1 – Basis of presentation

The Consolidated Financial Statements of the BASF Group for the year ending December 31, 2018, were prepared in accordance with the International Financial Reporting Standards (IFRS) in effect as of the balance sheet date. The Consolidated Half-Year Financial Statements as of June 30, 2019, have been prepared – in line with the rules of International Accounting Standard 34 – in abbreviated form and largely continuing the same accounting policies, with the exception of the accounting rules presented in the following.

The Condensed Consolidated Half-Year Financial Statements and the Consolidated Interim Management’s Report have not been audited, nor have they undergone an auditor’s review.

Accounting policies applied for the first time in 2019

IFRS 16 – Leases

IFRS 16 – Leases was endorsed by the European Union on October 31, 2017, and applied by BASF for the first time as of January 1, 2019. IFRS 16 requires an accounting model for a lessee that recognizes all right-of-use assets and liabilities from lease agreements in the balance sheet. As for the lessor, the new standard substantially carries forward the accounting requirements of IAS 17 – Leases. This means that lessors will continue to classify leases as either finance or operating leases.

The first-time adoption of IFRS 16 at BASF followed the modified retrospective method. Comparative prior-period information is not restated; this continues to be presented in accordance with IAS 17. BASF measures lease liabilities arising from operating leases with a remaining term of more than 12 months at the present value of the remaining lease payments, taking into account the incremental borrowing rate (as of January 1, 2019). The right-of-use asset is generally recognized at the same amount as the lease liability. Differences between the value in use and the lease liability mainly arose from the lease payments made prior to the provision of the leased asset, less any lease incentives received. This did not have any effect on equity. BASF exercised the exemption for lease agreements of up to 12 months and low-value assets. As a general rule, low-value assets are defined as leased assets worth a maximum of €5,000. Lease agreements that were already in place as of December 31, 2018, were not reassessed. Existing finance leases are not affected.

At BASF, leases mainly relate to real estate and transportation and technical equipment. Extension and termination options were taken into account on recognition of the lease liability if BASF was reasonably certain that these options will be exercised in the future. As a general rule, BASF recognizes non-lease components such as services separately to lease payments.

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 item “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 2.3% as of January 1, 2019.

Other effects on the depreciation charge, 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.

Amendments to IFRS 9 – Financial Assets with a Prepayment Feature with Negative Compensation

The amendments pertain to 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. They have no effect on BASF.

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 with respect to both actual and deferred taxes. The amendments have no material effect on BASF.

Amendments to IAS 28 – Long-Term Interests in Associates and Joint Ventures

On October 12, 2017, the IASB published amendments with respect to the accounting treatment of long-term interests in associated companies and joint ventures. These amendments were endorsed by the European Union on February 8, 2019. They 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 amendments have no material effect on BASF.

Annual Improvements to IFRSs (2015–2017)

Four IFRSs were amended in the Annual Improvements to IFRSs (2015–2017). The amendments were endorsed by the European Union on March 14, 2019. They did not have any material effect on BASF.

In IFRS 3 – Business Combinations, 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 remeasure its previously held interest in the joint operation.

In IFRS 11 – Joint Arrangements, it was clarified that if 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 remeasured (IFRS 11.B33CA).

IAS 12 – Income Taxes 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.

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

Improvements to IAS 19 – Plan Amendment, Curtailment or Settlement

The amendments relate to the measurement of pension obligations based on updated assumptions if plan amendment, curtailment or settlement occurs. After such an event, the past service cost as well as any gains or losses on the basis of current actuarial assumptions and a comparison of the resulting pension benefits must be calculated before and after the change. The periods before and after the plan amendment, curtailment or settlement are treated separately in subsequent measurement. The improvements were endorsed by the European Union on March 13, 2019. BASF does not anticipate any effects from the improvements to IAS 19 in 2019.