8.Financial Instruments

The following tables show the carrying amounts and fair values of financial assets and liabilities based on IFRS 9:

Carrying amounts of financial instruments and their fair values as of June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement according to IFRS 9

 

 

 

 

 

 

Carrying amount

 

Carried at amortized cost

 

Fair value recognized in other comprehensive income

 

Fair value recognized in profit or loss

 

Measurement according to IFRS 16

 

Fair value

 

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

2,266

 

2,266

 

 

 

 

 

 

 

2,266

 

 

 

 

 

 

 

 

 

 

 

 

 

Other financial assets

 

592

 

 

 

 

 

 

 

 

 

 

Money market funds

 

502

 

 

 

502

 

 

 

502

Loans and bank deposits

 

50

 

45

 

 

5

 

 

 

50

Other investments

 

13

 

 

 

13

 

 

 

 

13

Receivables under lease agreements

 

8

 

 

 

 

 

 

 

8

 

25

Derivatives that do not qualify for hedge accounting

 

19

 

 

 

 

 

19

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

Other receivables1

 

37

 

29

 

 

8

 

 

 

37

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

856

 

856

 

 

 

 

 

856

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Financial debts

 

2,995

 

 

 

 

 

 

 

 

 

 

Bonds

 

1,991

 

1,991

 

 

 

 

 

 

2,090

Lease liabilities

 

757

 

 

 

 

 

 

 

757

 

 

Liabilities to banks

 

225

 

225

 

 

 

 

 

 

231

Derivatives that do not qualify for hedge accounting

 

21

 

 

 

 

 

21

 

 

 

21

Other financial liabilities

 

1

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

1,846

 

1,846

 

 

 

 

 

 

1,846

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities2

 

129

 

 

 

 

 

 

 

 

 

 

Derivatives that do not qualify for hedge accounting

 

3

 

 

 

 

 

3

 

 

 

3

Refund liabilities

 

77

 

77

 

 

 

 

 

 

77

Miscellaneous other liabilities

 

49

 

49

 

 

 

 

 

 

49

1

The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €386 million.

2

The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €182 million .

Carrying amounts of financial instruments and their fair values as of December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement according to IFRS 9

 

 

 

 

 

 

Carrying amount

 

Carried at amortized cost

 

Fair value recognized in other comprehensive income

 

Fair value recognized in profit or loss

 

Measurement according to IFRS 16

 

Fair value

 

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

1,593

 

1,593

 

 

 

 

 

1,593

 

 

 

 

 

 

 

 

 

 

 

 

 

Other financial assets

 

1,176

 

 

 

 

 

 

 

 

 

 

Money market funds

 

771

 

 

 

771

 

 

 

771

Loans and bank deposits

 

365

 

360

 

 

5

 

 

 

365

Other investments

 

14

 

 

 

14

 

 

 

 

14

Receivables under lease agreements

 

8

 

 

 

 

 

 

 

8

 

21

Derivatives that do not qualify for hedge accounting

 

18

 

 

 

 

 

18

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

Other receivables1

 

31

 

25

 

 

6

 

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

1,404

 

1,404

 


 


 

 

 

1,404

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Financial debts

 

2,899

 

 

 

 

 

 

 

 

 

 

Bonds

 

1,990

 

1,990

 

 

 

 

 

 

2,107

Lease liabilities

 

672

 

 

 

 

 

 

 

672

 

 

Liabilities to banks

 

227

 

227

 

 

 

 

 

 

234

Derivatives that do not qualify for hedge accounting

 

9

 

 

 

 

 

9

 

 

 

9

Other financial liabilities

 

1

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

1,241

 

1,241

 

 

 

 

 

 

1,241

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities2

 

150

 

 

 

 

 

 

 

 

 

 

Derivatives that do not qualify for hedge accounting

 

3

 

 

 

 

 

3

 

 

 

3

Refund liabilities

 

87

 

87

 

 

 

 

 

 

87

Miscellaneous other liabilities

 

60

 

60

 

 

 

 

 

 

60

1

The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €329 million.

2

The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €143 million.

The fair values of financial instruments are determined and reported in accordance with IFRS 13 (Fair Value Measurement) on the basis of the fair value hierarchy described below:

Level 1 covers fair values determined on the basis of quoted, unadjusted prices that exist in active markets.

Level 2 comprises fair values determined on the basis of parameters that are observable in an active market.

Level 3 applies to fair values determined using parameters whose input factors are not based on observable market data.

