Management Report contains cross-references which are not legally required and are identified as unaudited. Our opinion does not cover those cross-references and the related referenced information.

Pursuant to Section 322 (3) sentence 1 HGB, we declare that our audit has not led to any reservations relating to the legal compliance of the Consolidated Financial Statements and of the Group Management Report.

Basis for the Opinions

We conducted our audit of the Consolidated Financial Statements and of the Group Management Report in accordance with Section 317 HGB and the EU Audit Regulation No. 537/2014 (referred to subsequently as “EU Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer, IDW). Our responsibilities under those requirements and principles are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report” section of our auditor’s report. We are independent of the group entities in accordance with the requirements of European law and German commercial and profession-al law, and we have fulfilled our other German professional responsibilities in accordance with these requirements. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinions on the Consolidated Financial Statements and on the Group Management Report.

Key Audit Matters in the Audit of the Consolidated Financial Statements

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Consolidated Financial Statements for the financial year from January 1, 2019 to December 31, 2019. These matters were addressed in the context of our audit of the Consolidated Financial Statements as a whole, and in forming our opinion thereon, we do not provide a separate opinion on these matters.

Recoverability of goodwill

For information on the accounting principles applied, please refer to Note 1.4 to the Consolidated Financial Statements. The underlying assumptions used in the calculation and the disclosures on the impairment tests performed are included in Note 14 to the Consolidated Financial Statements.

Financial statement risk

Intangible assets in the Consolidated Financial Statements of BASF SE include goodwill in the amount of €8,105 million. Goodwill must be tested for impairment annually and whenever there is an indication that goodwill may be impaired.

Goodwill impairment testing is complex and based on a range of discretionary assumptions. These include the forecasts for future cash inflows in the detailed planning period, the assumed growth rate for subsequent periods, as well as the cost of capital. These assumptions have a material impact on the recoverability of goodwill. The growth forecasts of the Board of Executive Directors are associated with risks and can be revised in light of volatile raw materials prices and an instable macroeconomic environment.

There is the risk for the financial statements that impairment has not been identified. In addition, there is also a risk that the disclosures in the Notes on the key assumptions are not appropriate.

Our audit approach

We examined the forecast for future cash inflows in the detailed planning period, in particular with respect to whether the expected development of the relevant sales markets were given appropriate consideration and are consistent with the current budget adopted by the Board of Executive Directors and the Supervisory Board. We compared internal growth forecasts with industry expectations and those of significant competitors. We also reviewed whether the assumptions in the budget adopted by the Board of Executive Directors and the Supervisory Board about the future development of margins and the amount of investments are appropriate. Our review of the appropriateness of the budget adopted by the Board of Executive Directors and the Supervisory Board also included a comparison of planning in past business years with the results actually achieved. For selected units, we examined whether reasons for not reaching planned values in the past were given appropriate consideration in current planning, to the extent that this was relevant.

We assessed the appropriateness of the assumed growth rate for the period following the detailed planning period on the basis of industry and macroeconomic studies. We satisfied ourselves of the methodological appropriateness of the calculation and the appropriateness of the weighted cost of capital rates. To this end, we calculated our own expected values for the assumptions and parameters underlying the weighted cost of capital rates and compared these with the assumptions and parameters used. The audit team was supported by our company valuation specialists.

Finally, we assessed whether the disclosures in the Notes on the key assumptions are appropriate.

Our observations

The assumptions underlying the calculations of the Board of Executive Directors are balanced overall. The disclosures in the Notes on the key assumptions are appropriate.

Accounting for the interest in Wintershall Dea

For information on the accounting principles applied and on BASF’s oil and gas price scenario, please refer to Note 1.4 to the Consolidated Financial Statements. The underlying assumptions used in the calculation can be found in Note 2.5 to the Consolidated Financial Statements.

Financial statement risk

BASF and LetterOne completed the merger of their oil and gas businesses on May 1, 2019. BASF’s oil and gas activities, which had been accounted for as a discontinued operation until this date, were contributed to the joint venture Wintershall Dea. The share retained in Wintershall Dea in connection with the loss of control over the oil and gas activities is recognized at fair value on the date of the transaction in accordance with IFRS 10. The resulting gain of €5,684 million is included in income after taxes from discontinued operations. Since the transaction was completed, BASF has accounted for the interest according to the equity method.

The fair value of the interest in the Wintershall Dea joint venture was calculated internally by BASF on closing of the transaction; this calculation is complex and based on discretionary assumptions. These include, in particular, BASF’s forecasts on production volumes of the joint venture’s oil and gas fields based on expected license terms and production profiles, the development of oil and gas prices, and the cost of capital. In addition, the identification of the assets, liabilities and equity components of the oil and gas activities to be derecognized on initial recognition of the interest in the joint venture is a complex process.

