Scope of Consolidation

Changes in the Scope of Consolidation

As of September 30, 2019, the scope of consolidation comprised Covestro AG and 48 consolidated companies (December 31, 2018: 49 companies).

OOO Covestro, Moscow (Russia), was reclassified as an immaterial subsidiary in the first quarter of 2019 for reasons including the fact that local production was halted. It has therefore no longer been consolidated since the first quarter of 2019.

Effective April 1, 2019, a further 30% of the shares in DIC Covestro Polymer Ltd. Tokyo (Japan), was acquired, and the company was subsequently consolidated. Previously, it was classified as a joint venture and accounted for using the equity method in accordance with IAS 28 (Investments in Associates and Joint Ventures).

Pure Salt Baytown LLC (Pure Salt), Houston (United States), which was previously included in the consolidated financial statements as a structured entity, has been classified as an immaterial associated company since the third quarter of 2019 and was subsequently deconsolidated. The basis of the relationship with Pure Salt has changed to such a degree due to contractual and economic factors that control is no longer exercised.

Acquisitions and Divestitures

Acquisitions

Covestro increased its interest in DIC Covestro Polymer Ltd. (DCP), Tokyo (Japan) effective April 1, 2019, through a gradual acquisition of shares. DCP is a Japanese producer of thermoplastic polyurethanes, which are used, for example, in the automotive, IT, electronics, health-care and sports sectors. The acquisition of DCP contributes to the goal of benefiting from the future growth potential of the thermoplastic polyurethanes (TPU) business in Japan. Covestro and DIC Corporation (DIC), Tokyo (Japan) previously operated this company as a joint venture in which each held a 50% interest. By acquiring a further 30% of the shares in DCP, Covestro increased its interest to 80% and thus gained control. As a result, DCP has been fully consolidated since April 1, 2019. The shares previously recognized using the equity method of accounting were remeasured at their fair value of €34 million. The remeasurement resulted in a gain of €19 million, which was recognized in other operating income. The carrying amount of the noncontrolling interest, which corresponds to the remaining 20% share held by DIC, was determined proportionately from the net assets of DCP less goodwill. It amounted to €11 million and was recognized in equity.

The consideration transferred was €21 million and was settled by a cash transfer. The acquired net assets amount to €66 million. The goodwill of €10 million included in the net assets reflects the anticipated sales synergies resulting from joint marketing of products over the relevant trading platforms. The goodwill is not tax deductible.

As of the date of acquisition, the above transaction had the following impact on the assets and liabilities of the Covestro Group in fiscal year 2019 and led to the following cash outflow after adjustment for the cash and cash equivalents acquired:

Before the acquisition, Covestro and DCP engaged in operational goods and services transactions, which were recognized by Covestro as trade accounts receivable of €1 million. These accounts were settled when DCP was acquired. In addition, DIC was granted a put option on the remaining 20% shares still held by DIC. If it exercises this put option, the sale of these shares to Covestro would take effect in 2030. The put option is recognized in miscellaneous other financial liabilities while equity was reduced by the counter item recognized in retained earnings.

Since its consolidation as of April 1, 2019, DCP has contributed €20 million to net sales and a loss of €1 million to income after income taxes of the Covestro Group. Between January 1, 2019, and March 31, 2019, DCP generated sales of €9 million and income after income taxes of €1 million.

Divestitures

In the second quarter of 2019, Covestro’s Polyurethanes segment signed an agreement to divest the assets and liabilities (disposal group) of the European systems house business to H.I.G. Capital, Miami (United States). The systems houses provide customers with tailored polyurethane systems. The European systems house business comprises systems houses in Denmark, Germany, the Netherlands and Spain, plus further activities in Italy. In connection with this divestiture, production-related assets and inventories amounting to €54 million and liabilities of €15 million were classified as “held for sale” in accordance with IFRS 5. This transaction should be completed in the fourth quarter of 2019 at the latest.

In the third quarter of 2019, Covestro’s Polycarbonates segment signed an agreement to divest the assets and liabilities (disposal group) of the European polycarbonate sheets business to Serafin Group, Munich (Germany). Polycarbonate sheets are highly break-resistant and are mostly used in industrial protection, construction systems or signage applications. The European polycarbonate sheets business comprises manufacturing units in Belgium and Italy, as well as central management operations and sales support in Europe. In connection with this divestiture, production-related assets and inventories amounting to €15 million and liabilities of €19 million were classified as “held for sale” in accordance with IFRS 5. Impairment charges on the assets of the disposal group led to a loss totaling €26 million, which is reported in cost of goods sold, selling expenses and other operating expenses. This transaction should be completed in the first quarter of 2020 at the latest.