Notes to the Consolidated Financial Statements of the Covestro Group – Notes to the Statement of Financial Position

13. Noncurrent Assets

13.1 Goodwill and Other Intangible Assets

In the reporting year, impairment losses of €21 million were recognized on goodwill and other intangible assets. As in the previous year, no impairment loss reversals were recognized.

• See Note 13.3 “Impairment Testing.”

In the previous year, impairment losses of €80 million were recognized on goodwill and other intangible assets. These were primarily due to impairment testing of cash-generating units in fiscal 2022.

13.2  Property, Plant and Equipment

In the reporting year, impairment losses of €24 million were recognized on property, plant and equipment. No reversals of impairment losses were recognized in the reporting year (previous year: €1 million).

• See Note 13.3 “Impairment Testing.”

Covestro is increasingly investing in projects that drive success and progress in achieving a circular economy and climate neutrality. To this end, the company continued to pursue various investment projects in the areas of pollution prevention and control, energy efficiency improvements, and recycling management in the reporting year, with a particular focus on technical equipment and machinery. Examples include investments in the modernization of the TDI plant in Dormagen (Germany), the new chloralkali production plant in Tarragona (Spain) for greater energy efficiency, and the company’s first own plant for the mechanical recycling of polycarbonates in Shanghai (China).

Borrowing costs of €12 million (previous year: €5 million) were capitalized as part of the cost of qualifying assets under property, plant and equipment in the reporting year. The capitalization rate applied amounted to 2.9% on average (previous year: 1.7%).

In the previous year, impairment losses of €383 million were recognized on property, plant and equipment. These were primarily due to impairment testing of cash-generating units in fiscal 2022.

13.2.1  Leasing

Covestro as Lessee

The recognized right-of-use assets from leases are reported under property, plant and equipment.

Right-of-use assets relate mainly to leases for production and logistics infrastructure and real estate leases. Leases for production and logistics infrastructure are mainly related to the rental of tanks and containers as well as rail tank cars. For tanks and containers, the average lease term is 16 years (previous year: 16 years) and for rail tank cars, 12 years (previous year: 11 years). Leases for renting real estate, particularly buildings, are for an average lease term of 16 years (previous year: 15 years). Some of the underlying leases include variable lease payments as well as options to extend or terminate the lease.

• See note 3 “Accounting Policies and Valuation Principles.”

The following table presents the amounts recognized in the statement of cash flows and the income statement for all leases:

As of December 31, 2023, the lease commitments for short-term leases not recognized in the statement of financial position amount to €4 million (previous year: €6 million).

Further information on the liabilities arising from leases and details on payments from leases are described in the following notes:

• See Note 21 “Financing and Financial Debt.”
• See Note 27 “Notes to the Statement of Cash Flows.”

Covestro as Lessor

In the reporting year, leasing income generated from lease contracts under IFRS 16 (Leases) was €9 million (previous year: €8 million). These are mainly related to real estate. In addition, lease payments from rentals of €4 million (previous year: €5 million) are expected to be received in the following year, not including the investment property as outlined below. Lease payments totaling €5 million are expected to be received in the period from 2025–2028, and lease payments totaling €3 million after the year 2028.

At Covestro, risks from renting real estate are usually limited by building insurance policies and by the contractual obligation of the tenant to return the property to its original condition. In addition, contractual agreements provide for price adjustment mechanisms based primarily on the relevant consumer price indices.

13.2.2 Investment Property

The total carrying amount of investment property as of December 31, 2023, amounted to €21 million (previous year: €21 million), and its fair value totaled €150 million (previous year: €141 million). Rental income from investment property was €16 million (previous year: €17 million) and the operating expenses directly allocable to this property amounted to €10 million (previous year: €11 million). In the reporting period and in the previous year, no material operating expenses were recognized for investment property not generating any rental income.

Rental income generated from the leasing of properties classified as investment properties stemmed in part from contracts for hereditary building rights and leases granted by the Covestro Group. These contracts with a weighted average remaining term of 35 years relate to space used by companies in the chemical industry and contractual partners of Covestro at production sites in Germany. Based on current rental prices, around €5 million in rental income will be received annually from these long-term contracts in the coming years.

13.3  Impairment Testing

If there are indications that an individual asset that does not constitute goodwill may be impaired, the recoverable amount is compared to the carrying amount to determine whether it is higher or lower. If the recoverable amount does not exceed the respective carrying amount, an impairment loss is recognized in profit or loss in the amount of the difference between the carrying amount and the recoverable amount. An impairment loss is reversed in profit or loss if the reasons for impairment no longer apply. Impairment losses and any impairment loss reversals are recognized in the functional cost in the same way as depreciation and amortization, depending on the use of the respective assets.

