(35) Financial instruments

Primary financial instruments are reflected in the statement of financial position. In compliance with IAS 39, financial assets are categorized as “loans and receivables,” “held at fair value through profit or loss,” “held to maturity” or “available for sale” and, accordingly, recognized at cost or fair value. Liability instruments that are neither held for trading nor constitute derivatives are recognized at amortized cost.

Risks and risk management

The global alignment of the LANXESS Group exposes its business operations, earnings and cash flows to a variety of market risks. Material financial risks to the Group as a whole, such as currency, interest rate, credit, liquidity and commodity price risks, are centrally managed.

These risks could impair the earnings and financial position of the LANXESS Group. The various risk categories and the risk management system for the LANXESS Group are outlined below.

The principles of risk management are defined by the Board of Management. At the regular strategy meetings of the Financial Risk Committee, which are chaired by the Chief Financial Officer, reports on the outcome of financial risk management and on current risks levels are presented and any further action is decided upon. Simulations are performed to assess the impact of market trends. The implementation of the Financial Risk Committee’s decisions and ongoing risk management are undertaken centrally by the Treasury Group Function. The aim of financial risk management is to identify and evaluate risks and to manage and limit their effects as appropriate.

Currency risks
Since the LANXESS Group undertakes transactions in numerous currencies, it is exposed to the risk of fluctuations in the relative value of these currencies, particularly the U.S. dollar, against the euro.

Currency risks from potential declines in the value of financial instruments due to exchange rate fluctuations (transaction risks) arise mainly when receivables and payables are denominated in a currency other than the company’s local currency.

Currency risks relating to operating activities are systematically monitored and analyzed. While the risks relating to changes in the value of receivables and payables denominated in foreign currencies are fully hedged, the scope of hedging for currency risks relating to forecasted transactions is subject to regular review. A substantial proportion of currency risks arising from contracts are hedged using derivative financial instruments. Changes in the fair values of these instruments are recognized in the financial result or, in the case of cash flow hedges, in other comprehensive income. Realized income/expense from the effective portion of cash flow hedges are recognized in other operating income/expenses.

Currency risks arising on financial transactions, including the interest component, are fully hedged through forward exchange contracts.

Since the LANXESS Group concludes derivative contracts for the greater part of its currency risks, it believes that, in the short term, a rise or fall in the euro against other major currencies would have no material impact on future cash flows. In the long term, however, these exchange rate fluctuations could adversely affect future cash flows should the LANXESS Group not be in a position to absorb them, for example, through the pricing of its products in the respective local currencies.

If the exchange rate for the euro had been 5% higher against the hedged currencies on the reporting date, this would have had a €19 million (2012: €20 million) effect, mainly on other comprehensive income, which would have improved accordingly. This effect mainly relates to the U.S. dollar. A correspondingly lower rate for the euro would have had basically the opposite effect.

Many companies in the LANXESS Group are based outside the eurozone. Since the Group prepares its consolidated financial statements in euros, the annual financial statements of these subsidiaries are translated into euros for consolidation purposes. Changes in the average exchange rate for a given local currency from one period to the next can materially affect the translation of both sales and earnings reported in this currency into euros (translation risk). Unlike the effect of exchange rate fluctuations in the case of transaction risk, translation risk has no impact on Group cash flows in the local currency.

The LANXESS Group has material assets, liabilities and businesses outside the eurozone that are reported in local currencies. The related long-term currency risks are estimated and evaluated on a regular basis. In view of these risks, however, foreign currency transactions are only concluded if consideration is being given to withdrawing from a particular business and it is intended to repatriate the funds released by the withdrawal. The effects of exchange rate fluctuations on the translation of net positions into euros are reflected in other comprehensive income.

Interest rate risks
Fluctuations in market interest rates can cause fluctuations in the fair value of a financial instrument. Interest rate risk affects both financial assets and financial liabilities.

Since the majority of financial liabilities were entered into at fixed interest rates, changes in interest rates in the coming years will only have a limited impact on the LANXESS Group. The available liquidity is invested in instruments with short-term fixed interest rates, so that the LANXESS Group benefits quickly from rising interest rates. A general change of one percentage point in interest rates as of December 31, 2013 would have altered Group net income by €1 million (2012: €3 million).

Credit risks
Credit risks arise from trade relationships with customers and dealings with banks and other financial partners, especially with regard to the investment business and financial-instrument transactions.

Customer risks are systematically identified, analyzed and managed, using both internal and external information sources. Customer portfolios may be insured against credit risks, especially where the risk profile is elevated.

