5.Changes in the Scope of Consolidation

5.1 Scope of consolidation and investments

As of December 31, 2019, the scope of consolidation comprised Covestro AG and 47 (previous year: 49) consolidated companies.

OOO Covestro, Moscow (Russia), was reclassified as an immaterial subsidiary in the first quarter of 2019 for reasons including the fact that local production was halted. It has therefore no longer been consolidated since the first quarter of 2019.

Effective April 1, 2019, a further 30% of the shares in DIC Covestro Polymer Ltd., Tokyo (Japan) (DCP), was acquired, and the company was subsequently consolidated. Previously, it was classified as a joint venture and accounted for using the equity method in accordance with IAS 28 (Investments in Associates and Joint Ventures).

Pure Salt Baytown LLC, Houston (United States), previously consolidated as a structured entity, was reclassified as an immaterial associate in the third quarter of 2019 and subsequently deconsolidated. The foundations of the relationships with Pure Salt have changed contractually and economically in such a way that control no longer exists.

The sale of the European systems house business to H.I.G. Capital, Miami (United States), was closed in the fourth quarter of 2019. Consequently, the entities Covestro A / S, Otterup (Denmark), Covestro B.V., Foxhol (Netherlands), and Covestro Oldenburg GmbH & Co. KG, Oldenburg, were deconsolidated.

In the second half of 2019, Covestro Procurement Services GmbH & Co. KG, Leverkusen, and Covestro Intellectual Property GmbH & Co. KG, Leverkusen, were established and consolidated. Covestro Procurement Services GmbH & Co. KG KG was established for the purpose of securing the efficient procurement of strategically important raw materials for the Covestro Group and to provide consulting on procurement strategies. Covestro Intellectual Property GmbH & Co. KG will assume management of the patents, brands, licensing agreements and other intangible assets of Covestro Deutschland AG, Leverkusen.

The Covestro Group holds 100% of the voting rights in the fully consolidated subsidiary Pearl Covestro Polyurethane Systems L.L.C, Dubai (United Arab Emirates), pursuant to a contractual agreement with the noncontrolling stockholders.

As in the previous year, the scope of consolidation as of December 31, 2019, included the joint operation LyondellBasell Covestro Manufacturing Maasvlakte V.O.F, Rotterdam (Netherlands). Pursuant to IFRS 11 (Joint Arrangements), Covestro’s shares of this company’s assets, liabilities, revenues and expenses are included in the consolidated financial statements in accordance with Covestro’s rights and obligations. The main purpose of LyondellBasell Covestro Manufacturing Maasvlakte V.O.F is the joint production of propylene oxide (PO) for Covestro and its partner Lyondell.

Additionally, two associated companies (previous year: two associated companies and one joint venture) are accounted for in the consolidated financial statements using the equity method.

Seven (previous year: five) subsidiaries and two (previous year: one) associated companies that in aggregate are immaterial to the Covestro Group’s net assets, financial position and results of operations are not consolidated but recognized at cost. The immaterial subsidiaries each accounted for no more than 0.1% of Group sales, equity or total assets.

The consolidated financial statements of Covestro are submitted to the operator of the Federal Gazette (Bundesanzeiger).

Details of subsidiaries and affiliated companies pursuant to Section 313 of the German Commercial Code (HGB) are shown in the following tables. The first table shows the following fully consolidated companies:

The following joint operation was included in the consolidated financial statements in line with Covestro‘s shares of its assets, liabilities, revenues and expenses:

The following associated companies are accounted for in the consolidated financial statements using the equity method:

The following subsidiaries were reflected in the consolidated financial statements at amortized cost due to their immateriality:

The following associated company was accounted for in the consolidated financial statements at cost due to its immateriality:

The following domestic subsidiaries availed themselves in fiscal 2019 of certain exemptions granted under Section 264, Paragraph 3 or Section 264b of the German Commercial Code (HGB) regarding the preparation, auditing and publication of financial statements:

5.2 Acquisitions and divestitures

Acquisitions

Covestro increased its interest in DCP effective April 1, 2019, through a step acquisition of shares. DCP is a Japanese producer of thermoplastic polyurethanes, which are used, for example, in the automotive, IT, electronics, health care and sports sectors. By acquiring DCP, Covestro would like to exploit the future growth potential of the business in thermoplastic polyurethanes (TPU) in Japan. Covestro and DIC Corporation (DIC), Tokyo (Japan), previously operated this company as a joint venture in which each held a 50% interest. By acquiring a further 30% of the shares in DCP, Covestro increased its interest to 80% and thus gained control. As a result, DCP has been fully consolidated since April 1, 2019. The shares previously recognized using the equity method of accounting were remeasured at their fair value of €34 million. The remeasurement resulted in a gain of €19 million, which was recognized in other operating income. The noncontrolling interest corresponding to the remaining 20% of the shares held by DIC was determined proportionately from the net assets of DCP less goodwill. It amounted to €11 million and was recognized in equity.

The consideration transferred was €21 million and was settled by a cash transfer. The acquired net assets amounted to €66 million. The goodwill of €10 million included in the net assets reflects the anticipated sales synergies resulting from joint marketing of products over the relevant trading platforms. The goodwill is not tax deductible.

As of the date of acquisition, the above transaction had the following impact on the assets and liabilities of the Covestro Group in fiscal 2019 and led to the following cash outflow after adjustment for the cash and cash equivalents acquired:

Before the acquisition, Covestro and DCP engaged in operational goods and services transactions, which were recognized by Covestro as trade accounts receivable of €1 million. These accounts were settled when DCP was acquired. In addition, DIC was granted a put option on the remaining 20% shares still held by DIC. If it exercises this put option, the sale of these remaining shares to Covestro would take effect in fiscal 2030. The put option is recognized in miscellaneous other financial liabilities while equity was reduced by the counter item recognized in retained earnings.

Since its consolidation as of April 1, 2019, DCP has contributed €31 million to sales and posted a loss of €1 million affecting the income after income taxes of the Covestro Group. Consolidation as of January 1, 2019 would have no significant impact on sales or income after income taxes of the reporting period of the Covestro Group.

Divestitures

In the third quarter of 2019, Covestro signed an agreement to divest the assets and liabilities (disposal group) of the European polycarbonate sheets business, belonging to the Polycarbonates segment, to the Serafin group, Munich (Germany). Polycarbonate sheets are extremely strong and are used primarily in the areas of industrial protection, construction systems and for advertising applications. The European polycarbonate sheets business comprises production sites in Belgium and Italy as well as central management and distribution functions in Europe. In connection with this divestiture, production-related assets and inventories amounting to €12 million and liabilities of €14 million were classified as “held for sale” in accordance with IFRS 5. Impairment losses on the assets of the disposal group resulted in a loss in the amount of €26 million, which is reported under the cost of goods sold, selling expenses and other operating expenses. This transaction should be completed in the first quarter of 2020 at the latest.

In the fourth quarter of 2019, Covestro completed the divestment of the assets and liabilities (disposal group) of the European systems house business, belonging to the Polyurethanes segment, to H.I.G. Capital, Miami (United States). The systems houses provide customers with tailored polyurethane systems. The European systems house business comprises systems houses in Denmark, Germany, Spain and the Netherlands, plus further activities in Italy. The fair value of the consideration transferred amounts to €74 million and comprises the cash transferred during the reporting period of €57 million, a contingent purchase price receivable of €9 million to be paid in fiscal 2022 (see note 24.1 “Financial instruments by category”), a deferred purchase price payments of €5 million also to be paid in fiscal 2022 and purchase price adjustments of €3 million. Within the scope of the sale, net assets of €38 million were transferred to the buyer. The gain on the disposal of this business totaling €34 million was recognized in other operating result.