26 – Supplementary Information on Financial Instruments

26.1 Accounting policies

Financial instruments

Financial assets and financial liabilities are recognized in the consolidated balance sheet when the BASF Group becomes a party to a financial instrument. Financial assets are derecognized when BASF no longer has a contractual right to the cash flows from the financial asset or when the financial asset is transferred together with all material risks and rewards of ownership and BASF does not have control of the financial asset after it has been transferred. For example, receivables are derecognized when they are definitively found to be uncollectible. Financial liabilities are derecognized when the contractual obligations expire, are discharged or cancelled. Regular-way purchases and sales of financial instruments are accounted for using the settlement date; in precious metal trading, the trade date is used.

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If pricing on an active market is available, for example in the form of exchange prices, these are used as the basis for the measurement. Otherwise, the measurement is based on either internal measurement models using current market parameters or external measurements, for example, from banks. These internal measurements rely predominantly on the net present value method and option pricing models. These models incorporate, for example, expected future cash flows as well as discount factors adjusted for term and, potentially, risk. Depending on the availability of market parameters, BASF assigns financial instruments’ market values one of the three levels of the fair value hierarchy pursuant to IFRS 13. Reassignment to a different level during a fiscal year is only carried out if the availability of observable market parameters for identical or similar items changes.

Except for financial assets measured at fair value through profit or loss, IFRS 9 requires the recognition of impairments for expected credit losses, independent of the existence of any actual default events and individual impairments if evidence of a permanent need for impairment exists. If this evidence no longer exists, the impairment is reversed in the statement of income up to the carrying amount of the asset had the default event not occurred. Impairments are generally recognized in separate accounts.

The classification and measurement of financial assets is based on the one hand 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. On the other hand, it also depends on the business model used for managing financial asset portfolios. Based on these two criteria, BASF uses the following measurement categories for financial assets:

  • Financial assets at fair value through profit or loss include all financial assets whose cash flows are not solely payments of principal and interest in accordance with the cash flow condition established in IFRS 9. At BASF, derivatives, for example, are allocated to this measurement category. In general, BASF does not exercise the fair value option in IFRS 9, which permits the allocation of financial instruments not to be measured at fair value through profit or loss on the basis of the cash flow condition or the business model criterion to the above category under certain circumstances.
  • Financial assets measured at amortized cost include all assets with contractual terms that give rise to cash flows on specific dates, provided that these cash flows are solely payments of principal and interest on the principal amount outstanding in accordance with the cash flow condition in IFRS 9, to the extent that the asset is held with the intention of collecting the expected contractual cash flows over its term. At BASF, this measurement category includes trade accounts receivable, as well as receivables reported under other receivables and miscellaneous assets and certain securities.
    Initial measurement of these assets is generally at fair value, which usually corresponds to the transaction price at the time of acquisition. Subsequent measurement effects are recognized in income using the effective interest method.
    Impairments are recognized for expected credit losses in both initial and subsequent measurement, even before the occurrence of any default event. Counterparties are generally considered to default when they become insolvent, become a debtor in a creditor protection program or are in a finance-related legal dispute with BASF, or more than half of BASF’s receivables portfolio with them is more than 90 days overdue. In these cases, individual impairments are recognized for the financial assets measured at amortized cost that are then considered to be credit impaired. In addition, an impairment must be recognized when the contractual conditions that form the basis for the receivable are changed through renegotiation in such a way that the present value of the future cash flows decreases.
    The extent of expected credit losses is determined based on the credit risk of a financial asset, as well as any changes to this credit risk: If the credit risk of a financial asset has increased significantly since initial recognition, expected credit losses are generally recognized over the lifetime of the asset. If, however, the credit risk has not increased significantly in this period, impairments are generally only recognized as 12-month expected credit losses. By contrast, under the simplified approach for determining expected credit losses permitted by IFRS 9, impairments for receivables such as lease receivables and trade accounts receivable always cover the lifetime expected credit losses of the receivable concerned.
    At BASF, the credit risk of a financial asset is assessed using both internal information and external rating information on the respective counterparty. A significant increase in the counterparty’s credit risk is assumed if its rating is lowered by a certain number of notches. The significance of the increase in the credit risk is not reviewed for trade accounts receivable or lease receivables. Furthermore, it is generally assumed that the credit risk for a counterparty with a high credit rating will not have increased significantly.
    Regional and, in certain circumstances, industry-specific factors and expectations are taken into account when assessing the extent of impairment as part of the calculation of expected credit losses and individual impairments. In addition, BASF uses internal and external ratings and the assessments of debt collection agencies and credit insurers, when available. Individual impairments are also based on experience relating to customer solvency and customer-specific risks. Factors such as credit insurance, which covers a portion of receivables measured at amortized cost, are likewise considered when calculating impairments. Bank guarantees and letters of credit are used to an immaterial extent. Expected credit losses and individual impairments are only calculated for those receivables that are not covered by insurance or other collateral. Impairments on receivables whose insurance includes a deductible are not recognized in excess of the amount of the deductible.
    A decrease in impairment due, for example, to a reduction in the credit risk of a counterparty or an objective event occurring after the impairment is recorded in profit or loss. Reversals of impairments may not exceed amortized cost, less any expected future credit losses.
  • Financial assets at fair value through other comprehensive income include all assets with contractual terms that give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding, in accordance with the cash flow condition in IFRS 9. Furthermore, the assets in this measurement category may not just be held with the intention of collecting the expected contractual cash flows over their term, but also generating cash flows from their sale. At BASF, certain securities that are classified as debt instruments are allocated to this category. BASF does not exercise the option to subsequently measure equity instruments through other comprehensive income.
    Assets measured at fair value through other comprehensive income are initially measured at fair value, which usually corresponds to the nominal value of the securities allocated to this category at the time of acquisition. Subsequent measurement is likewise at fair value. Changes in the fair value are recognized in other comprehensive income and reclassified to the statement of income when the asset is disposed of.
    Impairments on financial assets measured at fair value through other comprehensive income are calculated in the same way as impairments on financial assets measured at amortized cost and recognized in profit or loss.