The objective of receivables management at LANXESS is to collect all outstanding payments punctually and in full, and thus to minimize the risk of default. Continuous monitoring is computer-assisted based on the payment terms agreed with the customers. These are generally based on the customary payment terms for the business or country. Reminders are sent out at regular intervals if payments are overdue.

The maximum risk of default on receivables, cash and cash equivalents, near-cash assets, derivatives and other financial assets is reflected in their carrying amounts in the statement of financial position (disregarding netting arrangements not reflected in the statement of financial position).

Credit insurance has been concluded with a well-known European credit insurer to cover material credit risks relating to receivables from customers. After a deductible, these cover default risks, especially in Europe, that could arise up to the end of the fiscal year in the mid-double-digit millions of euros. The maximum credit risk is further reduced by letters of credit in favor of LANXESS. In certain cases, prepayment is agreed with the contracting partner.

In addition, LANXESS has a contractually agreed title to goods until the contracting partner has paid the full purchase price. The vast majority of receivables relate to customers with very high credit standing.

The creditworthiness of the counterparty is a key criterion in the financial policy and credit risk management of the LANXESS Group, especially in the selection of banks and financial partners for capital investments and transactions involving financial instruments. LANXESS therefore endeavors to undertake transactions with banks and other financial counterparties that have at least an investment grade rating. The derivatives and financial assets outstanding as of the closing date were almost all concluded with banks with an investment grade rating.

Credit risk management also includes global management of the counterparty risk relating to banks and financial partners. The LANXESS Group pays particular attention to risk diversification to prevent any cluster risks that could jeopardize its existence. Through master agreements, the market values of open trading positions can be netted if a partner becomes insolvent, thereby further reducing risks.

Liquidity risks
Liquidity risks arise from potential financial shortfalls and the resulting increase in refinancing costs. The aim of liquidity management in the LANXESS Group is to ensure that the Group has sufficient liquidity and committed credit facilities available at all times to enable it to meet its payment commitments, and to optimize the liquidity balance within the Group.

The main liquidity reserve is a €1.25 billion syndicated credit facility, which was not significantly drawn upon as of year end. Its original term was extended by one year in February 2014 to run until February 2019, and it can be renewed one more time for a further period of one year. A further material credit line of €200 million with the European Investment Bank remained undrawn as of year end 2013. In addition to credit facilities, the Group has short-term liquidity reserves of €533 million (2012: €797 million) in the form of cash and cash equivalents and AAA rated money market funds. Accordingly, the LANXESS Group has a liquidity position based on a broad range of financing instruments.

The following table shows the contractually agreed (undiscounted) cash flows for primary financial liabilities, the interest components thereof and derivative financial instruments:

Dec. 31, 2012
 
€ million 2013 2014 2015 2016 2017 > 2017
             
Bonds (42) (593) (115) (252) (41) (1,343)
of which interest (42) (93) (55) (52) (41) (143)
Liabilities to banks (80) (46) (38) (37) (41) (22)
of which interest (5) (5) (4) (3) (2) 0
Trade payables (795)          
of which interest 0          
Liabilities under finance leases (38) (10) (7) (7) (5) (25)
of which interest (3) (2) (2) (2) (1) (4)
Other primary financial liabilities (57) (3) (3) (2) 0 (2)
of which interest (54) 0 0 0 0 0
Derivative liabilities            
Hedging instruments that qualify for hedge accounting            
Disbursements (170) (20)        
Receipts 162 19        
Other hedging instruments            
Disbursements (260) (13) (19) (25) (9)  
Receipts 257 12 17 23 8  
Derivative assets            
Hedging instruments that qualify for hedge accounting            
Disbursements (331) (172)        
Receipts 343 180        
Other hedging instruments            
Disbursements (952) (5) (27)      
Receipts 967 5 28      
 
Dec. 31, 2013
 
€ million 2014 2015 2016 2017 2018 > 2018
 
Bonds (542) (114) (252) (41) (541) (802)
of which interest (42) (54) (52) (41) (41) (102)
Liabilities to banks (108) (62) (37) (41) (22) 0
of which interest (3) (4) (3) (2) 0 0
Trade payables (690)          
of which interest 0          
Liabilities under finance leases (11) (8) (8) (6) (5) (22)
of which interest (2) (2) (2) (1) (1) (3)
Other primary financial liabilities (57) (3) (1) (2) 0 0
of which interest (54) 0 0 0 0 0
Derivative liabilities            
Hedging instruments that qualify for hedge accounting            
Disbursements (136) (48)        
Receipts 116 39        
Other hedging instruments            
Disbursements (182) (14) (24) (6) (6)  
Receipts 180 13 23 5 5  
Derivative assets            
Hedging instruments that qualify for hedge accounting            
Disbursements (415) (131) (3)      
Receipts 444 138 3      
Other hedging instruments            
Disbursements (972) (32) (1) (3)    
Receipts 1,002 38 5 4    
 

The contractually agreed payments on other primary financial liabilities due within one year following the reporting date include accrued interest of €53 million (2012: €52 million) that mainly relates to the bonds.

