10. Investments Accounted for Using the Equity Method and Other Financial Assets

Joint ventures and associated companies are accounted for using the equity method. The carrying amounts of shareholdings are adjusted annually based on the pro rata share of net income, dividends and other changes in equity. Should there be indications of a reduction in the value of an investment, an impairment test is conducted and, if necessary, an impairment is recognized in the income statement. In the case of publicly listed associated companies, share prices are included in the impairment test and form the basis of valuation if there is an indication for permanent impairment or reversal of an impairment. Furthermore, earnings and the carrying amount are adjusted when accounting policies deviate or as a result of purchase price allocations, which primarily affects Wintershall Dea AG, Kassel/Hamburg, Germany.

Exploration and development expenses in the oil and gas business, for which the equity method is applied, are accounted for using the successful efforts method. Under this method, costs of successful exploratory drilling as well as successful and dry development wells are capitalized.

Income from integral companies accounted for using the equity method is presented in EBIT, and income from non-integral companies accounted for using the equity method is presented together with income from other financial assets in net income from shareholdings. Similarly, integral and non-integral shareholdings accounted for using the equity method are also shown separately in the balance sheet. The material equity-accounted shareholding that is classified as integral is BASF-YPC Company Ltd., Nanjing, China, in which BASF and Sinopec each hold 50%, and which operates the Verbund site in Nanjing, China. The material non-integral shareholding is the Wintershall Dea AG oil and gas company, in which BASF holds a 72.7% share. The remaining shares are held by LetterOne. Wintershall Dea is classified as an associated company because, in addition to BASF and LetterOne, independent members are also represented in the board responsible for decisions about relevant activities and BASF can thus only exercise significant influence.

Stahl Lux 2 S.A., Luxembourg (BASF interest: 16.32%), Quantafuel ASA, Oslo, Norway (BASF interest: 9.51%), and CIMO Compagnie industrielle de Monthey S.A., Monthey, Switzerland (BASF interest: 15%), are classified as associated companies as BASF is represented in the relevant boards and can thus exercise significant influence over the companies.

10.1 Integral companies accounted for using the equity method

Income from integral companies accounted for using the equity method decreased by €289 million in 2022. Of the decrease, €196 million related to the shareholding in BASF-YPC Com­pany Ltd. and €41 million to BASF MPCC Company Ltd., Zhanjiang, China, primarily due to higher raw materials prices and lower volumes. In addition, negative earnings contributions resulted at Lucura Ver­sicherungs AG, Ludwigshafen am Rhein, Germany, due to losses from the valuation of securities. Lucura’s earnings contribution was positive in 2021.

Proportional income after taxes and other adjustments to income and expenses for the joint ventures decreased mainly because of the lower earnings contribution of BASF-YPC Company Ltd.

Changes in the scope of consolidation resulted from the transition to full consolidation of Lucura Versicherungs AG as of December 31, 2022, due to the increased significance of the company.

Proportional changes in other comprehensive income included income and expense recognized directly in equity and related, in addition to currency effects, to changes in the fair value of derivatives in connection with long-term power supply agreements, particularly at the HKZ Investor Holding B.V. joint venture in Arnhem, Netherlands.

Additions in 2022 mainly related to the shareholding in the HKZ Investor Holding B.V. joint venture. The company holds shares in the Hollandse Kust Zuid offshore wind farm and manages the power supply agreements with the wind farm. As a result of the sale of 51% of shares in HKZ Investor Holding B.V. as of April 12, 2022, it will no longer be controlled solely by BASF, but jointly with Allianz, and, as an an integral joint venture, accounted for using the equity method.

Disposals related to decreases in capital of the associated company, Yara Freeport LLC, Freeport, Texas.

Transfers in 2022 mainly included dividend payments for BASF-YPC Company Ltd. (joint venture) and Markor Meiou Chemical (Xinjiang) Co., Ltd., Korla, China (associated company).

Additional information on the BASF-YPC Company Ltd. material integral investment accounted for using the equity method

10.2 Non-integral companies accounted for using the equity method

Income from non-integral companies accounted for using the equity method decreased by €5,170 million in 2022 due primarily to the negative earnings contribution of Wintershall Dea AG.

