14.Property, Plant and Equipment

The deconsolidation of Pure Salt Baytown LLC, Houston (United States), resulted in a decrease in the historical cost of acquisition or construction of plant installations and machinery due to changes in the scope of consolidation amounting to €73 million, a corresponding derecognition of accumulated depreciation of €65 million and the carrying amount of €8 million. Initial application of IFRS 16 resulted in an increase in cost of acquisition or construction in property, plant and equipment. See note 2.1 “Financial reporting standards applied for the first time in the reporting period” for effects of initial application.

Impairment losses of €1 million were reversed for property, plant, and equipment in the reporting year (previous year: €0 million).

Borrowing costs of €6 million were capitalized in property, plant, and equipment in the reporting year as part of the cost of qualifying assets (previous year: €4 million). The capitalization rate applied amounted to 1.4% on average (previous year: 1.4%).

14.1 Leasing

Covestro as lessee

The right-of-use assets from leases are reported in capitalized property, plant and equipment.

The following table shows the changes in carrying amounts of right-of-use assets from January 1, 2019, to December 31, 2019.

Right-of-use assets relate mainly to leases for production and logistics infrastructure and real estate leases. Some of the underlying leases include variable lease payments as well as options to extend or terminate the lease (for further details, see note 3 “Accounting Policies and Valuation Principles”). Leases for production and logistics infrastructure are mainly related to the rental of tanks and containers as well as rail cars. For tanks and containers, the average lease term is 14 years and for rail cars, nine years. Leases for renting real estate, particularly buildings, are for an average lease term of nine years.

The following table shows the amounts for all leases shown in the statement of cash flows and income statement:

The lease commitments for current leases not recognized on the balance sheet amount to €2 million.

For information on the liabilities arising from leases, see note 22 “Financing and Financial Liabilities.” For further details on payments from leases, see note 27 “Notes to the Statement of Cash Flows.”

Covestro as lessor

In fiscal 2019, leasing income generated from lease contracts under IFRS 16 (Leases) was €12 million. These are mainly related to real estate. In addition, lease payments from rentals of €8 million are expected to be received in the following year, not including the investment property as outlined below. Lease payments totaling €8 million are expected to be received in 2021 – 2024, and lease payments totaling €5 million after 2024.

At Covestro, risks from renting real estate are usually limited by building insurance policies and by the contractual obligation of the renter to return the real estate to its original condition. In addition, price adjustments based mainly on the consumer price index mechanisms are contractually agreed.

14.2 Investment property

Internal valuations are used as the primary basis for determining the fair values of investment property. The income approach is used for buildings and developed sites, and the market comparison approach is used for undeveloped sites.

The total carrying amount of investment property as of December 31, 2019, amounted to €31 million (previous year: €36 million), and its fair value totaled €211 million (previous year: €211 million). The rental income from investment property was €17 million (previous year: €26 million) and the operating expenses directly allocable to this property amounted to €14 million (previous year: €13 million). In the reporting period and in the previous year, there were no operating expenses recognized for investment property not generating any rental income.

Rental income generated from the leasing of properties classified as investment properties stemmed in part from contracts for hereditary building rights and leases granted by the Covestro Group. These contracts with a weighted average remaining term of 37 years relate to space used by companies and contractual partners in the chemical industry at production sites in Germany. Based on current rental prices, around €5 million in compensation will be received annually from these long-term contracts for the use of this space in the coming years.