The following measurement categories are used for financial liabilities:

  • Financial liabilities measured at amortized cost generally include all financial liabilities, provided these do not represent derivatives. They are generally measured at fair value at the time of initial recognition, which usually corresponds to the value of the consideration received. Subsequent measurement is recognized in profit or loss at amortized cost using the effective interest method. At BASF, for example, bonds and liabilities to banks reported under financial indebtedness are measured at amortized cost.
  • Financial liabilities at fair value through profit or loss contain derivative financial liabilities. These are likewise measured at the value of the consideration received as the fair value of the liability on the date of initial recognition. Fair value is also applied as a measurement basis for these liabilities in subsequent measurement. The option to subsequently measure non-derivative financial liabilities at fair value is not exercised.
    Derivative financial instruments can be embedded within other contracts, creating a hybrid financial instrument. If IFRS policies require separation, the embedded derivative is accounted for separately from its host contract and measured at fair value. If IFRS 9 does not provide for separation, the hybrid instrument is accounted for at fair value in its entirety.

Financial guarantees of the BASF Group are contracts that require compensation payments to be made to the guarantee holder if a debtor fails to make payment when due under the terms of a transaction entered into with the holder of the guarantee. Financial guarantees issued by BASF are measured at fair value upon initial recognition. In subsequent periods, these financial guarantees are carried at the higher of amortized cost or the best estimate of the present obligation as of the reporting date.

In cash flow hedges, future cash flows and the related income and expenses are hedged against the risk of changes in fair value. To this end, future underlying transactions and the corresponding hedging instruments are designated to a cash flow hedge accounting relationship for accounting purposes. The effective portion of the change in fair value of the hedging instrument, which often meets the definition of a derivative, and the cost of hedging are recognized directly in equity under other comprehensive income over the term of the hedge, taking deferred taxes into account. The ineffective portion is recognized immediately in the income statement. In the case of future transactions that lead to recognition of a nonfinancial asset or a nonfinancial liability, the cumulative fair value changes of the hedge in equity are generally charged against the cost of the hedged item on its initial recognition. For hedges based on financial assets, financial liabilities or future transactions, cumulative fair value changes of the hedges are transferred from equity to the income statement in the reporting period in which the hedged item is recognized in the income statement. The maturity of the hedging instrument is aligned with the effective date of the future transaction.

When fair value hedge accounting is used, the asset or liability recognized is hedged against the risk of a change in fair value. The hedging instruments used, which often take the form of a derivative, are measured at fair value and changes in fair value are recognized in the statement of income. The carrying amounts of the assets or liabilities designated as the underlying transaction are also measured at fair value through the statement of income.

26.2 Financial risks

Market risks

Foreign currency risks: Changes in exchange rates could lead to losses in the value of financial instruments and adverse changes in future cash flows from planned transactions. Foreign currency risks from financial instruments result from the translation at the closing rate of financial receivables, loans, securities, cash and financial liabilities into the functional currency of the respective Group company. Foreign currency contracts in various currencies are used to hedge foreign exchange risks from nonderivative financial instruments and planned transactions.