There is a risk for the Consolidated Financial Statements that the fair value of the interest in the Wintershall Dea joint venture is not calculated properly, and that the assets, liabilities and equity components allocated to BASF’s oil and gas business have not been properly identified. Furthermore, there is a risk that the disclosures on the divestiture of the oil and gas business and on the interest in the Wintershall Dea joint venture in the Notes to the Consolidated Financial Statements are not sufficiently detailed and appropriate.

Our audit approach

We started by assessing whether the assets, liabilities and noncontrolling interests to be derecognized in connection with the loss of control were properly identified. In addition, we evaluated whether the equity components were properly reclassified to profit or loss for the year or recognized directly in retained earnings.

We consulted our valuation specialists in order to assess, among other things, whether the calculation of the fair value of the interest in the Wintershall Dea joint venture is consistent with the relevant accounting principles, and whether the key assumptions made in this calculation are appropriate. In doing so, we assessed the competence, abilities and objectivity of the internal experts used by BASF to measure the interest in the Wintershall Dea joint venture. We also evaluated whether the underlying process used to identify Wintershall Dea’s assets and liabilities is appropriate based on our knowledge of BASF’s business model.

We discussed the projected development of production volumes and oil and gas prices with the per-sons responsible for planning. We evaluated the production profiles used in the measurement of the exploration and production business’s assets on the basis of discussions with the client’s experts, taking into account the assessments submitted. In order to assess its suitability as a basis for calculation, we had the oil and gas price scenario used by the company explained to us. To assess its appropriateness, we compared the oil and gas price scenario used by BASF with the published forecasts of industry associations, analysts, international institutions and other market participants. We compared the assumptions and parameters underlying the cost of capital, in particular the risk-free rate, the market risk premium and the beta factor, with our own assumptions and publicly available data.

In order to assess the accuracy of the measurement of the interest in the Wintershall Dea joint venture, we reproduced selected calculations taking into account risk-based considerations.

In addition, we satisfied ourselves of the correct presentation of the transaction in the Consolidated Financial Statements of BASF SE. In doing so, we also assessed whether the disclosures on the divestiture of the oil and gas business and on the interest in the Wintershall Dea joint venture contained in the Notes to the Consolidated Financial Statements are sufficiently detailed and appropriate.

Our observations

The assumptions and parameters underlying the calculation of the fair value of the interest in the Wintershall Dea joint venture are appropriate. The assets, liabilities and equity components allocated to the oil and gas activities of BASF for the calculation of the disposal gain have been properly identified. The disclosures in the Notes to the Consolidated Financial Statements on the divestiture of the oil and gas business, as well as on the interest in the Wintershall Dea joint venture, are sufficiently detailed and appropriate.

Accounting treatment of the construction chemicals business

For information on the accounting principles applied, please refer to Note 1.4 to the Consolidated Financial Statements. Information on the discontinued construction chemicals business can be found in Note 2.5 to the Consolidated Financial Statements.

Financial statement risk

On December 21, 2019, BASF signed an agreement with Lone Star Funds on the sale of the construction chemicals business. The construction chemicals business represents a separate, material business area of BASF. Until conclusion of the agreement, it was accounted for as the Construction Chemicals division in the Surface Technologies segment. Since signing of the agreement, the Construction Chemicals division has been classified as a discontinued operation in accordance with IFRS 5. The transaction is expected to be concluded in the third quarter of 2020. The income after tax of the construction chemicals business (€24 million; previous year: €34 million) is included in income after taxes from discontinued operations.

The accounting treatment of the Construction Chemicals division as a discontinued operation in accordance with IFRS 5 is complex. This applies in particular to the identification of the assets and liabilities allocated to discontinued operations in Group companies that have activities in several divisions. In addition, the explanatory disclosures on the discontinued operation in the Notes to the Consolidated Financial Statements are complex.

There is a risk for the Consolidated Financial Statements that the expenses and income, and the assets and liabilities allocated to discontinued operation have not been properly identified and thus that the presentation of discontinued operations in the consolidated statement of income and in the balance sheet is not correct. With respect to the explanatory disclosures on discontinued operations in the Notes to the Consolidated Financial Statements, there is a risk that the explanations are not sufficiently detailed and appropriate.

Our audit approach

In a first step, we gained an understanding of the process used by BASF to identify the activities of the discontinued operation. To this end, we analyzed, among other things, the underlying allocation concept with respect to completeness and conformity with IFRS 5. The risk-based focus of our audit procedures on the allocation of assets and liabilities, and expenses and income, was on Group companies that have activities in several divisions. In doing so, we examined whether the allocation is consistent with BASF’s internal reporting systems and the provisions of the purchase agreement signed with Lone Star Funds.

