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 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. Certificates purchased on the market are capitalized at cost as intangible assets. Emissions generated create an obligation to surrender the emission certificates. Emission certificates 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 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 (2019: 22), which are defined either on the basis of business units or at a higher level. The reduction was due to the reclassification of goodwill for two of these cash-generating units, Pigments and Construction Chemicals, to the disposal groups in 2019. Impairment tests were performed on goodwill for both cash-generating units prior to their respective reclassifications in the previous year.

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 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. It comprises a risk-free interest rate, a market risk premium, and a spread for credit risk based on the respective industry-specific peer group.

Triggering events for potential impairment first became evident over the course of the summer due to the significant economic impact of the coronavirus pandemic. All cash-generating units were evaluated for potential impairment risks based on analyses. Except for the cash-generating unit and business unit, Surface Treatment, in the Surface Technologies segment, the analyses resulted in solid findings indicating no impairment risk.

The impairment test for the cash-generating Surface Treatment unit was accelerated; and future cash flows were adjusted downward given the market environment in the automotive and aviation industries due to the significant drop in demand from effects of the coronavirus pandemic and expectations for slow recovery. The impairment test also took into consideration measures approved and being taken due to the pandemic, such as efficiency improvements across the unit’s entire value chain. Assuming a weighted average cost of capital rate after taxes of 6.53% (2019: 5.17%), the changed assumptions resulted in a goodwill impairment of €786 million of the Surface Treatment unit, recognized in other expenses. The recoverable amount corresponds to the unit’s value in use and was €1,946 million as of September 30, 2020. A growth rate reduction of 0.5 percentage points would lead to a further need for impairment in the amount of €138 million. If all basic assumptions remained constant, a reduction of 10 percentage points in income from operations within the period of detailed planning would lead to a further need for impairment in the amount of €161 million. Irrespective of that, an additional impairment in the amount of €185 million would result from an increase of 0.5 percentage points to the cost of capital rate.

The annual impairment tests of the other 19 cash-generating units were performed in the fourth quarter of 2020. 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 4.86% and 6.92% (2019: between 5.16% and 7.73%). This corresponds to a weighted average cost of capital rate before taxes of between 6.50% and 8.85% (2019: between 6.38% and 10.00%).

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 amounts of 18 units exceeding their respective recoverable amounts.

This does not apply to the goodwill of the cash-generating unit and business unit, Resins, in the Industrial Solutions segment.

Future cash flows for the Resins unit were adjusted downward due to the effects of the coronavirus pandemic on the market environment in the automotive industry. Besides the effects of the coronavirus pandemic, profitability and efficiency-boosting measures, currently being implemented, were factored into the impairment test. The result of these assumptions was that the recoverable amount exceeded the carrying amount by €68 million, given a weighted average cost of capital rate after taxes of 6.63% (2019: 7.03%) and a growth rate of 2.0% (2019: 2.0%). The recoverable amount would be equal to the unit’s carrying amount if the weighted average cost of capital rate rose by 0.69 percentage points or the growth rate were 1.03 percentage points lower. Goodwill in the amount of €34 million was allocated to the Resins unit as of December 31, 2020.

Development of intangible assets

Additions in 2020 related primarily to the acquisition of production technologies amounting to €21 million from AgriMetis LLC, Lutherville, Maryland, in the Agricultural Solutions segment. Additions also included internally created intangible assets totaling €37 million, comprising primarily the development of software not allocated to an operational segment.

Additions from acquisitions resulted mainly from the acquisition of Solvay’s global polyamide business in the Materials segment, to which the additional goodwill is also allocated.

Disposals of intangible assets amounting to €249 million primarily concerned the derecognition of fully amortized assets for distribution and similar rights and of production technologies in the Industrial Solutions and Nutrition & Care segments.

Transfers to disposal groups related to the adjustment of reclassified amounts to the discontinued construction chemicals business.

In 2020, additions to accumulated amortization contained impairments of €35 million (excluding goodwill). They related mainly to customer relationships and to a production technology in the Nutrition & Care segment. Its use was discontinued prematurely due to the optimization of the production structure. Moreover, customer rights and production technologies were impaired in the Agricultural Solutions segment after the registration of an active ingredient expired.

Further impairments totaling €11 million were attributable to the Chemicals, Industrial Solutions, Nutrition & Care, Agricultural Solutions, Materials and Surface Technologies segments and related primarily to know-how, patents and production technologies.

Additions in 2019 related primarily to the acquisition of technologies and patents amounting to €49 million from Grillo-Werke AG, Duisburg, Germany, in the Nutrition & Care segment. Additions also included newly acquired software licenses and rights of use.

Additions from acquisitions resulted from the acquisition of Isobionics B.V., Geleen, Netherlands, a startup company that develops and produces natural flavors and fragrances. This increased goodwill by €16 million and capitalized know-how by €31 million. By contrast, there was a decrease of goodwill in the amount of €65 million due to a retroactive purchase price allocation and purchase price adjustment to assets from the acquisition of significant parts of Bayer’s seed and non-selective herbicide businesses and its vegetable seeds business in the previous year.

Disposals of intangible assets amounting to €281 million primarily concerned the derecognition of fully amortized assets for distribution and supply rights in the Agricultural Solutions segment and of software licenses.

Transfers to disposal groups were attributable to intangible assets in connection with the construction chemicals business in December 2019 and the pigments business in August 2019.

In 2019, additions to accumulated amortization contained impairments of €15 million. These impairments pertained primarily to patents that were not allocated to an operational segment and were revalued due to a planned sale.