The foreign currency risk exposure corresponds to the net amount of the nominal volume of the primary and the derivative financial instruments that are exposed to currency risks. In addition, planned purchase and sales transactions of the respective following year are included if they fall under the currency risk management system. Long and short positions in the same currency are offset against each other.

The sensitivity analysis was conducted by simulating a 5% and 10% appreciation of the respective functional currency against the other currencies. A 5% appreciation of the respective functional currency would have reduced BASF’s income before income taxes by €203 million as of December 31, 2020. A 10% appreciation of the respective functional currency would have resulted in a negative effect on BASF’s income before income taxes in the amount of €390 million. A 5% appreciation of the respective functional currency resulted in an effect on BASF’s income in the amount of –€187 million as of December 31, 2019 (–€356 million with a 10% appreciation). The effect from the items designated under hedge accounting would have increased shareholders’ equity before income taxes by €36 million applying a 5% increase to the functional currency and by €78 million applying a 10% increase to the functional currency as of December 31, 2020 (2019: increase of €19 million applying a 5% increase to the functional currency and increase of €40 million applying a 10% increase to the functional currency). This only refers to transactions in U.S. dollars.

Exposure and sensitivity by currency (Million €)

 

December 31, 2020

December 31, 2019

 

Exposure

Sensitivity

Exposure

Sensitivity

 

 

+5%

+10%

 

+5%

+10%

USD

1,965

–101

–190

1,977

–111

–209

Other

1,117

–66

–123

1,037

–56

–106

Total

3,082

–167

–313

3,014

–167

–315

Due to the use of options to hedge currency risks, the sensitivity analysis is not a linear function of the assumed changes in exchange rates.

Interest rate risks: Interest rate risks arise from changes in prevailing market interest rates, which can lead to changes in the fair value of fixed-rate instruments and in interest payments for variable-rate instruments. Interest rate swaps and combined interest rate and currency derivatives are used in individual cases to hedge these risks. The derivatives are presented in Note 26.5. Interest rate risks are relevant to BASF’s financing activities but are not of material significance for BASF’s operating activities.

The variable interest risk exposure, which also includes fixed rate bonds maturing in the following year, amounted to –€1,659 million as of December 31, 2020 (2019: –€1,414 million). An increase in all relevant interest rates by one half of a percentage point would have lowered income before income taxes by €5 million as of December 31, 2020. An increase in all relevant interest rates by one percentage point would have lowered income before income taxes by €10 million as of the same date. An increase in all relevant interest rates by one half of a percentage point would have lowered income before income taxes by €3 million as of December 31, 2019 (an increase of one percentage point would have lowered income before income taxes by €6 million). Because no interest derivatives were designated to hedge accounting relationships as of December 31, 2020, a change in interest rates would not have had an effect on shareholders’ equity. If the relevant interest rates had changed by one half of a percentage point, the before-tax effect from items designated under hedge accounting would have been an immaterial increase in shareholders’ equity as of December 31, 2019 (increase of €1 million applying a 1% change in interest rates).

Carrying amount of nonderivative interest-bearing financial instruments (Million €)

 

December 31, 2020

December 31, 2019

 

Fixed interest rate

Variable interest rate

Fixed interest rate

Variable interest rate

Loans

75

115

156

255

Securities

51

206

89

490

Financial indebtedness

17,742

1,472

15,848

2,529

Nominal and fair values of interest rate swaps and combined interest rate and currency swaps (Million €)

 

December 31, 2020

December 31, 2019

 

Nominal value

Fair value

Nominal value

Fair value

Interest rate swaps

300

–4

of which payer swaps

300

–4

Combined interest rate and currency swaps

4,183

–163

4,183

60

of which fixed rate

4,183

–163

4,183

60

Commodity price risks: Some of BASF’s divisions are exposed to strong fluctuations in raw materials prices. These result primarily from raw materials (for example naphtha, benzene, natural gas, LPG condensate) as well as from precious metals. BASF takes the following measures to reduce price risks associated with the purchase of raw materials:

  • BASF uses commodity derivatives to hedge risks from the volatility of raw materials prices. These are primarily options on crude oil, oil products and natural gas.
  • The Catalysts division enters into both short-term and long-term purchase contracts with precious metal and battery metal producers. It also buys precious metals on spot markets from various business partners. The price risk from metals purchased to be sold on to third parties, or for use in the production of catalysts and battery materials, is hedged using derivative instruments. This is mainly performed using forward contracts, which are settled by either entering into offsetting contracts or by delivering the precious metal.
  • In the Agricultural Solutions division, the sales prices of products are sometimes pegged to the price of certain agricultural commodities. To hedge the resulting risks, derivatives on agricultural commodities are concluded.

