Notes to the Consolidated Financial Statements of the Covestro Group – Principles and Methods

2. Effects of New Financial Reporting Standards

2.1  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.

2.2  Published Financial Reporting Standards that have not yet been Applied

The IASB issued the following standards and amendments to standards which have already been adopted by the European Union (EU) but are not mandatory for financial statements 2022

The application of the following other standards and amendments to standards issued by the IASB is conditional upon their endorsement by the EU. The effective date for the standards is assumed to be the effective date designated by the IASB.

The effects of the initial application of the aforementioned 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 will have no effect on the presentation of the net assets, financial position, and results of operations of the Covestro Group.

On January 23, 2020, the IASB published “Classification of Liabilities as Current or Non-current,” an amendment to IAS 1 (Presentation of Financial Statements) that clarifies when a liability with an uncertain settlement date is classified as current or noncurrent in the statement of financial position. On October 31, 2022, the IASB published further amendments to IAS 1 under the title “Non-current Liabilities with Covenants.” The changes resulted in the effective date being postponed to January 1, 2024. The amendments clarify this from fiscal 2020 and clarify that the conditions of loan agreements which a company must only comply with after the reporting date have no bearing on whether a liability is classified as current or noncurrent on the reporting date. In contrast, conditions which a company must comply with on or before the reporting date have a bearing on a liability’s classification as current or noncurrent, even if the condition itself is only assessed after the reporting date.

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 the “material accounting policies” in their notes to the consolidated financial statements that are relevant to understanding the financial statements and the underlying transactions, for example in the case of (de facto) accounting options with respect to material individual items in the group, rather than “significant accounting policies” in general. Accounting policies are significant when they relate to high-value positions such as pension provisions, but the standard on which they are based specifies clear accounting policies that apply to every entity. 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 (Accounting Policies, Changes in Accounting Estimates and Errors) under the title “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.

On September 22, 2022, the IASB published amendments to IFRS 16 under the title “Lease Liability in a Sale and Leaseback.” The amendments clarify that no gains or losses relating to the retained right of use may be recognized in the subsequent measurement of a lease liability in a sale and leaseback transaction.

In December 2022, the Council of the European Union reached an agreement regarding implementation of the EU Directive “Global Anti-Base Erosion Rules (Pillar Two)” of the OECD regarding the global minimum taxation of multinational enterprises. This is yet to be transposed into national law in Germany, with this expected to occur in fiscal 2023. The locally implemented EU Directive is likely to be applicable for the first time to fiscal years beginning on January 1, 2024. The impacts of implementation of the EU Directive are currently being examined.

In this context, the IASB published the Exposure Draft “International Tax Reform – Pillar Two Model Rules (Proposed amendments to IAS 12)” on January 9, 2023. Among other measures, this proposes the introduction of a temporary exception to the accounting for deferred taxes arising from the implementation of the new EU Directive as well as supplementary notes depending on whether or not it has already been transposed into national tax law. The proposed exception to the accounting for deferred taxes is to apply with retroactive effect immediately upon the standard being adopted, subject to the relevant endorsement. 

Additionally, the International Sustainability Standards Board (ISSB) newly founded in fiscal 2021 published initial drafts for sustainability reporting in fiscal 2022, the potential future effect of which on the Covestro Annual Report is currently being analyzed.