2.Effects of New Financial Reporting Standards

2.1 Financial reporting standards applied for the first time in the reporting period

With the exception of IFRS 16 (Leases), initial application of the standards listed in the table had little or no material impact on the presentation of the net assets, financial position, and results of operations. The impact of the initial application of IFRS 16 is outlined below.

Initial application of IFRS 16

On January 13, 2016, the IASB published IFRS 16 (Leases), a new standard for recognizing leases, which has been applied since January 1, 2019, in accordance with the transitional provisions and replaces the previous accounting provisions for leases.

While IFRS 16 basically retains the previous accounting rules for lessors, there is now only one accounting model for use by lessees. This requires a lessee to recognize a right-of-use asset and a corresponding lease liability for each lease. The right-of-use asset reflects a lessee’s right to use the asset being leased. The lease liability represents the lessee’s obligation to make contractual lease payments. Exemptions are available for leases with a term of 12 months or less or those with a low-value underlying asset.

IFRS 16 was applied using the modified retrospective approach for all leases in which Covestro is the lessee. For this reason, the reference figures for previous years were not adjusted. These continue to be presented in accordance with the previous accounting rules under IAS 17 (Leases) (for further details, see note 3 “Accounting Policies and Valuation Principles”). The initial application of IFRS 16 had no effect on equity as of January 1, 2019.

The transitional provisions under IFRS 16 stipulate that on the date of initial application no new assessment has to be made as to whether an existing agreement meets the definition of a lease according to IFRS 16. Rather, those arrangements previously assessed to be leases by applying IAS 17 and IFRIC 4 (Determining Whether an Arrangement Contains a Lease), up to and including December 31, 2018, can be continued. Covestro made use of this practical expedient when applying IFRS 16 for the first time.

With regard to lessees, right-of-use assets were generally recognized in the amount of the corresponding lease liabilities upon initial application of IFRS 16 at Covestro. In specific cases, the right-of-use asset was adjusted by the amount of accrued advance payments or liabilities recognized in the financial statements as of the end of fiscal 2018. Initial direct costs were not taken into account in the measurement of the right-of-use asset on the date of initial application. The corresponding lease liability was routinely measured using the incremental borrowing rate at the date of initial application. In addition, Covestro took advantage of the optional exemptions regarding the recognition of leases with a term of 12 months or less (short-term leases) and leases on low-value assets. As under the previously applicable standard IAS 17, payments for these leases continue to be recognized in profit or loss over the term using the straight-line method. Leases with a remaining term of less than 12 months at the date of application were recognized in the same way as short-term leases. Options to extend or terminate were reconsidered at initial application of IFRS 16 in the assessment of the term of the contract.

Upon initial application of IFRS 16, Covestro recognized lease liabilities for leases formerly classified as operating leases under IAS 17. These liabilities are measured as of January 1, 2019, at the present value of the remaining contractual lease payments discounted using the lessee’s individual incremental borrowing rate. The weighted average of the incremental borrowing rate amounted to 3.2%.

The difference between the total of the future minimum lease payments from operating leases disclosed in the Notes to the Consolidated Financial Statements as of December 31, 2018, in accordance with IAS 17 and the lease liabilities as of January 1, 2019, recognized in accordance with IFRS 16, is in particular a result of the liabilities from former finance leases already recognized as of December 31, 2018, the effect of discounting future lease payments from operating leases, leases assessed for the first time under initial application of IFRS 16, changes in the assumptions on the contract term, and the exemptions exercised in relation to the accounting approach for short-term leases and leases for low-value assets.

The following reconciliations of the carrying amounts of right-of-use assets and lease liabilities as of January 1, 2019, to the carrying amounts as of December 31, 2019, are broken down by former finance leases recognized on the balance sheet in accordance with IAS 17 in conjunction with IFRIC 4 and former operating leases recognized for the first time through initial application of IFRS 16.

As of January 1, 2019, property, plant and equipment and financial liabilities increased by €660 million and €656 million, respectively, due to the initial application of IFRS 16. The underlying leases relate mainly to leases for production and logistics infrastructure as well as real estate. The principal additions in fiscal 2019 comprise new leases for transport vessels, rail cars and electric buses. The retirements recorded in the reporting year are mainly the result of early termination of lease agreements for rail cars.

2.2 Published financial reporting standards that have not yet been applied

The IASB and the IFRS IC have issued the following standards, amendments to standards, and interpretations whose application has not yet been mandatory to date. The application of these IFRS standards is conditional upon their endorsement by the European Union.

The date of initial application of the standards not yet endorsed by the EU is deemed to be the effective date stipulated by the IASB. Because the amendments to IFRS 3 (Business Combinations) outlined in the table above have not yet been endorsed by the EU, Covestro did not yet apply these changes as of January 1, 2020.

The effects of initial application of IFRS 17 (Insurance Contracts) and the amendments to IAS 1 (Presentation of Financial Statements) are currently being reviewed. Initial application of the other standards listed in the table is expected to have little or no material impact on the presentation of the net assets, financial position and results of operations. IFRS 17 and the amendments to IAS 1 are explained below.

On May 18, 2017, the IASB issued IFRS 17. IFRS 17 regulates the recognition, measurement and presentation of issued insurance contracts as well as the necessary disclosures in the notes. In addition, IFRS 17 requires the application of similar principles in the case of reinsurance contracts and, insofar as insurance contracts are issued, also investment contracts with a discretionary participation feature. IFRS 17 will replace IFRS 4 (Insurance Contracts).

On January 23, 2020, the IASB published amendments to IAS 1 under the title “Classification of Liabilities as Current or Non-current.” The amendments define more precisely when a liability is to be classified as current or non-current in the statement of financial position if the settlement date is still uncertain.