In addition, BASF holds limited unhedged precious metal and oil product positions, which can also include derivatives, for trading on its own account. The value of these positions is exposed to market price volatility and is subject to constant monitoring.

By holding commodity derivatives and precious metal trading positions, BASF is exposed to price risks. The valuation of commodity derivatives and precious metal trading positions at fair value means that adverse changes in market prices could negatively affect the earnings and equity of BASF.

BASF performs value-at-risk analyses for all commodity derivatives and precious metal trading positions. Using the value-at-risk analysis enables continual quantification of market risk and forecasting of the maximum possible loss within a given confidence interval over a defined period. The value-at-risk calculation is based on a confidence interval of 95% and a holding period of one day. BASF uses the variance-covariance approach.

BASF uses value at risk in conjunction with other risk management tools. Besides value at risk, BASF sets volume-based limits as well as exposure and stop-loss limits.

Exposure to commodity derivatives (Million €)

 

December 31, 2020

December 31, 2019

 

Exposure

Value at risk

Exposure

Value at risk

Crude oil, oil products and natural gas

56

5

87

3

Precious metals

88

1

112

2

Agricultural commodities

37

0

163

0

The exposure corresponds to the net amount of all long and short positions of the respective commodity category.

Default and credit risk

Default and credit risks arise when customers and debtors do not fulfill their contractual obligations. BASF regularly analyzes the creditworthiness of the counterparties and grants credit limits on the basis of this analysis. Due to the global activities and diversified customer structure of the BASF Group, there is no significant concentration of default risk. The carrying amount of all receivables, loans and interest-bearing securities plus the nominal value of financial obligations stemming from contingent liabilities not to be recognized represents the maximum default risk for BASF.

Liquidity risks

BASF promptly recognizes any risks from cash flow fluctuations as part of liquidity planning. BASF has ready access to ample liquid funds from the ongoing commercial paper program and confirmed lines of credit from banks.

26.3 Maturity analysis

The interest and principal payments as well as other payments for derivative financial instruments are relevant for the presentation of the maturities of the contractual cash flows from financial liabilities. Future cash flows are not discounted here.

Derivatives are included using their net cash flows, provided they have negative fair values and therefore represent a liability. Derivatives with positive fair values are assets and are therefore not taken into account.

Maturities of contractual cash flows from financial liabilities as of December 31, 2020 (Million €)

 

Bonds and other liabilities to the capital market

Liabilities to credit institutions

Accounts payable, trade

Derivative liabilities

Miscellaneous liabilities

Total

2021

2,531

1,128

5,276

76

749

9,760

2022

2,161

295

12

287

267

3,022

2023

2,150

301

3

103

178

2,735

2024

673

868

28

132

1,701

2025

1,749

215

70

91

2,125

2026 and thereafter

8,133

1,035

80

605

9,853

Total

17,397

3,842

5,291

644

2,022

29,196

Maturities of contractual cash flows from financial liabilities as of December 31, 2019 (Million €)

 

Bonds and other liabilities to the capital market

Liabilities to credit institutions

Accounts payable, trade

Derivative liabilities

Miscellaneous liabilities

Total

2020

2,483

1,149

5,087

404

969

10,092

2021

1,252

89

146

334

1,821

2022

2,244

212

52

209

2,717

2023

1,239

221

31

139

1,630

2024

683

776

101

1,560

2025 and thereafter

9,541

888

101

493

11,023

Total

17,442

3,335

5,087

734

2,245

28,843

26.4 Classes and categories of financial instruments

For trade accounts receivable, other receivables and miscellaneous assets, cash and cash equivalents, as well as trade accounts payable and other liabilities, the carrying amount approximates the fair value.

The fair value of financial indebtedness is determined on the basis of interbank interest rates. The difference between carrying amounts and fair values results primarily from changes in market interest rates.

Carrying amounts and fair values of financial instruments as of December 31, 2020 (Million €)

 

Carrying amount

Total carrying amount within scope of application of IFRS 7

Valuation category in accordance with IFRS 9b

Fair value

Of which fair value level 1c

Of which fair value level 2d

Of which fair value level 3e

Shareholdingsa

533

533

FVTPL

94

93

1

Receivables from finance leases

44

44

n/a

44

Accounts receivable, trade

9,422

9,422

AC

9,422

Accounts receivable, trade

44

44

FVTPL

44

44

Derivatives – no hedge accounting

387

387

FVTPL

387

1

386

Derivatives – hedge accounting

132

132

n/a

132

0

132

Other receivables and miscellaneous assetsf

4,889

1,075

AC

1,075

Other receivables and miscellaneous assetsf

133

133

FVTPL

133

133

Securities

8

8

AC

8

Securities

0

0

FVTOCI

0

0

Securities

249

249

FVTPL

249

207

42

Cash equivalents

145

145

FVTPL

145

145

Cash and cash equivalents

4,185

4,185

AC

4,185

Total assets

20,171

16,357

 

