5.Changes in the Scope of Consolidation

Scope of Consolidation and Investments

As of December 31, 2021, the scope of consolidation comprised Covestro AG and 66 (previous year: 47) consolidated companies.

The increase in the number of consolidated companies in the reporting year 2021 is attributable to the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands). A total of 27 RFM companies were fully consolidated effective April 1, 2021, for the first time. As a result of the acquisition of the RFM business, DSM NeoResins Holdings B.V., Waalwijk (Netherlands); DSM Resins Holding (Nederland) B.V., Zwolle (Netherlands); and DSM Coating Resins International Holding B.V., Zwolle (Netherlands), merged with Covestro (Netherlands) B.V., Nieuwegein (Netherlands), and Healthy Nest Inc., Wilmington, Delaware (United States), merged with Covestro LLC, Pittsburgh, Pennsylvania (United States), effective between August 3, 2021, and December 1, 2021. Furthermore, the former RFM company Again IP B.V., Horst aan de Maas (Netherlands), was dissolved effective October 1, 2021.

Asellion B.V., Amsterdam (Netherlands), merged with Covestro (Netherlands) B.V., Nieuwegein (Netherlands), effective July 1, 2021.

The sale of the legal entities Pearl Polyurethane Systems FZCO, Dubai (United Arab Emirates), and Pearl Polyurethane Systems L.L.C, Dubai (United Arab Emirates), was successfully completed effective July 26, 2021. This wrapped up the sale of the polyurethane systems house business in the Middle East.

Effective January 14, 2022, the purchase agreement for the remaining 30% of the shares of the joint venture Japan Fine Coatings Co., Ltd., Ibaraki (Japan), formerly held by our joint venture partner JSR Corporation, Tokyo (Japan), was signed and executed. Covestro is now sole owner of the company.

The scope of consolidation includes the joint operation LyondellBasell Covestro Manufacturing Maasvlakte V.O.F, Rotterdam (Netherlands), as of December 31, 2021, which is unchanged from the previous year. 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 (previous year: two) associated companies are accounted for in the consolidated financial statements using the equity method.

Ten (previous year: nine) 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 in the reporting year 2021.

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

According to IFRS 12 (Disclosure of Interests in Other Entities), Covestro’s interest in the amount of 50% in Covestro Eternal Resins (Kunshan) Co., Ltd., Kunshan (China), is classified as a fully consolidated company due to the 57% share of voting rights.

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 fully consolidated domestic subsidiaries availed themselves in fiscal year 2021 of the 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 April 1, 2021, Covestro successfully completed the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., which was included in the consolidated financial statements for the first time as of that date. The responsible authorities approved the transaction after Covestro and Koninklijke DSM N.V. reached an agreement on the purchase at the end of September 2020. The acquisition of RFM makes the Solutions & Specialties segment a leading supplier of sustainable coating resins. Thanks to the acquisition, the segment’s even more comprehensive and highly innovative product portfolio will offer customers clear added value. The transaction covers innovative projects such as Additive Manufacturing, Advanced Solar Coatings, and Niaga.

The acquisition was accounted for as a business combination in accordance with IFRS 3 (Business Combinations). For purposes of the purchase price allocation, the acquired company’s identifiable assets, the assumed liabilities and contingent liabilities, and any noncontrolling interest in the acquiree were recognized at fair value. According to IFRS 3, the purchase price allocation can be adjusted within one year of the acquisition date based on new information and findings. This can affect especially items that are based on assumptions and estimates, which mainly include provisions, contingent liabilities, and deferred taxes. No assurance can be given that other items may not change.

The acquisition also includes the following shares and voting rights in four companies with noncontrolling interests that are nonetheless fully consolidated: the 50% interest (57% voting rights) in Covestro Eternal Resins (Kunshan) Co., Ltd., Kunshan (China); the 60% interest (60% voting rights) in Covestro Eternal Resins (Far East) Ltd., Pingtung (Taiwan, Greater China); the 72% interest (72% voting rights) in Covestro Amulix V.o.F., Zwolle (Netherlands); and the 70% interest (100% voting rights) in Japan Fine Coatings Co., Ltd., Ibaraki (Japan).

