7.Changes in the Scope of Consolidation

Scope of consolidation and investments

As of December 31, 2020, the scope of consolidation comprised Covestro AG and 47 (previous year: 47) consolidated companies.

Effective January 1, 2020, Asellion B.V., Amsterdam (Netherlands), was included in the consolidated financial statements for the first time as a result of growth in business activities. Previously, the company had been classified as an immaterial subsidiary. Asellion B.V. provides a digital platform for online direct sales where manufacturers, suppliers and service providers can do business in a flexible, secure and private environment.

Covestro (Tielt) NV, Tielt (Belgium), and Covestro S.p.A., Milan (Italy), were deconsolidated in the course of the sale of the European polycarbonate sheets business to Munich-based Serafin Group concluded on January 2, 2020.

Effective June 1, 2020, Covestro International Re, Inc., Colchester, Vermont (United States), was included in the consolidated financial statements as a fully consolidated company. This is Covestro’s own insurance company, which received a license from the state of Vermont to act as a reinsurer for the external primary insurer and to provide coverage for certain insurance risks to which the Covestro Group is exposed.

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 shareholders.

As in the previous year, the scope of consolidation as of December 31, 2020, 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 LyondellBasell.

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

Nine (previous year: seven) subsidiaries and two (previous year: two) 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).

In addition, 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 companies are accounted for in the consolidated financial statements at cost due to their immateriality:

The 41.2% investment in Crime Science Technology SAS, Loos (France), is classified as a debt instrument in accordance with IAS 32 (Financial Instruments: Presentation) and is measured at fair value through profit or loss in accordance with IFRS 9 (Financial Instruments).

The following domestic subsidiaries availed themselves in fiscal 2020 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:

Acquisitions and divestitures

Acquisitions

On September 30, 2020, Covestro signed an agreement to acquire the Resins & Functional Materials (RFM) business of Koninklijke DSM N.V., Heerlen (Netherlands). The acquisition of RFM will make Coatings, Adhesives, Specialties into one of the leading suppliers of sustainable coating resins and enable the segment to add clear value for its customers thanks to a more comprehensive and highly innovative product portfolio. In fiscal 2019, the core RFM business generated sales of €1.0 billion and EBITDA of €141 million, based on published company figures in each case. Moreover, the transaction also includes the Additive Manufacturing, Advanced Solar Coatings, and Niaga innovation projects. Covestro and Koninklijke DSM N.V. agreed on a preliminary purchase price of €1.6 billion. Funding for the acquisition was initially secured for Covestro with an acquisition financing agreement featuring a combination of equity and debt instruments and cash generation by Covestro. However, on account of the successful capital increase in October 2020, and the very positive performance of free operating cash flow in the fourth quarter of 2020, Covestro now has sufficient liquidity to pay the full purchase price in cash. The transaction is expected to close in the first quarter of 2021 subject to regulatory approval, including approval under the Merger Regulation and other standard authorizations.

Divestitures

On January 2, 2020, Covestro concluded the sale of 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. Within the scope of the sale, net liabilities totaling €2 million were transferred to the buyer and net payments amounting to €3 million were made by Covestro to Serafin. The loss on the disposal of this business totaling €1 million was recognized in other operating result.

In the fourth quarter of 2020, Covestro decided to sell the assets and liabilities (disposal group) of the systems house business in the Middle East to the current co-shareholder Pearl Industries Overseas Ltd., Dubai (United Arab Emirates). The sale of this systems house business is the next step in Covestro’s portfolio streamlining process, which has already led to divestment of the only systems house business in North America in April 2017 and the system house business in Europe in November 2019. The systems house business belongs to the Polyurethanes segment and produces customer-specific polyurethane systems, primarily for the construction industry. The transaction is structured as a share deal. The expected sale price is lower than the value of the net assets to be sold, for which impairment losses were recognized. The impairment led to losses totaling €16 million reported in the cost of production, selling expenses, and general administration expenses. In connection with this divestiture, current assets amounting to €19 million and liabilities of €10 million were classified as “held for sale” in accordance with IFRS 5 (Non‑current Assets Held for Sale and Discontinued Operations). The transaction is expected to close in the first half of 2021 subject to regulatory approval.