15,918

446

738

Bonds

14,189

14,189

AC

15,500

15,500

Commercial paper

1,290

1,290

AC

1,290

Liabilities to credit institutions

3,735

3,735

AC

3,735

Liabilities from leases

1,360

1,360

n/a

1,360

Accounts payable, trade

5,291

5,291

AC

5,291

Derivatives – no hedge accounting

957

957

FVTPL

957

25

932

Derivatives – hedge accounting

1

1

n/a

1

1

Other liabilitiesf

2,833

1,804

AC

1,804

Total liabilities

29,656

28,627

 

29,938

25

16,433

a

In general, only significant shareholdings are measured at fair value. All insignificant shareholdings are measured at cost (carrying amount: €439 million). Fair value level 1 is applied to publicly listed shareholdings. Level 2 is applied to shareholdings for which valuation is based on parameters observable in the market to the greatest extent possible. These may be adjusted to reflect valuation-relevant characteristics of the respective shareholding in the fair value.

b

AC: amortized cost; FVTOCI: fair value through other comprehensive income; FVTPL: fair value through profit or loss; a more detailed description of the categories can be found in Note 26.1.

c

Fair value was determined based on quoted, unadjusted prices on active markets.

d

Fair value was determined based on parameters for which directly or indirectly quoted prices on active markets were available.

e

Fair value was determined based on parameters for which there was no observable market data.

f

Does not include separately shown derivatives or receivables and liabilities from finance leases. If miscellaneous receivables are valued at fair value through profit or loss, their valuation is generally based on parameters observable on the market. These are adjusted to reflect valuation-relevant characteristics of the respective assets in the fair value.

Carrying amounts and fair values of financial instruments as of December 31, 2019 (Million €)

 

Carrying amount

Total carrying amount within scope of application of IFRS 7

Valuation category in accordance with IFRS 9b

Fair value

Of which fair value level 1c

Of which fair value level 2d

Of which fair value level 3e

Shareholdingsa

501

501

FVTPL

34

22

12

Receivables from finance leases

23

23

n/a

23

Accounts receivable, trade

8,755

8,755

AC

8,755

Accounts receivable, trade

338

338

FVTPL

338

338

Derivatives – no hedge accounting

437

437

FVTPL

437

1

436

Derivatives – hedge accounting

162

162

n/a

162

0

162

Other receivables and miscellaneous assetsf

4,192

1,186

AC

1,186

Other receivables and miscellaneous assetsf

88

88

FVTPL

88

88

Securities

11

11

AC

11

Securities

4

4

FVTOCI

4

4

Securities

563

563

FVTPL

563

563

Cash equivalents

198

198

FVTPL

198

198

Cash and cash equivalents

2,229

2,229

AC

2,229

Total assets

17,501

14,495

 

14,028

784

1,040

Bonds

14,276

14,276

AC

15,461

15,461

Commercial paper

861

861

AC

861

Liabilities to credit institutions

3,240

3,240

AC

3,240

Liabilities from leases

1,420

1,420

n/a

1,420

Accounts payable, trade

5,087

5,087

AC

5,087

Derivatives – no hedge accounting

677

677

FVTPL

677

33

644

Derivatives – hedge accounting

4

4

n/a

4

0

4

Other liabilities f

3,004

1,558

AC

1,558

Total liabilities

28,569

27,123

 

28,308

33

16,109

a

In general, only significant shareholdings are measured at fair value. All insignificant shareholdings are measured at cost (carrying amount: €467 million). Fair value level 1 is applied to publicly listed shareholdings. Level 2 is applied to shareholdings for which valuation is based on parameters observable in the market to the greatest extent possible. These may be adjusted to reflect valuation-relevant characteristics of the respective shareholding in the fair value.

b

AC: amortized cost; FVTOCI: fair value through other comprehensive income; FVTPL: fair value through profit or loss; a more detailed description of the categories can be found in Note 26.1.

c

Fair value was determined based on quoted, unadjusted prices on active markets.

d

Fair value was determined based on parameters for which directly or indirectly quoted prices on active markets were available.

e

Fair value was determined based on parameters for which there was no observable market data.

f

Does not include separately shown derivatives or receivables and liabilities from finance leases. If miscellaneous receivables are valued at fair value through profit or loss, their valuation is generally based on parameters observable on the market. These are adjusted to reflect valuation-relevant characteristics of the respective assets in the fair value.