Covestro and Koninklijke DSM N.V. agreed on a preliminary consideration transferred of €1,544 million, which was paid in cash. The purchase price allocation resulted in a goodwill of €489 million. This goodwill includes expected synergies arising from administrative processes and infrastructure, including cost savings in procurement, sales, and general administration, and from unlocking future business opportunities with new customers. Goodwill is not tax deductible in the countries involved in the acquisition, except the United States. The share of tax-deductible goodwill attributable to the United States amounts to €50 million.

The purchase price allocation was prepared by an external appraiser and continually updated during fiscal 2021 based on additional information, analyses, and calculations. As a result, the purchase price allocation was adjusted as of December 31, 2021. The following overview shows the fair value of the identifiable acquired assets and liabilities as of December 31, 2021, adjustments to these fair values since June 30, 2021, the consideration transferred, and the net cash outflow considering acquired cash and cash equivalents:

The other intangible assets mainly include customer relationships in the amount of € 412 million as well as technologies relating to water-based hybrid technologies, powder coating resins, and radiation curing resins in the amount of € 176 million. The measurement of this item at fair value is based mainly on discounted payment surpluses.

The fair value of acquired receivables totaling €212 million relates mainly to trade accounts receivable. At the acquisition date, gross contractual receivables amounted to €214 million, with €2 million of this amount estimated to be unrecoverable.

Noncontrolling interests were measured according to the partial goodwill method in the course of initial consolidation. Based on the partial goodwill method, the value of the noncontrolling interests totals €39 million.

Acquisition-related costs associated with the business combination of €42 million were recognized in the income statement as an expense in the amount of €38 million. Costs of €4 million arising as part of the capital increase prior to the RFM acquisition were recognized in equity. Of this total amount, €38 million had already been recognized in the previous year.

The sales generated by the acquired RFM business since the acquisition date amounted to €862 million, with income after taxes amounting to €–9 million. The income after taxes comprised expenses resulting from one-time effects and the purchase price allocation. If the aforementioned acquisition had been completed by January 1, 2021, Covestro would have reported sales of €16,266 million. Income after taxes would have amounted to €1,635 million, including expenses from one-time effects and the purchase price allocation. Intercompany profits between Covestro and RFM companies were eliminated in this case.

The purchase price allocation for RFM has not yet been completed, because the preparation and audit of the underlying financial information will still take some time. Allocations of the purchase price to the individual assets and liabilities could therefore still change.

Divestitures

On July 26, 2021, Covestro successfully completed the sale of the assets and liabilities (disposal group) of the system house business in the Middle East to the former co-shareholder Pearl Industries Overseas Ltd., Dubai (United Arab Emirates). The sale of this systems house business is part of Covestro’s portfolio optimization process, during the course of which Covestro sold the only North American systems house in April 2017 and the European systems house business in November 2019. The systems house business was part of the Solutions & Specialties segment and offers customer-specific polyurethane systems to the construction sector in particular. The transaction was structured as a share deal. The selling price expected in the fourth quarter of 2020 was lower than the value of the net assets to be sold, which were written down accordingly. Impairment charges led to a loss totaling €16 million reported in manufacturing costs, selling expenses, and general administration expenses in fiscal 2020. In connection with this disposal, current assets amounting to €55 million and liabilities of €22 million were sold. Due to impairment charges on the asssets in the previous year, the loss of €1 million on the disposal led to an insignificant negative effect on earnings and was recognized in the other operating expenses.

On July 31, 2021, the sale of assets (disposal group) in Taoyuan (Taiwan, Greater China), to Evermore Chemical Industry Co. Ltd., Nantou (Taiwan, Greater China), was completed successfully. These were part of the RFM acquisition and therefore attributable to the Solutions & Specialties segment. Production-related assets totaling €12 million were sold. Inventories, which are measured separately, were also transferred. Due to remeasurement as part of the purchase price allocation, the disposal led to an insignificant negative effect on earnings. The loss of €1 million on the disposal was recognized in the other operating expenses.