Estimation uncertainties and exercise of discretion
The preparation of consolidated financial statements in accordance with IFRS entails the selection of accounting policies and valuation principles and the use of forward-looking assumptions and estimates that may affect the measurement of assets and liabilities, income and expenses, and contingent liabilities.
All assumptions and estimates used in the consolidated financial statements are based on management’s expectations. Information that could alter these estimates is reviewed continually and may result in adjustments to the carrying amounts of the respective assets and liabilities.
Assumptions and estimates that could materially impact the measurement of the LANXESS Group’s assets and liabilities are explained below.
The LANXESS Group tests its cash-generating units for impairment at least once a year by determining the respective recoverable amount (for further information see the section headed “Global impairment testing procedure and impact”). The test is based on forecasts of future cash flows, derived from reasonable assumptions representing the management’s best assessment of the economic circumstances at the time of the impairment test. Management’s expectations of future cash flows therefore indirectly affect the measurement of goodwill and other assets.
The assumptions and estimates used for the impairment test conducted on assets in fiscal 2013 could differ from the actual values in subsequent periods, necessitating subsequent valuation adjustments. The annual impairment tests are based on a discount rate after taxes of 7.9% (2012: 7.9%), while the impairment tests as of the closing date are based on a discount rate after taxes of 7.8% (2012: 7.9%), without using growth rates to extrapolate the last year of the forecasting period.
The annual testing of cash-generating units for indicators of possible impairment showed the need to recognize an impairment of €174 million for the cash-generating unit Keltan Elastomers in the Performance Polymers segment. This reduced the carrying amount of this cash-generating unit to its fair value less costs of disposal.
The Keltan business was acquired from Royal DSM N.V., Netherland, in 2011 and integrated with the existing activities of the business unit known at that time as Technical Rubber Products. As of January 1, 2013, the Technical Rubber Products business unit was split into Keltan Elastomers and High Performance Elastomers. The business activities of the Keltan Elastomers business unit comprises the production and marketing of ethylene propylene diene monomer (EPDM) synthetic rubber.
In view of the temporary overcapacities anticipated for the coming years combinen with the increasing production of shale gas in the United States and the resulting cost advantages for local manufacturers, changes are forecasted in the market and competitive environment for the business of Keltan Elastomers cash-generating unit. To determine a fair value less costs of disposal, the final value according to the five-year plan was therefore assessed over a five-year period and the outcome of this assessment taken into account in the measurement. The imapairment deemed necessary as a result was recognized in the income statement under other operating expenses. Of the Impairment recognized, goodwill accounted for €11 million, other intagible assets for €16 million and property, plant and equipment for 147 million.
In view of the challenging competitive environment and the change in the assessment of growth prospects, additional impairment tests were performed as of the end of the reporting period on the High Performance Elastomers cash-generating unit in the Performance Polymers segment and the Rubber Chemicals cash-generating unit in the Performance Chemicals segment.
The business activities of the High Performance Elastomers cash-generating unit comprise the production and distribution of synthetic rubber with special technical properties for the manufacturing industry, especially the automotive and construction sectors, and mechanical engineering. The impairment test as of year end led to the recognition of a €54 million impairment to reduce the carrying amount to the recoverable amount less costs of disposal. This impairment is recognized in the income statement under other operating expenses. Of the impairment recognized, €1 million pertained to intangible assets and €53 million to property, plant and equipment.
The business activities of the Rubber Chemicals cash-generating unit comprise the production and marketing of specialty rubber chemicals sold mainly to manufacturers of tires and technical rubber products. The impairment test as of year end led to the recognition of a €29 million impairment to reduce the carrying amount to the recoverable amount less costs of disposal. This impairment is recognized in the income statement under other operating expenses. Of the impairment charge recognized, €5 million pertained to intangible assets and €24 million to property, plant and equipment.
The annual impairment test for the principal goodwill items was performed on the basis of fair value less costs of disposal by testing the goodwill from previous years for impairment after adjusting for currency translation effects. This mainly comprised the goodwill of €80 million (2012: €95 million) recognized upon the acquisition of Petroflex in 2008 and carried by the Performance Butadiene Rubbers business unit in Brazilian real. The carrying amount of this goodwill equaled approximately 7% (2012: 6%) of the Performance Butadiene Rubbers cash-generating unit’s fair value less costs of disposal. The forecasts pertain to a five-year planning period.
The goodwill of €2 million recognized upon the acquisition in 2013 of PCTS Specialty Chemicals Pte. Ltd., Singapore, was allocated to the Material Protection Products business unit in the Performance Chemicals segment and tested for impairment as of the end of the reporting period.
The goodwill of €11 million pertaining to the Keltan Elastomers cash-generating unit was impaired to zero (see above).
The impairment tests performed on other goodwill items did not indicate any need for recognition of impairment charges. Neither a one-percentage-point increase in the discount rate nor a 10% reduction in expected future cash flows would have led to the recognition of an impairment charge on any other goodwill items.
The recognition and measurement of provisions are also affected by assumptions as to the probability of utilization, timing, the underlying discount rate and the absolute level of risk. The LANXESS Group performed sensitivity analyses on all provisions existing as of December 31, 2013 as required by the IFRS. These involved calculating the impact of variations in the parameters used, especially the probability of occurrence, discount rate and absolute level of risk. The outcome of these sensitivity analyses shows that variations in the assumptions described above would not have a material impact on the level of other provisions reported in the consolidated financial statements of the LANXESS Group. For further information on the sensitivity analyses relating to provisions for pension and other post-employment benefits, see Note .
Defined benefit pension plans also necessitate actuarial computations and measurements. The section on provisions for pensions and other post-employment benefits contains information on the assumptions on which the actuarial calculations and estimates were based (see Note ).
Further, the LANXESS Group is affected by a number of legal disputes. As an international chemicals group, LANXESS is exposed to administrative or court proceedings in the normal course of business and may be again in the future. Administrative and court proceedings generally involve complex technical and/or legal issues and are therefore subject to a number of imponderables. The outcomes of any current or future proceedings cannot be predicted with certainty. It is therefore possible that legal judgments could give rise to expenses that are not covered, or not fully covered, by recognized provisions or equivalent insurance and that could materially affect the business operations, revenues, earnings or cash flows of the LANXESS Group.
There is also a degree of uncertainty surrounding the assessment of certain tax situations by the tax authorities. Although the LANXESS Group believes it has presented all tax-relevant information correctly and in compliance with the law, it is possible that the tax authorities may occasionally reach different conclusions. Provisions have been established for this.
Other significant estimates are used to assess the useful lives of intangible assets and property, plant and equipment, the probability of collecting receivables and other assets, the valuation of inventories and the ability to realize tax claims and deferred tax assets recognized for temporary differences and tax loss carryforwards. The first-time consolidation of business operations also involves estimation uncertainties and the exercise of discretion in determining the fair values of the acquired assets and assumed liabilities.
On December 18, 2013, the European Commission launched an investigation to determine whether certain provisions of the German Renewable Energy Act of 2012 are legally admissible under European Union rules on government aid. It is not currently considered likely that the investigation will result in claims. In the event of an unfavorable ruling, however, LANXESS could face payment claims in the mid-double-digit millions of euros with respect to energy surcharges from which it had been exempted.
Up to the time these consolidated financial statements were authorized for issue, no circumstances had become known that would necessitate a major change in the estimates.