28 – Leases

A lease is an agreement that conveys the right to control the use an identified asset for a defined period of time in return for a payment.

Leases in which BASF is a lessee mainly relate to real estate and transportation and technical equipment.

Leases can be embedded within other contracts. If separation is required under IFRS, the embedded lease is recorded separately from its host contract and each component of the contract is carried and measured in accordance with the applicable regulations.

Lease accounting until December 31, 2018

Lease contracts were classified as either operating or finance leases until December 31, 2018.

A lease is classified as a finance lease if it transfers all substantial risks and rewards related to the leased asset. Assets subject to a finance lease were capitalized at the lower of the fair value of the leased assets or the present value of the minimum lease payments. A lease liability was recorded in the same amount. The periodic lease payments were divided into principal and interest components. The principal component reduced the lease liability and did not have an effect on earnings. The interest component was reported as an interest expense and increased the lease liability through the unwinding of the discount. Depreciation was recognized over the shorter of the useful life of the asset or the period of the lease.

Assets subject to operating leases were not capitalized. Lease payments were recognized in the income statement in the period they were incurred.

Lease accounting since January 1, 2019

With the adoption of IFRS 16, the lessee is no longer required to differentiate between operating and finance leases. As lessee, BASF now accounts for nearly all leases, recognizing right-of-use assets for leased assets and liabilities for lease agreements. The following principles are considered:

• BASF exercises the exemption for lease agreements with a maximum term of 12 months from the date of provision and low-value assets. Low-value assets are generally defined as leased assets worth a maximum of €5,000.
• Lease liabilities are measured at the present value of the remaining lease payments, taking into account the incremental borrowing rate.
• As a general rule, BASF SEparates non-lease components, such as services, from lease payments.
• A right-of-use asset is generally recognized at the same amount as the lease liability. Differences may arise from the lease payments made prior to the provision of the leased asset, less any lease incentives received.
• After capitalization at commencement date, whereby the right-of-use asset is measured at cost, the right-of-use asset is generally depreciated over the lease term using the straight-line method.
• A number of leases, particularly for real estate and barges, include extension and termination options. Extension and termination options are taken into account on recognition of the lease liability only if BASF is reasonably certain that these options will be exercised in the future. When contract terms are being determined, consideration is given to all facts and circumstances that offer an economic incentive for exercising extension options or not exercising termination options. Changes in lease terms arising from the exercise of an extension option or non-exercise of a termination option are only considered when determining lease terms if sufficient certainty exists. Estimates and expectations which are asserted at the commencement date of the lease liability and the right-of-use asset and pertain to future payments not yet determined on the date of provision are assessed continuously during the lease term. If subsequently improved or changed knowledge influences the expected payment profile over time, the lease liability is remeasured.
• If an existing lease contract is modified, the lease liability and right-of-use asset must be remeasured, provided the modification changes the payment profile (pursuant to the interest and principal plan) or the scope (either quantitatively or time-related) of use of the asset.

The first-time adoption of IFRS 16 at BASF as of January 1, 2019, follows the modified retrospective method, meaning that prior-period information was not restated; this continued to be presented in accordance with IAS 17.

First-time adoption did not have any effect on equity. Lease agreements that were already in place as of December 31, 2018, were not re-assessed. Existing finance leases were not affected.

The application of IFRS 16 increased total assets by around €1.3 billion as of January 1, 2019, due to the addition of right-of-use assets and lease liabilities.

Lease liabilities as of December 31, 2018, included liabilities from finance leases in accordance with IAS 17, which did not change as of January 1, 2019. Assets previously capitalized through finance leases were reclassified to the new balance sheet items for right-of-use assets.

Based on the operating lease commitments as of December 31, 2018, the reconciliation to the opening balance for lease liabilities as of January 1, 2019, was as follows:

The weighted average incremental borrowing rate used to discount gross lease liabilities was 3.0% as of January 1, 2019.

Other effects on the depreciation expense, the interest result, the statement of cash flows and other indicators such as earnings per share are explained in the relevant notes, provided the effects are material.

BASF presents the interest component of lease payments in cash flows from operating activities and the repayment portion in cash flows from financing activities. Lease payments under short-term agreements, agreements with low-value assets or variable payments are presented in cash flows from operating activities.

BASF as lessee

Future lease payments as of December 31, 2019 included payments for individual lease contracts from the discontinued construction chemicals business for which associated lease liabilities were transferred to liabilities of the disposal groups in the amount of €3 million.

BASF Schweiz AG entered a five-year rental contract for a building and various parking lots with the sale of the Klybeck site in 2019. Lease liabilities from this sale and leaseback transaction totaled €8 million as of December 31, 2019 and earnings from the transaction totaled €29 million in 2019.

BASF was also a lessee under operating lease contracts in 2018. The resulting lease commitments totaled €1,482 million in 2018 and became due in the following years:

Future minimum payments from operating lease contracts included €144 million for companies in the oil and gas disposal group as of December 31, 2018.

Future minimum lease payments from subleases based on existing agreements amounted to €10 million in 2018.

In 2018, minimum lease payments in the amount of €494 million were included in income from operations. In 2018, conditional lease payments in the amount of €1 million were also included in income from operations. Furthermore, sublease payments in the amount of €4 million were included in income from operations in 2018.

BASF as lessor

BASF acts as a lessor for finance leases to a minor extent only. Receivables on finance leases were €23 million in 2019 (2018: €25 million). The leased assets pertained primarily to buildings and production facilities.

Claims arising from operating leases amounted to €174 million in 2019 (2018: €166 million). There are no material operating leases for property, plant and equipment.