14 – Intangible Assets

Accounting policies

Acquired intangible assets (excluding goodwill) with defined useful lives are generally measured at cost less straight-line amortization. The useful life is determined using the period of the underlying contract or the period of time over which the intangible asset can be expected to be used.

Impairments are recognized if the recoverable amount of the asset is lower than the carrying amount. The recoverable amount is the higher of either fair value less costs to sell or the value in use. The value in use is determined on the basis of future cash inflows and outflows, and the weighted average cost of capital after taxes, depending on tax rates and country-related risks. If the reasons for an impairment no longer exist, the write-downs are reversed up to the value of the asset, had an impairment not been recognized. Depending on the type of intangible asset, amortization is reported under cost of sales, selling expenses, research and development expenses or other operating expenses.

Intangible assets with indefinite useful lives are trade names and trademarks that have been acquired as part of acquisitions. These are measured at cost and tested for impairment annually, or if there is an indication that their value has declined.

Internally generated intangible assets primarily comprise internally developed software. Such software and other internally generated intangible assets are measured at cost and amortized over their estimated useful lives. Impairments are recognized if the carrying amount of an asset exceeds the recoverable amount. In addition to those costs directly attributable to the asset, costs of internally generated intangible assets also include an appropriate portion of overhead costs.

The expected useful lives and amortization methods of intangible assets are based on historical values, plans and estimates. The weighted average amortization periods of intangible assets were as follows:

Emission rights: Emission certificates, which are granted free of charge by the German Emissions Trading Authority (Deutsche Emissionshandelsstelle) or a similar authority in other countries, are recognized in the balance sheet with a value of zero. Certificates purchased on the market are capitalized at cost as intangible assets. Emissions generated create an obligation to surrender the emission certificates. Emission certificates purchased on the market are subsequently measured at fair value, up to a maximum of the amount of the acquisition costs. If the fair value is lower than the carrying amount on the balance sheet date, the emission rights are impaired.

Goodwill is only written down in the case of an impairment. Impairment testing is performed once a year and whenever there is an indication of impairment. Goodwill impairments are not reversed.

Goodwill

BASF’s goodwill is allocated to 22 cash-generating units (2018: 23), which are defined either on the basis of business units or at a higher level. Goodwill for two of these cash-generating units, Pigments and Construction Chemicals, was reclassified to the disposal groups in 2019.

Annual impairment testing was performed in the fourth quarter of 2019 on the basis of the cash-generating units with the exception of the goodwill of the two units affected by the reclassification. Recoverable amounts were determined using the value in use. This was based on plans approved by company management and their respective cash flows, generally for the next five years. For the period thereafter, a terminal value was calculated using a forward projection from the last detailed planning year as a perpetual annuity. 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 and industry-specific sources.

The required discounting of cash flows for impairment testing is calculated using the weighted average cost of capital rate after tax, which is determined using the capital asset pricing model. It comprises a risk-free interest 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 were conducted assuming a weighted average cost of capital rate after taxes of between 5.16% and 7.73% (2018: between 5.83% and 6.90%). This corresponds to a weighted average cost of capital rate before taxes of between 6.38% and 10.00% (2018: between 7.00% and 8.50%).

The impairment tests for the construction chemicals and pigments cash-generating units were conducted before reclassification of goodwill to the disposal groups.

The recoverable amount for the two cash-generating units was calculated using fair value less expected costs to sell or the value in use. The weighted average cost of capital rates on the respective dates of impairment testing were 5.32% for construction chemicals and 7.03% for pigments.

After determining the recoverable amount for the cash-generating units, the conclusion was that reasonable possible deviations from the key assumptions would not lead to the carrying amounts of the 22 units exceeding their respective recoverable amounts.

Development of intangible assets

Additions related primarily to the acquisition of technologies and patents amounting to €49 million from Grillo-Werke AG, Duisburg, Germany, in the Nutrition & Care segment. Additions also included newly acquired software licenses and rights of use.

Additions from acquisitions resulted from the acquisition of Isobionics B.V., Geleen, Netherlands, a startup company that develops and produces natural flavors and fragrances. This increased goodwill by €16 million and capitalized know-how by €31 million. By contrast, there was a decrease of goodwill in the amount of €65 million due to a retroactive purchase price allocation and purchase price adjustment to assets from the acquisition of significant parts of Bayer’s seed and non-selective herbicide businesses and its vegetable seeds business in the previous year.

Disposals of intangible assets amounting to €281 million primarily concerned the derecognition of fully amortized assets for distribution and supply rights in the Agricultural Solutions segment and of software licenses.

Transfers to disposal groups were attributable to intangible assets in connection with the construction chemicals business in December 2019 and the pigments business in August 2019.

In 2019, additions to accumulated amortization contained impairments of €15 million, which pertained primarily to patents that were not allocated to an operational segment and were revalued due to a planned sale.

In 2018, intangible assets included rights of the Oil & Gas segment, which were amortized using the unit of production method, until the date of reclassification to the disposal group.

Additions referred primarily to software licenses purchased or internally developed software applications. Additions also included concessions for the search and production of oil and gas in Brazil.

Additions from acquisitions amounted to €5,540 million in 2018. The acquisition of significant parts of Bayer’s seed and non-selective herbicide businesses and vegetable seeds business, as well as the acquisition of Toda America LLC’s battery materials business led to a €1,257 million increase in goodwill. A further addition to goodwill amounting to €4 million arose from an additional purchase price payment for the acquisition in 2017 of GRUPO Thermotek based in Monterrey, Mexico. Further additions to intangible assets in connection with the key acquisitions mentioned above amounted to €4,279 million. These related predominantly to know-how, patents and production technologies in the amount of €2,725 million; product rights, licenses and trademarks in the amount of €1,054 million, as well as distribution, supply and similar rights in the amount of €364 million.

Disposals of intangible assets amounting to €294 million were largely attributable to the derecognition of fully amortized assets. The sale of shares in the Aguada Pichana Este concession in Argentina and the divestiture of the production site for styrene butadiene-based paper dispersions in Pischelsdorf, Austria led to a €6 million disposal of goodwill.

Transfers to disposal groups related mainly to the reclassification of intangible assets from the oil and gas business as of September 30, 2018 and, to a lesser extent, from the paper and water chemicals business to the disposal groups.

In 2018, additions to accumulated amortization contained impairments of €4 million. This mainly pertained to impairments of non-strategic know-how, patents and production technologies in the Functional Materials & Solutions segment and, to a lesser extent, to the amortization of unused software licenses and discontinued IT projects. Reversals of impairments of €2 million included in additions to accumulated amortization had a countereffect. These related primarily to distribution rights in the Functional Materials & Solutions segment and to a higher valuation of emissions rights due to increased fair market values. Until September 30, 2018, they also included amortization of rights belonging to the Oil & Gas segment in the amount of €29 million, which were amortized in accordance with the unit of production method.