In addition, we evaluated whether the explanations on the discontinued operation contained in the Notes to the Consolidated Financial Statements are sufficiently detailed and appropriate.

Our observations

The allocation of the assets and liabilities, as well as the expenses and income of the Construction Chemicals division to discontinued operations is appropriate and consistent with IFRS 5. The corresponding explanations in the Notes to the Consolidated Financial Statements are sufficiently detailed and appropriate.

Accounting treatment of the pigments business

For information on the accounting principles applied, please refer to Note 1.4 to the Consolidated Financial Statements. Information on the disposal group can be found in Note 2.5 to the Consolidated Financial Statements.

Financial statement risk

On August 28, 2019, BASF signed an agreement with DIC on the sale of the pigments business. The pigments business is part of the Dispersions & Pigments division in the Industrial Solutions segment. The pigments business has been classified as a disposal group in accordance with IFRS 5 since signing of the agreement. The transaction is expected to be concluded in the fourth quarter of 2020. The measurement of the disposal group at fair value less costs to sell in accordance with IFRS 5 led to an impairment charge of €73 million.

The measurement of the disposal group for the pigments business in accordance with IFRS 5 is complex and based on discretionary assumptions. These include valuation assumptions such as expected future cash inflows and risk-equivalent discount rates, which market participants would be able to use to determine the price for the disposal group. In addition, the explanatory disclosures on the disposal group in the Notes to the Consolidated Financial Statements are complex.

There is the risk for the financial statements that the measurement of the disposal group is not appropriate. There is a risk that the explanatory disclosures on the disposal group in the Notes to the Consolidated Financial Statements are not sufficiently detailed and appropriate.

Our audit approach

In a first step, we gained an understanding of the approach used by BASF to measure the fair values less costs to sell of the pigments business. To this end, we analyzed whether the approach underlying the measurement is consistent with IFRS.

We examined the calculation of fair value less costs to sell, in particular with respect to whether the transaction price used can be derived from the underlying agreement, and whether the other input factors are appropriate, such as future cash inflows until the completion of the transaction and risk-equivalent discount rates.

Furthermore, we evaluated whether the explanations on the disposal group in the Notes to the Consolidated Financial Statements are sufficiently detailed and appropriate.

Our observations

The assumptions and parameters underlying the measurement of the disposal group for the pigments business are appropriate. The explanations relating to the disposal group in the Notes to the Consolidated Financial Statements are sufficiently detailed and appropriate.

Initial application of the new IFRS 16 – Leases accounting standard

For information on the accounting principles applied, please refer to Note 28 to the Consolidated Financial Statements. Disclosures on the effects of initial application and reconciliations can be found in Note 28 of the Notes to the Consolidated Financial Statements.

Financial statement risk

As of December 31, 2019, right-of-use assets in the amount of €1,655 million and lease liabilities in the amount of €1,420 million were recognized in BASF’s Consolidated Financial Statements. Lease liabilities account for 1.6% of total assets and thus have a material impact on the company’s net assets and financial position.

The initial application of the new IFRS 16 – Leases accounting standard led to material effects on the opening balance for the fiscal year and their development as of the balance sheet date. BASF SE applies the new standard in accordance with the modified retrospective method.

The calculation of the lease term and the incremental borrowing rates used as discount rates can be discretionary and based on estimates. In addition, extensive data from the leases must be recorded to calculate the initial effects of IFRS 16 and the development of lease liabilities and right-of-use assets in accordance with the standard. This data is the basis for the measurement and recognition of the lease liabilities and right-of-use assets.

There is a risk for the Consolidated Financial Statements that the lease liabilities and right-of-use assets are not recognized in full in the balance sheet. Furthermore, there is a risk than the lease liabilities and right-of-use assets have not been measured correctly.

Our audit approach

In a first step, we gained an understanding of the process used by BASF SE to implement the new IFRS 16 accounting standard. We then analyzed the accounting instructions underlying the implementation for completeness and conformity with IFRS 16.

For selected leases, chosen in part on a representative and in part on a risk-oriented basis, we reviewed whether the relevant data was recorded correctly and in full. To the extent that discretionary decisions were made regarding the lease term, we reviewed whether, in light of the market conditions and risks in the industry, the underlying assumptions are plausible and consistent with other assumptions made in the Consolidated Financial Statements.

In consultation with our valuation specialists, we compared the assumptions and parameters underlying the incremental borrowing rates with our own assumptions and publicly available data. In addition, we evaluated the appropriateness of the model used to calculate the interest rate and reproduced the calculation of the incremental borrowing rates on a risk-oriented basis.

