Changes in Accounting as a Result of the Initial Application of IFRS 9 and IFRS 15
Accounting for Financial Instruments in Accordance with IFRS 9
The new IFRS 9 (Financial Instruments) accounting standard, which replaces the rules on financial instruments in place previously, has been applied since January 1, 2018. Covestro applied IFRS 9 retrospectively without adjusting prior-year figures. As a result, the effects of initial application as of January 1, 2018, are recognized cumulatively in equity, and the figures for the reference period continue to be presented in accordance with the previous rules (for additional details, see the Annual Report 2017, Notes 2.2 and 3). The cumulative negative effect of initial application of the standard amounts to €7 million.
The changes at Covestro resulted from the new impairment model and the amended classification and measurement rules stipulated by the new IFRS 9 standard. The new impairment rules increase provisions to account for defaults of financial instruments by recognizing expected credit losses, particularly for trade accounts receivable. In the case of equity investments that were not held for trading as of January 1, 2018, Covestro opted to recognize future changes in their fair value in other comprehensive income and to continue recognizing these in equity on disposal. Additional information about the new accounting rules and the effects of initial application is provided in the half-year financial report as of June 30, 2018, Note 2.1.
Accounting for Sales in Accordance with IFRS 15
The new IFRS 15 (Revenue from Contracts with Customers) accounting standard, which replaces the rules in place previously for the recognition of sales, has been applied since January 1, 2018. IFRS 15 was introduced at Covestro using the modified retrospective approach. As a result, there is no requirement to adjust figures from prior periods, so these continue to be presented in accordance with the previously applicable accounting rules in IAS 11 and IAS 18 (for additional information, see the Annual Report 2017, Notes 2.2 and 3). The positive cumulative effect of initially applying the standard as of January 1, 2018, totals €14 million and is recognized in equity.
According to IFRS 15, sales are recognized using a five-step model with the new principles affecting parameters including the point in time or time period when sales are recognized and resulting in new balance sheet items such as contract assets, contract liabilities, and refund liabilities, which Covestro reports in other receivables or in other liabilities. For Covestro, the application of IFRS 15 resulted in changes in the recognition of sales in particular from consignment warehousing agreements, transportation clauses, contracts with provisional prices, licenses, and customer-specific products. Additional information about the new accounting rules and the effects of initial application is provided in the half-year financial report as of June 30, 2018, Note 2.1.