Raw material price risks
The LANXESS Group is exposed to changes in the market prices of energies and raw materials used for its business operations. Increases in energy and raw material procurement costs are generally passed on to customers. Where such risks cannot be passed on in their entirety, the related risks may be hedged on a case-by-case basis through forward commodity contracts to reduce the volatility of cash flows. Where cash flow hedges qualify for hedge accounting, changes in their fair values are recognized in other comprehensive income until the hedged transaction is realized.

LANXESS did not have any forward commodity contracts at year end 2013 or 2012.

Carrying amounts, measurement and fair value of financial instruments

The table shows the carrying amounts of the individual classes of financial assets and liabilities and their fair values. The basis of measurement is also shown:

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Dec. 31, 2012
 
€ million IAS 39
measurement category
Carrying
amount
Dec. 31, 2012
 Measurement according to IAS 39 Measurement according to
IAS 17
Fair value
Dec. 31, 2012
  Amortized
cost
Acquisition
cost
Fair value
(other comprehensive income)
Fair value
(profit or loss)
 
Financial assets                
Trade receivables LaR 1,117 1,117         1,117
Receivables under finance leases 4         4 4
Other financial receivables LaR 8 8         8
Cash and cash equivalents LaR 386 386         386
Available-for-sale financial assets                
Near-cash assets AfS 411     411     411
Other available-for-sale financial assets AfS 20   15 5     5
Derivative assets                
Hedging instruments that qualify for hedge accounting 21     21     21
Other hedging instruments FAHfT 23       23   23
                 
Financial liabilities                
Bonds FLAC (1,946) (1,946)         (2,128)
Liabilities to banks FLAC (245) (245)         (245)
Trade payables FLAC (795) (795)         (794)
Liabilities under finance leases (78)         (78) (78)
Other primary financial liabilities FLAC (65) (65)         (65)
Derivative liabilities                
Hedging instruments that qualify for hedge accounting (8)     (8)     (8)
Other hedging instruments FLHfT (6)       (6)   (6)
 

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Dec. 31, 2013
 
in Mio. € IAS 39
measurement category
Carrying
amount
Dec. 31, 2013
Measurement according to IAS 39 Measurement according to
IAS 17
Fair value
Dec. 31, 2013
  Amortized
cost
Acquisition
cost
Fair value
(other comprehensive income)
Fair value
(profit or loss)
 
Financial assets                
Trade receivables LaR 1,070 1,070         1,070
Receivables under finance leases 2         2 2
Other financial receivables LaR 14 14         14
Cash and cash equivalents LaR 427 427         427
Available-for-sale financial assets                
Near-cash assets AfS 106     106     106
Other available-for-sale financial assets AfS 14   9 5     5
Derivative assets                
Hedging instruments that qualify for hedge accounting 35     35     35
Other hedging instruments FAHfT 43       43   43
                 
Financial liabilities                
Bonds FLAC (1,948) (1,948)         (2,032)
Liabilities to banks FLAC (258) (258)         (264)
Trade payables FLAC (690) (690)         (690)
Liabilities under finance leases (49)         (49) (51)
Other primary financial liabilities FLAC (62) (62)         (62)
Derivative liabilities                
Hedging instruments that qualify for hedge accounting (30)     (30)     (30)
Other hedging instruments FLHfT (4)       (4)   (4)
LaR Loans and Receivables
AfS Available-for-Sale Financial Assets
FAHfT Financial Assets Held for Trading
FLAC Financial Liabilities Measured at Amortized Cost
FLHfT Financial Liabilities Held for Trading
  

Fair value measurement of the bonds is allocated to Level 1 of the hierarchy outlined in the section “Fair value measurement.” However, one bond with a fair value of €103 million is allocated to Level 2 as there is no liquid market for it. Fair value measurement of non-current liabilities to banks is also allocated to Level 2.

