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 the 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. Emission rights purchased on the market are capitalized at cost as intangible assets. Emissions generated create an obligation to surrender the emission certificates. Intangible assets 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 for goodwill is performed once a year and whenever there is an indication of impairment. Goodwill impairments are not reversed.

BASF’s goodwill is allocated to 20 cash-generating units (2020: 20), which are defined either on the basis of business units or at a higher level.

The respective recoverable amounts were determined using the value in use. Plans approved by company management and their respective cash flows for the next five years were used. 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. Market assumptions regarding, for example, economic development, inflation expectations and market growth are included based on external macroeconomic and industry-specific sources.

The fundamental transformation of the automotive industry will have a significant impact on the emissions catalyst business, which belongs to the Catalysts (excluding battery materials) cash-generating unit. In the planning period, the demand for catalysts is initially expected to remain stable as a result of higher environmental standards. In the medium term, the transition from combustion engines to electromobility will lead to a steady decline in demand. For this reason, the growth rate for perpetual annuity was adjusted from 2.0% in 2020 to –0.7% in 2021.

• For more information on the Surface Technologies segment, which the cash-generating Catalysts (excluding battery materials) unit is allocated to, see the Management’s Report

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.

• For more information on the weighted cost of capital rate, see Note 1

The annual impairment tests of the 20 cash-generating units were performed in the fourth quarter of 2021. 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 were performed on the units assuming a weighted average cost of capital rate after taxes of between 5.51% and 6.67% (2020: between 4.86% and 6.92%). This corresponds to a weighted average cost of capital rate before taxes of between 6.53% and 8.94% (2020: between 6.50% and 8.85%).

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

In 2020, a goodwill impairment for the cash-generating Surface Treatment unit was recognized in the amount of €786 million in other expenses due to the significant drop in demand from effects of the coronavirus pandemic and expectations for slow recovery. The outcome of the annual impairment test in 2021 was that the recoverable amount for the cash-generating unit exceeded the carrying amount by €408 million. The recoverable amount would be equal to the carrying amount if the weighted average cost of capital rate rose by 1.05 percentage points or the growth rate were 1.46 percentage points lower.

Development of intangible assets

Additions from acquisitions resulted in the amount of €392 million from the acquisition of the 51% share in BASF Shanshan Battery Materials Co., Ltd., Changsha, China. It is allocated to the Surface Technologies segment.

• For more information on acquisitions, see Note 3

Disposals of intangible assets amounting to €638 million primarily concerned fully amortized distribution and similar rights in the Industrial Solutions and Nutrition & Care segments. Furthermore, customer relationships in the amount of €72 million and goodwill in the amount of €8 million were derecognized in connection with a divestiture in the Nutrition & Care segment. In addition, goodwill was derecognized through a divestiture in the Surface Technologies segment.

Transfers to disposal groups related to the adjustment of reclassified amounts of the divested pigments business and goodwill of the kaolin minerals business held for sale.

In 2021, additions to accumulated amortization contained impairments of €2 million. They primarily related to unrealized IT projects not allocated to an operational segment.