In addition to impairment testing of individual items of property, plant and equipment and other intangible assets, cash-generating units are globally tested if there is indication of impairment. Goodwill is tested for impairment in the fourth quarter at the level of (groups of) cash-generating units. As a rule, Covestro considers strategic business entities to be cash-generating units. They represent the reporting level below the seven business entities that form the two reportable segments, Performance Materials and Solutions & Specialties. If the annual impairment test of goodwill is performed at the level of groups of cash-generating units or if a business entity comprises only one cash-generating unit, the level tested is the relevant business entity.

If recognizing an impairment loss is required at the level of a CGU or group of CGUs, goodwill is written down first. In cases where the necessary impairment loss exceeds the goodwill written down, the remaining charge is distributed across other noncurrent, nonfinancial assets in proportion to their carrying amount. Impairment losses on goodwill are recognized in other operating expenses.

The recoverable amount of a CGU or group of CGUs is equal to the fair value less costs of disposal. This calculation is based on the present value of the future cash flows since no market price can be determined for the individual units. The forecasts of future cash flows for determining the recoverable amount are based on the Covestro Group’s current planning, which generally extends over five years. In certain cases, shorter or longer planning horizons are also considered if advisable due to CGU-specific assumptions underlying the planning. Assumptions made for purposes of forecasting cash flows mainly concern future selling prices and sales volumes, costs, market growth rates, economic cycles, and exchange rates. Changes in these assumptions are based on the Group’s own estimates and external sources of information. Where the recoverable amount is the fair value less costs of disposal, this is measured from the viewpoint of an independent market participant. Cash flows beyond the detailed planning period are determined on the basis of the respective individual growth rates derived from market information and the associated long-term business expectations. The measurement of fair value less costs of disposal is based on unobservable inputs (“Level 3” of the fair value hierarchy).

The net cash inflows are discounted at the weighted average cost of capital (WACC), which is calculated as the weighted average cost of equity and cost of debt. To take into account the risk and return profile of the Covestro Group, an after-tax cost of capital is calculated, and a specific capital structure is defined via benchmarking against comparable companies in the same industry sector (“peer group”). The cost of equity corresponds to the return expected by shareholders, while the cost of debt is based on the terms at which the peer group can obtain long-term financing. Both components are derived from capital market information.

The monitoring and management structure for recognized goodwill and the capital cost factors and growth rates used in annual impairment testing are presented in the following table for each CGU or group of CGUs. The growth assumptions reflect, in particular, economic cycles over several years as well as expectations for capacity and the market for each unit to be tested.

Indicator-based impairment tests were performed in the fourth quarter due to the persistently difficult economic environment. These did not indicate any need to recognize impairment losses or reversals of impairment losses, whereas in the previous year, €418 million in impairment losses was recognized as a result of the central impairment tests. Taking into account the impairment of individual property, plant and equipment and other intangible assets, impairment losses in fiscal 2023 totaled €45 million (previous year: €463 million). Of this amount, €43 million (previous year: €76 million) was attributable to the Solutions & Specialties segment and €2 million (previous year: €387 million) to the Performance Materials segment. €31million of the impairment losses recognized in Solutions & Specialties relate to the discontinuation of production of the highly specialized Maezio® products of the Engineering Plastics (EP) business entity and the associated closure of the production site in Markt Bibart (Germany). No impairment loss reversals were recognized on property, plant and equipment and intangible assets (previous year: €1 million).

The carrying amount of the CA business entity includes a considerable proportion of goodwill valued at €529 million. The impairment test was based on a detailed planning period of three years, in which it was assumed that there would be volume increases in the mid- to high-single-digit percentage range and above-average EBITDA growth. A key planning assumption is that the current difficult economic environment will largely stabilize by the year 2025.

Although no need to recognize impairment losses was identified in fiscal 2023 as a result of the central impairment tests, changes in the assumptions or circumstances could nevertheless necessitate corrections, leading to additional impairment losses or – except in the case of goodwill – to reversals of previously recognized impairment losses if developments are contrary to expectations. The sensitivity analysis for all tested cash-generating units and the CA business entity assumed a linear reduction in the future free operating cash flow, an increase in the WACC, or a reduction in the long-term growth rate. Except for the cash-generating units that were subject to impairment in the previous financial year and whose carrying amount was confirmed by testing in fiscal 2023, no impairment would be required for any of the CGUs tested in these scenarios. The CGUs impaired in the previous year do not include any recognized goodwill. However, the gradual normalization of the economic situation assumed for the determination of the recoverable amount of the individual cash-generating units, in particular the imbalance of global supply and demand, and capacity utilization at Covestro’s own plants, can materially affect the recoverability of the individual cash-generating units in the next fiscal year and lead to reversals of impairment losses.