BASF Report 2021 Management’s Report – Opportunities and Risks 154 An internal control system for financial reporting continuously moni- – Monitoring of control weaknesses macroeconomic risks result from the escalation of other geopolitical tors these principles. To this end, methods are provided to ensure The responsible managers receive reports on any control weak- conflicts and a renewed intensification of the trade conflict between that evaluation of the internal control system in financial reporting is nesses identified and their resolution; and an interdisciplinary the United States and China. Both can have a considerable impact structured and uniform across the BASF Group. They also work in committee investigates their relevance to the BASF Group. The on global demand for intermediate goods for industrial production accordance with the international risk management standard, Board of Executive Directors and the Audit Committee are and demand for investment goods. COSO II Enterprise Risk Management – Integrated Framework. informed if control weaknesses with a considerable impact on financial reporting are identified. Only after material control weak- Weather-related influences can result in positive or negative effects Material risks for the BASF Group regarding a reliable control envi- nesses have been resolved does the company’s managing direc- on our business, particularly in the Agricultural Solutions segment. ronment for proper financial reporting are reviewed and updated on tor confirm the effectiveness of the internal control system. an annual basis. Risks are compiled into a central risk catalog. – Internal confirmation of the internal control system Margins All managing directors and chief financial officers of each consoli- Opportunities and risks for the BASF Group primarily result from Moreover, a centralized selection process identifies companies that dated Group company must confirm to the Board of Executive higher or lower margins in the Chemicals and Materials segments. are exposed to particular risks, that are material to the Consolidated Directors of BASF SE every half-year and at the end of the annual Opportunities arise here if the positive margin trend continues for Financial Statements of the BASF Group, or that provide service cycle, in writing, that the internal control system is effective with longer than expected. However, further increases in energy and raw processes. The selection process is conducted annually. Persons regard to accounting and reporting. materials prices in particular, new capacities and raw materials responsible for implementing the requirements for an effective con- shortages could increase margin pressure on a number of products trol system in financial reporting are appointed at the relevant and value chains. This would have a negative effect on our EBIT. companies. Operational opportunities and risks Moreover, if oil and gas prices rise, Wintershall Dea does not have The process for identifying, evaluating, managing and controlling Market growth a compensating effect on the BASF Group’s EBIT because this risks related to preparing the Consolidated Financial Statements as The development of our sales markets is one of the strongest shareholding is no longer reported in EBIT, but in net income from well as monitoring these processes in the selected companies com- sources of opportunities and risks. For more details on our assump- shareholdings. prises the following steps: tions regarding short-term growth rates for the global economy, – Evaluation of the control environment regions and key customer industries, such as the chemicals, auto- The year’s average oil price for Brent crude was $71 per barrel in Adherence to internal and external guidelines that are relevant to motive and construction sectors, see Economic Environment in 2021, compared with $42 per barrel in the previous year. For 2022, the maintenance of a reliable control environment is checked by 2022 on pages 145 to 147. we anticipate an average oil price of $75 per barrel. We therefore means of a standardized questionnaire. expect price levels for the raw materials and petrochemical basic – Identification and documentation of control activities We also consider opportunities and risks caused by deviations in products that are important to our business to rise. In order to mitigate the risks to the financial reporting processes assumptions. Stronger demand resulting from faster eradication of listed in our central risk catalog, critical processes and control the coronavirus pandemic, for example through sustained efficacy Competition activities are documented. and growing acceptance of coronavirus vaccines and drugs, will We continuously enhance our products and solutions in order to – Assessment of control activities give rise to macroeconomic opportunities. A significant macro- maintain competitive ability. We monitor the market and the compe- After documentation, a review is performed to verify whether the economic risk arises from the possibility that measures to contain tition, and try to take targeted advantage of opportunities and described controls are capable of adequately covering the risks. the coronavirus are kept in place for a longer period of time or aug- counter emerging risks with suitable measures. Aside from inno- In the subsequent test phase, spot checks are carried out to test mented, and, as a result, negatively affect global supply chains and vation, key components of our competitiveness are our ongoing whether, in practice, the controls were executed as described and slow global economic growth. Further increases in energy prices, cost management and continuous process optimization. effective. caused, for example by an escalation of the conflict between Russia and Ukraine, and the resulting higher inflation rates for manufacturer and consumer prices also pose a risk to the economy. Additional