Due to government intervention, among other things, there are growing limitations on the influence Wintershall Dea can exert on its shareholdings in Russia. For this reason, Wintershall Dea decon­solidated its shareholdings in Russia in the fourth quarter of 2022. The fair value adjustments carried forward at BASF from 2019 until that point were also derecognized. In turn, Wintershall Dea recognized its shareholdings as financial assets at fair value in accordance with IFRS 9. Interventions by the Russian government, particularly in the second half of 2022, had a severe negative impact on this value. Therefore, the initial value of the financial assets in the amount of €248 million was significantly below the previous value contribution and led to deconsolidation losses in BASF’s net income from shareholdings in the amount of €4,353 million (including previously recognized impairments). Moreover, Wintershall Dea recognized impairments on further Russia-related assets: As a result of the damage to the Nord Stream 1 and Nord Stream 2 pipelines, the shareholding in Nord Stream AG (BASF interest after taxes €997 million) as well as financing of Nord Stream 2 (BASF share after taxes €729 million) were fully impaired over the course of 2022. In addition, impairments of €438 million (BASF share after taxes) on Winters­hall Dea’s gas transportation business were recognized in connection with the war in Ukraine and the resulting sanctions and counter-sanctions. Deconsolidation effects and Russia-related impairments totaled €6,517 million (BASF share after taxes) in income from non-integral equity-accounted companies.

Furthermore, Wintershall Dea recognized expenses for impairments and reversals of impairments on assets in Germany, Mexico, Egypt and Algeria in the total amount of €58 million (BASF share after taxes).

Values in use were determined for the impairment test conducted by BASF as of December 31, 2022. The underlying assumptions for production and cost trends as well as the price assumptions for 2023 to 2040 largely correspond with Wintershall Dea’s. For 2023, an oil price of $85 per bbl of Brent crude and a gas price (TTF) of $35 per mmBtu were assumed. After a decline in oil prices to approximately $71 per bbl in 2024, and in gas prices to around $10 per mmBtu from 2024 to 2028, a subsequent increase is assumed at a nominal rate of 2% p.a. for both oil and gas. The expected cash flows were discounted using country-specific cost of capital rates, which reflect the relevant country risks and tax rates. The cost of capital rates in euros, calculated using the capital asset pricing model, were between 5.3% and 25.0% (2021: between 3.4% and 14.3%). On that basis, proportional impairments resulted in the amount of €11 million after taxes and reversals of impairments of €55 million after taxes on the fair value adjustments from 2019. The shareholding as a whole is recoverable.

Both a decrease of 10% in oil and gas price assumptions for the entire planning period and an increase of one percentage point in the cost of capital rate would not result in the need for an impairment of the shareholding as a whole. By contrast, a 10% price decrease would result in a decrease of €45 million (after taxes) in proportional reversals of impairments as well as in additional proprtional impairments of €47 million after taxes. An increase in capital cost rates of one percentage point would lead to lower proportional reversals of impairments of €31 million after taxes.

• For more information on Wintershall Dea, see the chapter on Non-Integral Oil and Gas Business in the Management’s Report

Proportional income after taxes and other adjustments to income and expenses for the associated companies declined mainly because of the negative earnings contribution of Wintershall Dea AG due to the impairments recognized as well as losses from the deconsolidation of its Russian shareholdings. Furthermore, an impairment on the shareholding in Quantafuel ASA is also included.

Proportional changes in other comprehensive income predominantly included currency effects at Wintershall Dea. With the deconsolidation of the Russian shareholdings held by Wintershall Dea, total differences arising from currency translation of €868 million were reclassified as earnings to the income statement.

Transfers in 2022 contained primarily Wintershall Dea’s dividend payments. Transfers in 2021 mainly related to the reclassification of Wintershall Dea, which had been under joint control until October 2021, from joint ventures to associated companies.

Additional information on the Wintershall Dea material non-integral investment accounted for using the equity method

The following table contains financial information on the Wintershall Dea material non-integral shareholding accounted for using the equity method, including adjustments for fair value made at initial recognition and the resulting effects on earnings.

10.3 Other shareholdings and financial assets

Net income from other shareholdings in 2022 rose year on year by €23 million due primarily to lower expenses from the measurement of shareholdings at fair value.

The rise in long-term securities in 2022 resulted from the inclusion of Lucura Versicherungs AG, which has been fully consolidated since December 31, 2022.