Offsetting of derivative assets and liabilities as of December 31, 2020 (Million €)

 

Offset amounts

Amounts that cannot be offset

 

 

Gross amount

Amount offset

Net amount

Due to global netting agreements

Relating to financial collateral

Potential net amount

Derivatives with positive fair values

415

–18

397

–134

–61

202

Derivatives with negative fair values

563

–18

545

–134

–233

178

Offsetting of derivative assets and liabilities as of December 31, 2019 (Million €)

 

Offset amounts

Amounts that cannot be offset

 

 

Gross amount

Amount offset

Net amount

Due to global netting agreements

Relating to financial collateral

Potential net amount

Derivatives with positive fair values

452

–70

382

–163

–116

103

Derivatives with negative fair values

424

–70

354

–163

–57

134

The table “Offsetting of derivative assets and liabilities” shows the extent to which assets and liabilities were offset in the balance sheet, as well as potential effects from the offsetting of derivatives subject to a legally enforceable global netting agreement (primarily in the form of an ISDA agreement) or similar agreement. For positive fair values of combined interest rate and currency swaps, the respective counterparties provided cash collaterals in an amount comparable to the outstanding fair values.

Deviations from the derivatives with positive fair values and derivatives with negative fair values reported in other receivables and other liabilities at the end of 2020 and 2019 arose from derivatives not subject to any netting agreements as well as from embedded derivatives. These are therefore not included in the table above.

In addition to the offsetting of derivatives presented in the table above, trade accounts receivable in 2020 were offset against trade accounts payable and advance payments received on orders, which were included in current other liabilities, provided specific netting agreements with customers existed. As a result, trade accounts receivable were reduced by €616 million. The reduction in trade accounts payable was €45 million and the reduction in advance payments received on orders was €571 million. Accordingly, the net amount for trade accounts receivable was €9,466 million (gross amount before offsetting: €10,082 million). The net amount for trade accounts payable was €5,291 million (gross amount before offsetting: €5,336 million). The net amount for advance payments received on orders was €679 million (gross amount before offsetting: €1,250 million). In 2019, trade accounts receivable were only offset against the advance payments received on orders included in current other liabilities. Both balance sheet items were reduced by €647 million. Accordingly, the net amount for trade accounts receivable was €9,093 million (gross amount before offsetting: €9,740 million). The resulting net amount for advance payments received on orders was €537 million (gross amount before offsetting: €1,184 million).

The net gains and losses from financial instruments shown in the following table comprise the results of valuations, the amortization of discounts, the recognition and reversal of impairments, results from the translation of foreign currencies as well as interest, dividends and all other effects on the earnings resulting from financial instruments. The line item financial instruments at fair value through profit or loss contains only gains and losses from instruments that are not designated as hedging instruments in accordance with IFRS 9.

Net gains and losses from financial instruments 2020 (Million €)

 

Total

Financial assets measured at amortized cost

–282

of which interest result

32

Financial instruments at fair value through profit or loss

691

of which interest result

65

Financial assets at fair value through other comprehensive income

2

of which interest result

1

Financial liabilities measured at amortized cost

–326

of which interest result

–403

Net gains and losses from financial instruments 2019 (Million €)

 

Total

Financial assets measured at amortized cost

256

of which interest result

48

Financial instruments at fair value through profit or loss

–37

of which interest result

68

Financial assets at fair value through other comprehensive income

4

of which interest result

4

Financial liabilities measured at amortized cost

–724

of which interest result

–512

26.5 Derivative financial instruments and hedge accounting

The use of derivative financial instruments

BASF is exposed to foreign currency, interest rate and commodity price risks during the normal course of business. These risks are hedged using derivative instruments as necessary in accordance with a centrally determined strategy. Hedging is employed for existing underlying transactions from the product business, cash investments and financing as well as for planned sales, raw material purchases and capital measures. Furthermore, hedging is also used for cash flows from acquisitions and divestitures. The risks from the hedged items and the derivatives are continually monitored. Where derivatives have a positive market value, BASF is exposed to credit risks from derivative transactions in the event of nonperformance of the other party. To minimize the default risk on derivatives with positive market values, transactions are exclusively conducted with creditworthy banks and partners and are subject to predefined credit limits.

To ensure efficient risk management, risk positions are centralized at BASF SE and certain Group companies. The contracting and execution of derivative financial instruments for hedging purposes are conducted according to internal guidelines, and subject to strict control mechanisms.

