BASF Report 2021 Consoli dated Financial Statements – Notes 269 26.4 Classes and categories of financial instruments At the time of initial recognition, the fair value of the contract for Sensitivities physical PPAs (Europe) difference, which was calculted using a valuation model, was higher Million € For trade accounts receivable, other receivables and miscellaneous than the transaction price. As this is a level 3 fair value, the difference Change in expected Change in expected Change in expected assets, cash and cash equivalents, as well as trade accounts of €12 million is deferred and reported in the balance sheet together electricity prices GoO prices production volumes payable and other liabilities, the carrying amount approximates the with the positive or negative fair value of the contract for difference, +10% –10% +10% –10% +10% –10% fair value. according to the valuation model, under other receivables and 42 –42 1 –1 8 –8 miscellaneous assets or other liabilities. The difference is reversed The fair value of financial indebtedness is determined on the basis of using the straight-line method over the term of the contract. Income At the time of initial recognition, the physical PPAs’ fair values, which interbank interest rates. The difference between carrying amounts from the reversal of the difference will be recognized in profit or loss were calculated using a valuation model, were higher or lower, and fair values results primarily from changes in market interest under other operating income. The changes in fair value according respectively, than the transaction prices. As these are level 3 fair rates. to the valuation model are recognized in profit or loss as other values, the differences amounting to €14 million and –€5 mil lion operating income or other operating expenses. were deferred and recognized in the balance sheet together with the The financial instruments reported under Derivatives – no hedge positive fair values of the contracts, according to the valuation accounting, of which fair value level 3, in the table “Carrying The financial instruments reported under Derivatives – hedge model, under assets of disposal groups. The differences are amounts and fair values of financial instruments” relate to a accounting, of which fair value level 3, in the table “Carrying reversed over the term of the contract using the straight-line method. contract for difference for electricity embedded in a virtual power amounts and fair values of financial instruments” relate to two The resulting gains and losses are reported in profit or loss under purchase agreement (virtual PPA). The expected contractual physical power purchase agreements (physical PPAs) concluded in other operating income or other operating expenses. capacity of the solar power plant in Texas, United States, is Europe. The physical PPAs are based on wind turbines in the 50 mega watts. The solar park is scheduled to go into operation in Netherlands with an expected proportional capacity of 35 mega- The physical PPAs were designated in a cash flow hedge accounting 2023. The level 3 fair value is determined as the present value of the watts each. The wind farm is scheduled to go into operation in 2022 relationship. Accordingly, the effective portion of the change in fair expected cash flows from the contract for difference. The key or 2023. Unlike virtual PPAs, physical PPAs provide for actual supply value of the hedging instruments is recognized directly in equity valuation parameters are the expected electricity prices and of electricity volumes to BASF. In addition to electricity, BASF (other comprehensive income). Possible ineffectiveness is recog- expected production volumes. A change in the key valuation receives certificates verifying the “green properties” of the electricity, nized in profit or loss as other operating income or other operating parameters as of December 31, 2021 would have af fected the fair known as guarantees of origin (GoOs). BASF pur chases both the expenses. value of the contract for difference as follows: electricity and the GoOs at a fixed price under the physical PPAs. Because the physical PPAs described here are not eligible for the Sensitivities virtual PPA contract for difference for electricity own use exemption, they are to be recognized in the balance sheet (United States) as derivatives and measured at fair value. Level 3 fair value is Million € determined as the present value of the difference between the Change in expected Change in expected agreed fixed price and the expected market prices for electricity or electricity prices production volumes GoOs. The key valuation parameters are the expected electricity +10% –10% +10% –10% and GoO prices as well as the expected production volumes. 5 –5 1 –1