Carrying Amounts by IAS 39 Category
 
€ million Dec. 31, 2012 Dec. 31, 2013
     
Loans and receivables 1,511 1,511
Available-for-sale financial assets 431 120
Financial assets held for trading 23 43
  1,965 1,674
Financial liabilities measured at amortized cost (3,051) (2,958)
Financial liabilities held for trading (6) (4)
  (3,057) (2,962)
 

Fair value measurement

The measurement of fair value is based on a hierarchy reflecting the significance of the measurement inputs. The fair value measurement hierarchy for an asset or liability comprises three levels:

Level 1
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date

Level 2
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3
Unobservable inputs for the asset or liability

The following table shows the volumes of assets and liabilities that were measured at fair value on a recurring basis as of the end of the reporting period and the levels of the fair value hierarchy into which the measurement inputs were categorized. Reclassification between the levels is reviewed as of each reporting date. There were no reclassifications in 2012 or 2013.

Assets and Liabilities Measured at Fair Value
 
€ million Dec. 31, 2012
       
  Level 1 Level 2 Level 3
       
Non-current assets      
Investments in other affiliated companies 3
Non-current derivative assets 16
Other non-current financial assets 1
Current assets      
Near-cash assets 411
Current derivative assets 28
Other current financial assets 1
Non-current liabilities      
Non-current derivative liabilities 4
Current liabilities      
Current derivative liabilities 10
 
Assets and Liabilities Measured at Fair Value
 
€ million Dec. 31, 2013
       
  Level 1 Level 2 Level 3
       
Non-current assets      
Investments in other affiliated companies 4
Non-current derivative assets 20
Other non-current financial assets 1
Current assets      
Near-cash assets 106
Current derivative assets 58
Other current financial assets 0
Non-current liabilities      
Non-current derivative liabilities 12
Current liabilities      
Current derivative liabilities 22
 

The investments in other affiliated companies measured at fair value pertain to shares in the listed companies Gevo Inc., Englewood, United States, and BioAmber Inc., Minneapolis, United States. The item “Investments in other affiliated companies” in the statement of financial position also includes €9 million in non-listed equity instruments whose fair values at the end of the reporting period could not be reliably measured and which are therefore recognized at cost. There are currently no plans to dispose of these investments.

Offsetting of financial assets and financial liabilities

Offsetting was not used for the financial assets and financial liabilities recognized in the statement of financial position. The following table shows how legally enforceable master netting arrangements or similar agreements impact, or could impact, the Group’s financial position:

Offsetting of Financial Assets and Financial Liabilities as of December 31, 2012
 
€ million   Carrying
amount of financial instruments
Related amounts not offset in the statement of financial position Net amount
  Financial
instruments
Financial
collateral
 
Financial assets        
Trade receivables 1,117 (32) (1) 1,084
Derivative assets 44 (9) 0 35
         
Financial liabilities        
Trade payables (795) 32 0 (763)
Derivative liabilities (14) 9 0 (5)
 
Offsetting of Financial Assets and Financial Liabilities as of December 31, 2013
 
in Mio. € Carrying
amount of financial instruments
Related amounts not offset in the statement of financial position Net amount
  Financial
instruments
Financial
collateral
 
Financial assets        
Trade receivables 1,070 (36) (1) 1,033
Derivative assets 78 (7) 0 71
         
Financial liabilities        
Trade payables (690) 36 0 (654)
Derivative liabilities (34) 7 0 (27)
 

Either contracting party may offset on a net basis the positive and negative fair values arising from past-due derivative asset or liability contracts with the same counterparty.

Net result by category

The following table provides an overview of the net results based on the measurement categories defined in IAS 39:

Net Results by IAS 39 Category
 
€ million 2012 2013
     
Loans and receivables (11) (27)
Available-for-sale financial assets (9) (6)
Assets and liabilities held for trading 27 41
Financial liabilities measured at amortized cost (108) (121)
  (101) (113)
 

Net gains and losses principally comprise interest income and expense and remeasurement effects.

In 2012, the net result for available-for-sale financial assets included gains of €10 million which were reflected in other comprehensive income.

In addition, fees of €9 million were incurred in 2013 (2012: €6 million) in connection with financial instruments.

Collateralization of financial liabilities

Financial liabilities of €0 million (2012: €4 million) were collateralized by mortgages or other property claims.

Mezzanine financing

Mezzanine instruments such as profit participation rights, convertible bonds or warrant bonds have not been issued. Information on the possible issuance of such instruments is given in Note [12].