2.Effects of New Financial Reporting Standards

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

Initial application of the standards listed in the table had no or no material impact on the presentation of the net assets, financial position and results of operations of the Covestro Group.

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.

The effects of the initial application of the financial reporting standards described below are currently being reviewed. At the time the financial statements were prepared, no material impact on the presentation of the net assets, financial position, and results of operations of the Covestro Group was expected. According to the analysis as it stands currently, initial application of the other standards listed in the table have no effect on the presentation of the net assets, financial position, and results of operations of the Covestro Group.

On August 27, 2020, the IASB published “Interest Rate Benchmark Reform – Phase 2” containing amendments to IFRS 9 (Financial Instruments), IAS 39 (Financial Instruments: Recognition and Measurement), IFRS 7 (Financial Instruments: Disclosures), IFRS 4 (Insurance Contracts), and IFRS 16 (Leases). The amendment pertaining to leases establishes a practical expedient relating (solely) to lease modifications within the meaning of IFRS 16 as a direct consequence of the interest rate benchmark reform.

On May 14, 2020, the IASB issued “Reference to the Conceptual Framework” with amendments to IFRS 3 (Business Combinations). The amendments ensure that IFRS 3 refers to the Conceptual Framework revised in the year 2018 instead of the previous version of the Conceptual Framework. In addition, the amendments require that, for transactions within the scope of IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) or IFRIC 21 (Levies), IAS 37 or IFRIC 21 must be applied to identify the liabilities assumed in a business combination. Moreover, the amendments explicitly state that acquired contingent assets are not recognized. Absent these amendments, according to the IASB, so-called day 2 gains or losses might arise if the Conceptual Framework revised in the year 2018 requires the initial (non-)recognition of a liability or an asset, whereas, for purposes of subsequent recognition, applicable standards would not. The amendments relate to business combinations completed on or after the effective date.

On May 14, 2020, the IASB also released amendments to IAS 16 (Property, Plant and Equipment) in “Property, Plant and Equipment: Proceeds before Intended Use.” The amendments to IAS 16 mainly include a change whereby proceeds from selling items produced while bringing an asset to the location and into the condition necessary for it to be capable of operating as intended by management and the corresponding costs according to IAS 2 (Inventories) are recognized directly in profit or loss. Supplementary disclosures in the notes are also prescribed. Specific transition rules apply to the amendments.

On May 14, 2020, the IASB additionally published “Onerous Contracts – Cost of Fulfilling a Contract,” which contains amendments to IAS 37 (Provisions, Contingent Liabilities and Contingent Assets). The amendments specify that, for the purpose of assessing whether a contract is onerous, the cost of fulfilling a contract comprises all costs directly related to the contract. Costs directly associated with fulfilling an onerous contract include, for example, directly attributable labor and material costs (“incremental cost”) as well as proportionately attributable depreciation charges. Specific transition rules apply to the amendments.

On May 18, 2017, the IASB issued IFRS 17 (Insurance Contracts). IFRS 17 governs 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, of investment contracts with a discretionary participation feature. IFRS 17 will replace IFRS 4 (Insurance Contracts). On June 25, 2020, the IASB released amendments to IFRS 17 in addition to other associated amendments and clarifications in respect of other standards with the aim of deferring the effective date of the standard by two years to January 1, 2023 (previously: January 1, 2021). This deferral addresses concerns such as those of insurers and certain financial service providers as those most affected by IFRS 17, and occurs in parallel with the deferral of the effective date of IFRS 9 (Financial Instruments) for this sector. IFRS 17 includes complex transition rules.

On January 23, 2020, the IASB issued 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. Due to the added pressure on companies from the coronavirus pandemic and the possible renegotiation of loans, the IASB issued an amendment to this publication on July 15, 2020, deferring the effective date by one year to January 1, 2023 (previously: January 1, 2022). The amendment is to be applied retrospectively.

On February 12, 2021 the IASB issued additional amendments to IAS 1, “Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2),” along with an amendment to the relevant practice statement. These amendments require all companies to disclose those accounting policies in their notes to the consolidated financial statements that are relevant for understanding the financial statements and the underlying transactions (“material accounting policies”), rather than their significant accounting policies in general. The amendments to IFRS Practice Statement 2 provide guidelines for the application of this materiality concept.

Also on February 12, 2021 the IASB issued amendments to IAS 8, “Definition of Accounting Estimates (Amendments to IAS 8).” These amendments are intended to clarify the distinction between changes in accounting policies and changes in accounting estimates. This distinction is generally relevant since changes in accounting policies are, subject to transitional provisions, always applied retrospectively to consolidated financial statements, while changes in accounting estimates are only applied prospectively from the date of the change in estimates.