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.

In both years, BASF’s goodwill was allocated to 20 cash-generating units, 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 sales revenue (excluding precious metals), contribution margins, fixed costs and investments from which income from operations before depreciation and amortization is determined based on which EBITDA margin is derived. Market assumptions regarding, for example, gas and raw materials prices, exchange rates, economic development, inflation expectations and market growth of the respective customer industries 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. Because there were no material changes in planning assumptions from the previous year, the growth rate for perpetual annuity remained unchanged at –0.7%. In the planning period, the demand for catalysts is still 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.

In light of the war in Ukraine, the significant movements in gas and raw materials prices are being taken into account in future business expectations. In upcoming years, the assumption is that average gas and raw materials prices in Germany will only slowly return to a level that is comparable to that of other regions. From 2024, a decline in prices is expected, which was accounted for in the respective planning.

In addition, planning is also based on the strategies of the individual strategic business units which comprise the respective cash-generating units. The digitalization and sustainability trends identified in the strategies are thus taken into account in the respective impairment tests.

More information on strategy and identified digitalization and sustainability trends:

• Our Strategic Action Areas
• Our Sustainability Concept

The required discounting of cash flows for impairment testing is calculated using the weighted average cost of capital after taxes, which is determined using the capital asset pricing model.

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

During the first half of 2022, BASF’s market capitalization fell significantly below the carrying amount of equity recognized in the balance sheet. BASF therefore reviewed whether a need for impairment could be derived from this, especially of goodwill, as of June 30, 2022. The tests showed that there were no indications of goodwill impairment as of June 30, 2022.

• For more information on the review of goodwill as of June 30, 2022, see Note 11 of the Half-Year Financial Report

The annual impairment tests of the 20 cash-generating units were performed in the fourth quarter of 2022. 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 5.97% and 7.75% (2021: between 5.51% and 6.67%). This corresponds to a weighted average cost of capital rate before taxes of between 6.96% and 10.80% (2021: between 6.53% and 8.94%).

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 exceeding the respective recoverable amounts except in the Catalysts (excluding battery materials) and Surface Treatment divisions, which are allocated to the Surface Technologies segment.

The recoverable amount for the Surface Treatment cash-generating unit exceeded the carrying amount by €108 million in 2022 (2021: €408 million). A weighted cost of capital after taxes of 7.75% (2021: 6.67%) and an EBITDA margin in the last detailed planning year were used as the basis for calculating the final value of 17.00% (2021: 18.88%) for the impairment test. The recoverable amount would be equal to the unit’s carrying amount if the weighted average cost of capital rose by 0.34 percentage points (2021: 1.05 percentage points), the growth rate were 0.48 percentage points (2021: 1.46 percentage points) lower, or the EBITDA margin in the last detailed planning year as the basis for calculating the final value were 0.95 percentage points (2021: 3.37 percentage points) lower.

A weighted cost of capital after taxes of 7.75% (2021: 6.63%) and an EBITDA margin in the last detailed planning year as the basis for calculating the final value of 29.60% were used for the annual impairment test of the Catalysts (excluding battery materials) cash-generating unit. The recoverable amount for this unit exceeded the carrying amount by €179 million. The recoverable amount would be equal to the unit’s carrying amount if the weighted average cost of capital rose by 0.25 percentage points, the growth rate were 0.66 percentage points lower, or the EBITDA margin in the last detailed planning year as the basis for calculating the final value were 1.07 percentage points lower.

Development of intangible assets

Additions in 2022 related primarily to capitalized IT project expenses and acquired software licenses in the Surface Technologies segment as well as internally developed software with no segment allocation.

Disposals of intangible assets amounting to €421 million primarily concerned fully amortized assets in the Agricultural Solutions, Industrial Solutions, Nutrition & Care segments as well as assets with no segment allocation. In addition, goodwill was derecognized through divestitures in the Surface Technologies and Industrial Solutions segments.

Transfers to disposal groups related to adjustments to goodwill of the divested kaolin minerals business.

In 2022, additions to accumulated amortization contained impairments of €4 million. These related mainly to unfinished IT projects with no operational allocation as well as customer relationships in the Agricultural Solutions segment.