The following table shows the assignment of the financial instruments to the three-level fair value hierarchy:

Fair value hierarchy of financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

 

 

Fair value

 

 

 

 

Dec. 31, 2020

 

Level 1

 

Level 2

 

Level 3

 

June 30, 2021

 

Level 1

 

Level 2

 

Level 3

 

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

Financial assets carried at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

771

 

 

771

 

 

502

 

 

502

 

Loans

 

5

 

 

 

5

 

5

 

 

 

5

Other investments

 

14

 

5

 

 

9

 

13

 

4

 

 

9

Derivatives that do not qualify for hedge accounting

 

18

 


 

13

 

5

 

19

 

 

13

 

6

Other receivables

 

6

 

 

 

6

 

8

 

 

 

8

Financial assets not carried at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables under lease agreements

 

21

 

 

 

21

 

25

 

 

 

25

Financial liabilities carried at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives that do not qualify for hedge accounting

 

12

 

 

9

 

3

 

24

 

 

21

 

3

Financial liabilities not carried at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

2,107

 

2,107

 

 

 

2,090

 

2,090

 

 

Liabilities to banks

 

234

 

 

234

 

 

231

 

 

231

 

Other financial liabilities

 

1

 

 

1

 

 

1

 

 

1

 

Reallocation between the different levels of the fair value hierarchy takes place at the end of the reporting period in which the change occurred. During the first half of 2021, no transfers were made between the levels of the fair value hierarchy.

Because of the generally short maturities of cash and cash equivalents, loans and bank deposits, trade accounts receivable and payable, and other receivables and liabilities, their carrying amounts do not significantly differ from the fair values.

The fair value of the bonds issued by Covestro AG is based on quoted, unadjusted prices in active markets and therefore assigned to Level 1 of the fair value hierarchy. The fair value of some of the other investments is also based on quoted prices in active markets (Level 1).

The fair values stated for noncurrent financial assets and liabilities are the present values of the respective future cash inflows or outflows. These are determined by discounting the cash flows at a reporting-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. For this reason, these values are assigned to Level 2 of the fair value hierarchy.

The fair values of money market funds correspond to the quoted prices of the funds in accordance with Article 29 in conjunction with Article 33 of EU Regulation 2017/1131 on money market funds (Level 2).

The fair values of derivatives for which no publicly quoted market prices existed are determined using valuation techniques based on observable market data as of the reporting date (Level 2). Credit value adjustments and debt value adjustments are determined to allow for both the contracting party’s credit risk and Covestro’s own credit risk. The currency forward contracts are measured individually at their forward rates or forward prices as of the reporting date. These depend on spot rates or prices including time spreads.

Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. The fair values of noncurrent receivables under lease agreements are reported are calculated on the basis of interest curves observable in the market. Additionally, a discount for cash flows that are very far in the future is applied as an unobservable factor.

Covestro works with and invests in start-ups under the auspices of the Covestro Venture Capital (COVeC) approach, which was newly developed during the 2020 fiscal year. Debt instruments associated with COVeC activities are recognized at fair value through profit and loss. The fair value is calculated as the present value of the future cash flows estimated based on available performance indicators. The cash flows are discounted at the current interest rate for the appropriate term on the reporting date and reflecting the creditworthiness of the venture capital company. The main input factors are not based on observable market data (Level 3). The estimated fair value of the debt instruments classified in Level 3 would rise (fall) if the expected cash inflows were to be higher (lower) or if the risk-adjusted discount rate were to be lower (higher).

Other financial investments are recognized at fair value directly in equity because they are held for the long term for strategic reasons. The fair value of some of the other investments is based on quoted prices in active markets (Level 1). Where there are no quoted, unadjusted prices in an active market for identical or similar instruments, and there is no suitable valuation method where all major input factors are based on observable market data, the fair value of the other investments is determined using a market price-oriented valuation method where the main input factors are not based on observable market data (Level 3). The valuation of certain other investments is based on available performance indicators as well as on market valuation multipliers. The estimated fair value of the equity instruments categorized within Level 3 would rise (fall) if the multiple applied were to be greater (smaller).

Further, the fair values of embedded derivatives are determined on the basis of unobservable input factors (Level 3). They are separated from their respective host contracts, which are purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with fluctuations in exchange rates, or regional and industry-specific price indices, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include prices or price indices derived from market data. The estimated fair value of the embedded derivative would rise (fall) if the expected payment flows were to be higher (lower) as a result of fluctuations in exchange rates or prices.

Other receivables include a contingent purchase price receivable from divestments. The fair value of the receivable is measured as the present value of the future cash inflows. The basis is the expected EBITDA of the business unit sold for fiscal year 2021. The cash flows are discounted at the current interest rate for the appropriate term on the reporting date and reflecting the creditworthiness of the buyer. The contingent purchase price receivable is assigned to Level 3 of the fair value hierarchy. The estimated fair value would rise (fall) if the expected cash inflows were to be higher (lower) or if the risk-adjusted discount rate were to be lower (higher).

The table below shows the reconciliation of Level 3 financial instruments:

Changes in the net amount of financial assets and liabilities recognized at fair value based on unobservable inputs (level 3)

 

 

 

 

 

 

 

2020

 

2021

 

 

€ million

 

€ million

Net carrying amounts, Jan. 1

 

21

 

22

Gains (losses) recognized in profit or loss

 

(4)

 

3

of which related to assets / liabilities recognized in the statement of financial position

 

(4)

 

3

Gains (losses) recognized outside profit or loss

 

1

 

Additions of assets (liabilities)

 

5

 

Net carrying amounts, June 30

 

23

 

25

Gains and losses from embedded derivatives (Level 3) recognized in profit or loss are reported in other operating expenses or income.