The fair values of derivative financial instruments are calculated using valuation models that use input parameters observable on the market. Exceptions to this are some commodity derivatives, whose valuation is based directly on market prices.

In addition to the derivative instruments presented in the following table, BASF also has derivatives that are embedded in other financial instruments. This primarily relates to options embedded in a loan on the borrower’s equity instruments. The fair value of these derivatives was €33 million as of December 31, 2020.

Fair value of derivative instruments (Million €)

 

December 31,
2020

December 31,
2019

Foreign currency forward contracts

10

26

Foreign currency options

35

22

Foreign currency derivatives

45

48

of which designated hedging instruments as defined by IFRS 9 (hedge accounting)

35

18

Interest rate swaps

–4

of which designated hedging instruments as defined by IFRS 9 (hedge accounting)

–4

Combined interest rate and currency swaps

–163

60

of which designated hedging instruments as defined by IFRS 9 (hedge accounting)

90

138

Interest derivatives

–163

56

Commodity derivatives

–321

–186

of which designated hedging instruments as defined by IFRS 9 (hedge accounting)

7

6

Derivative financial instruments

–439

–82

Hedge accounting

BASF is exposed to commodity price risks in the context of procuring naphtha. Some of the planned purchases of naphtha are hedged using swaps and options on oil and oil products. The main contractual elements of these items are aligned with the characteristics of the hedged item. Cash flow hedge accounting was employed for a portion of these hedging relationships in 2020 and 2019. The average exercise price of the designated options was $454.45 per metric ton as of December 31, 2020 (December 31, 2019: $529.53 per metric ton). Cash flows from designated hedging instruments and hedged transactions occur in the following year and are also recognized in profit or loss for that year.

Furthermore, cash flow hedge accounting continued to be employed to a minor extent for procuring natural gas, which is likewise exposed to commodity price risks. Commodity price-based options serve as hedging instruments, for which contract terms are defined to reflect the risks of the hedged item. Depending on where trading took place, the average exercise price of the designated options was €13.35 per MWh or $2.7410 per mmBtu as of December 31, 2020. The average exercise price of the designated options was $2.4539 per mmBtu as of December 31, 2019. Cash flows from the hedging transaction and hedged item are generally recognized in profit or loss for the following year.

The change in the options’ time value is recognized separately in equity as costs of transaction-related hedging and, in the year during which the hedged items mature, it is initially derecognized against the carrying amount of the procured assets and recognized in profit or loss when the assets are consumed. In 2020, a decrease in fair value of €17 million was recognized in equity attributable to shareholders of BASF SE, and €13 million was initially derecognized against the carrying amount of the inventories procured and then recognized for their use in profit or loss. In 2019, a decrease in fair value of €3 million was recognized in equity attributable to shareholders of BASF SE, and €2 million was derecognized against the carrying amount of the assets.

BASF’s planned soybean procurement is also exposed to commodity price risks. These commodity price risks are hedged with soybean futures. The contractual conditions for these hedging transactions correspond to the respective hedged item, and some are designated as cash flow hedge accounting relationships. The average price hedged using these instruments was $12.5175 per bushel as of December 31, 2020 (December 31, 2019: $9.4559 per bushel). Cash flows from these futures and the hedged expected future transactions are generally recognized in profit or loss for the following year.

BASF is exposed to foreign currency risks due to planned sales in U.S. dollars. To some extent, cash flow hedge accounting is applied using currency options. The hedged transaction – the designated share of expected sales in U.S. dollars – is calculated based on internal thresholds. The hedged volume is always below the total amount of expected sales in U.S. dollars for the following fiscal year. The average hedged rate was $1.1583 per euro as of December 31, 2020, and $1.1105 per euro in the previous year. The impact on earnings from designated transactions in 2020 will be recognized in the following year. The decrease in the options’ time value component arising in the amount of €30 million in 2020 was recognized separately in equity as the cost of hedging and resulted in a reduction in equity. Accumulated changes in the options’ time values were reclassified to profit or loss due to the maturity of hedged items in the amount of €34 million. In 2019, –€38 million was recognized separately in equity as a change in the options’ time value component, and €35 million was reclassified to profit or loss.

The interest rate risk of the variable-rate bonds issued by BASF SE in 2013 was hedged using interest rate swaps, which converted the bonds into fixed-interest rate bonds with a rate of 1.45%. The key terms of the interest rate swap contracts used as hedging instruments generally correspond to the contractual elements of the hedged item. The bond and the interest rate swaps were designated to hedge accounting. The hedge relationship ended in 2020 due to maturity of the hedging transaction and hedged item.

