5. Effects of the Coronavirus Pandemic on Financial Reporting
Business performance in the year 2020 as a whole was heavily influenced by the coronavirus pandemic. During this period, Covestro saw sales decline sharply due to a lower level of selling prices and total volumes sold. Whereas the APAC region’s sales had dropped considerably in the first quarter of 2020, sales in the EMLA and NAFTA regions did not begin their steep decline until the second quarter of 2020. In contrast, the slowdown in sales in the APAC region, particularly China, was much less severe than in the other regions in the second quarter of 2020. Starting in the third quarter of 2020, a strong recovery took shape in all regions, particularly APAC and EMLA. These two regions closed out the fourth quarter of 2020 with significant sales growth, mainly due to a higher level of selling prices and a positive effect stemming from total volumes sold. The NAFTA region saw sales drop considerably in the fourth quarter of 2020. This development was attributable to exchange rate and price effects, whereas total volumes sold rose slightly.
The significant declines in sales in fiscal 2020 affected all reportable segments, largely on account of a lower level of selling prices and total volumes sold. The change in total volumes sold resulted from weaker demand in all main customer industries.
Additional disclosures on the effects of the coronavirus pandemic and the countermeasures taken by Covestro are presented in the Group Management Report.
In view of the aforementioned changes in the business environment, preparation of the consolidated financial statements required Covestro to make assumptions and estimates to a certain extent that affected the measurement of reported assets and liabilities, as well as income and expenses, and that could deviate from the actual results in individual cases. Such estimates, assumptions and the exercise of discretion related primarily to the following areas:
- Impairment testing of non-financial assets, particularly goodwill;
- Assessment of the probability that deferred tax assets can be utilized in the future;
- Calculation of impairment losses on trade accounts receivable.
The method applied and effects of global impairment testing as of December 31, 2020, are outlined in the corresponding note:
The probability that deferred tax assets resulting from temporary differences, tax credits or loss carryforwards can be utilized in the future is the subject of forecasts by the individual companies regarding the future earnings situation in the respective Covestro companies and other parameters. These forecasts have been updated to reflect the effects of the coronavirus pandemic and did not result in any impairment losses on deferred tax assets in the current financial statements.
The level of default risk associated with the Covestro Group’s trade accounts receivable depends mainly on the creditworthiness of our customers. The coronavirus pandemic heightened industry risk (equivalent to the default risk relating to the companies in a particular industry), because demand, and subsequently sales revenues, in certain industries declined sharply. This can directly affect the creditworthiness of customers in these industries. In order to appropriately reflect the increased default risk when measuring trade accounts receivable, industry risk was additionally considered when assessing the creditworthiness of customers. The expected losses in trade accounts receivable therefore increased by €3 million.
In addition, attention is drawn to the following accounting issue associated with the coronavirus pandemic:
Covestro received public subsidies abroad in accordance with IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance) for managing sales losses resulting from the coronavirus pandemic. These subsidies related mainly to a reduction in personnel costs and amounted to €8 million in fiscal 2020.