We reproduced BASF’s calculations of the carrying amounts of the lease liabilities and right-of-use assets. To this end, we evaluated the measurement and recognition of lease liabilities and right-of-use assets performed by the IT system for selected leases, chosen in part on a representative and in part on a risk-oriented basis. The risk-based assessment included an evaluation of proper measurement in the case of changes to or reassessments of the underlying contract.

To the extent that IT processing systems were used to calculate and consolidate the relevant data, in consultation with our IT specialists, we tested the effectiveness of the rules and processes in the underlying accounting-relevant IT system.

Our observations

BASF SE has established an appropriate process to recognize leases in accordance with IFRS 16. The assumptions and parameters underlying the measurement of lease liabilities and right-of-use assets are appropriate overall.

Other information

The Board of Executive Directors and the Supervisory Board are responsible for the other information. The other information comprises:

• the information of the integrated non-financial statement which is identified as unaudited
• the corporate governance statement in the section Corporate Governance of the Group Management Report, and
• the disclosures which are not normally part of the Group Management Report and which are identified as unaudited.

Additionally the other information comprises the remaining parts of the BASF Report 2019.

The other information does not comprise the Consolidated Financial Statements, the audited parts of the Group Management Report and our auditor’s report.

Our opinions on the Consolidated Financial Statements and on the Group Management Report do not cover the other information, and consequently we do not express an opinion or any other form of assurance conclusion thereon.

In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information

• is materially inconsistent with the Consolidated Financial Statements, with the Group Management Report or our knowledge obtained in the audit, or
• otherwise appears to be materially misstated.

Responsibilities of the Board of Executive Directors and the Supervisory Board for the Consolidated Financial Statements and the Group Management Report

Board of Executive Directors is responsible for the preparation of the Consolidated Financial Statements that comply, in all material respects, with IFRSs as adopted by the EU, the additional requirements of German commercial law pursuant to Section 315e (1) HGB and full IFRS and that the Consolidated Financial Statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of the Group. In addition, the Board of Executive Directors is responsible for such internal control as they have determined necessary to enable the preparation of Consolidated Financial Statements that are free from material misstatement, whether due to fraud or error.

In preparing the Consolidated Financial Statements, the Board of Executive Directors is responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so.

Furthermore, the Board of Executive Directors is responsible for the preparation of the Group Management Report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the Consolidated Financial Statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, the Board of Executive Directors is responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a Group Management Report that is in accordance with the applicable German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the Group Management Report.

The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the preparation of the Consolidated Financial Statements and of the Group Management Report.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report

Our objectives are to obtain reasonable assurance about whether the Consolidated Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and whether the Group Management Report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the Consolidated Financial Statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our opinions on the Consolidated Financial Statements and on the Group Management Report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Section 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Consolidated Financial Statements and this Group Management Report.

We exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the Consolidated Financial Statements and of the Group Management Report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit of the Consolidated Financial Statements and of arrangements and measures (systems) relevant to the audit of the Group Management Report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of these systems.
• Evaluate the appropriateness of accounting policies used by the Board of Executive Directors and the reasonableness of estimates made by the Board of Executive Directors and related disclosures.
• Conclude on the appropriateness of the Board of Executive Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the Consolidated Financial Statements and in the Group Management Report or, if such disclosures are inadequate, to modify our respective opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to be able to continue as a going concern.
• Evaluate the overall presentation, structure and content of the Consolidated Financial Statements, including the disclosures, and whether the Consolidated Financial Statements present the underlying transactions and events in a manner that the Consolidated Financial Statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Group in compliance with IFRSs as adopted by the EU, the additional requirements of German commercial law pursuant to Section 315e (1) HGB and full IFRS.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express opinions on the Consolidated Financial Statements and on the Group Management Report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions.
• Evaluate the consistency of the Group Management Report with the Consolidated Financial Statements, its conformity with law, and the view of the Group’s position it provides.
• Perform audit procedures on the prospective information presented by the Board of Executive Directors in the Group Management Report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by the Board of Executive Directors as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information.

We communicate with the audit committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the audit committee with a statement that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards.

From the matters communicated with the audit committee, we determine those matters that were of most significance in the audit of the Consolidated Financial Statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter.

Other Legal and Regulatory Requirements

Further Information pursuant to Article 10 of the EU Audit Regulation

We were elected as group auditor by the annual general meeting on May 3, 2019. We were engaged by the Chairwoman of the audit committee on July 18, 2019. We have been the group auditor of BASF SE without interruption since the financial year 2006.

We declare that the opinions expressed in this auditor’s report are consistent with the additional report to the audit committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report).

German Public Auditor Responsible for the Engagement

The German Public Auditor responsible for the engagement is Alexander Bock.

Frankfurt am Main, February 25, 2020

KPMG AG
Wirtschaftsprüfungsgesellschaft [Original German version signed by:]