Furthermore, BASF SE’s fixed-rate U.S. private placement of $1.25 billion, issued in 2013, was converted to euros using cross-currency swaps, as the private placement exposes BASF to a combined interest/currency risk. The hedged interest rate was 4.13% in the fiscal years 2020 and 2019. The hedged foreign exchange rate in both years was $1.3589 per euro. This hedge was designated as a cash flow hedge.

In 2020, the expected sale price associated with the disposal of the construction chemicals and pigments businesses was partially hedged against exchange rate fluctuations. The occurrence of the hedged transactions was, due to contractual agreements, considered highly probable; and the transactions and derivatives used for hedging were designated to a cash flow hedge accounting relationship. The hedge was initially achieved through foreign currency forward contracts and, following the discontinuation of this hedging relationship, with foreign currency options. Both cases were transaction-related hedges. The change in the forward rate and the change in the time value component are recognized as hedging costs at a point in time. These costs were recognized in BASF Group equity in the amount of –€18 million Due to the sale of the construction chemicals business as of September 30, 2020, €11 million was reclassified to profit or loss and included in disposal gains from the discontinued construction chemicals business. There was no ineffectiveness at any time during the year. The average hedged rate was $1.1964 per euro as of December 31, 2020.

The effects of the hedging relationships on the balance sheet, the cash flow hedge reserve, hedged nominal value and ineffectiveness to be determined are presented in the following tables by fiscal year.

Cash flow hedge accounting effects in 2020 (Million €)

 

Carrying amount of hedging instruments

 

Cash flow hedge reserve

Change in fair values for assessing ineffectiveness

Recognized ineffectiveness

 

Financial assets

Financial liabilities

Balance sheet item

Nominal value

Accumulated amounts for continuing hedging relationships

Hedging effects recognized in other comprehensive income

Amounts reclassified to profit or loss for realized hedging transactions

Income statement item for recognition of reclassification

Hedging instrument

Hedged transaction

Ineffective­ness amount

Income statement item

Foreign currency risks

35

Other receivables and miscellaneous assets

1,142

27

114

–77

Other operating income/income from discontinued operations

27

27

n/a

Interest risks

Other liabilities

–3

4

Interest income

0

0

n/a

Combined interest/foreign currency risks

90

Other receivables and miscellaneous assets

920

5

–48

94

Other financial income

90

102

n/a

Commodity price risks

7

0

Other receivables and miscellaneous assets/other liabilities

65

5

9

n/a

5

5

n/a

Total

132

0

 

2,127

37

72

21

 

122

134

 

Cash flow hedge accounting effects in 2019 (Million €)

 

Carrying amount of hedging instruments

 

Cash flow hedge reserve

Change in fair values for assessing ineffectiveness

Recognized ineffectiveness

 

Financial assets

Financial liabilities

Balance sheet item

Nominal value

Accumulated amounts for continuing hedging relationships

Hedging effects recognized in other comprehensive income

Amounts reclassified to profit or loss for realized hedging transactions

Income statement item for recognition of reclassification

Hedging instrument

Hedged transaction

Ineffective­ness amount

Income statement item

Foreign currency risks

18

Other receivables and miscellaneous assets

733

10

7

0

Other operating income

10

10

n/a

Interest risks

4

Other liabilities

300

–1

–1

4

Interest income

4

4

n/a

Combined interest/foreign currency risks

138

Other receivables and miscellaneous assets

920

–37

58

–21

Other financial income

138

149

n/a

Commodity price risks

6

0

Other receivables and miscellaneous assets/other liabilities

123

2

4

n/a

2

2

n/a

Total

162

4

 

2,076

–26

68

–17

 

154

165

 

The occurrence of all forecasted transactions was considered to be highly probable at all times during fiscal years 2019 and 2020. Amounts accumulated in the cash flow hedge reserve for commodity price risks are derecognized against the carrying amount of acquired assets once the hedged transaction occurs. Thus, there is no immediate reclassification of the amounts recognized in the cash flow hedge reserve to profit or loss in these cases.

In connection with its catalyst production, BASF is exposed to commodity price risks associated with holding physical precious metal items. These production-related precious metal inventories are hedged with forward contracts in accordance with a defined hedging strategy. In 2020, a portion of these precious metal inventories was designated for the first time to a fair value hedge accounting relationship with forward contracts on the precious metals. Changes in the forward rate were considered costs of hedging, and €2 million was recognized in other comprehensive income and reclassified successively to profit or loss, being a time-period-related hedge. All hedging instruments expired in 2020. The hedged precious metals were sold. Cash flows in connection with the hedging instruments were recognized in profit or loss in 2020. All hedging relationships were fully effective.