BASF Report 2021 Consoli dated Financial Statements – Notes 264 The classification and measurement of financial assets is based on Impairments are recognized for expected credit losses in both impairments. Bank guarantees and letters of credit are used to an the one hand on the cash flow condition (the “solely payments of initial and subsequent measurement, even before the occurrence immaterial extent. Expected credit losses and individual principle and interest” criterion), that is, the contractual cash flow of any default event. Counterparties are generally considered to impairments are only calculated for those receivables that are not characteristics of an individual financial asset. On the other hand, it default when they become insolvent, become a debtor in a covered by insurance or other collateral. Impairments on also depends on the business model used for managing financial creditor protection program or are in a finance-related legal receivables whose insurance includes a deductible are not asset portfolios. Based on these two criteria, BASF uses the dispute with BASF, or more than half of BASF’s receivables recognized in excess of the amount of the deductible. following measurement categories for financial assets: portfolio with them is more than 90 days overdue. In these cases, A decrease in impairment due, for example, to a reduction in the – Financial assets at fair value through profit or loss include all individual impairments are recognized for the financial assets credit risk of a counterparty or an objective event occurring after financial assets whose cash flows are not solely payments of measured at amortized cost that are then considered to be credit the impairment is recorded in profit or loss. Reversals of principal and interest in accordance with the cash flow condition impaired. impairments may not exceed amortized cost, less any expected established in IFRS 9. At BASF, derivatives, for example, are The extent of expected credit losses is determined based on the future credit losses. allocated to this measurement category. In general, BASF does credit risk of a financial asset, as well as any changes to this – Financial assets at fair value through other comprehensive not exercise the fair value option in IFRS 9, which permits the credit risk: If the credit risk of a financial asset has increased income include all assets with contractual terms that give rise to allocation of financial instruments not to be measured at fair value significantly since initial recognition, expected credit losses are cash flows on specified dates that are solely payments of principal through profit or loss on the basis of the cash flow condition or the generally recognized over the lifetime of the asset. If, however, the and interest on the principal amount outstanding, in accordance business model criterion to the above category under certain credit risk has not increased significantly in this period, impair- with the cash flow condition in IFRS 9. Furthermore, the assets in circumstances. ments are generally only recognized as 12-month expected this measurement category may not just be held with the intention – Financial assets measured at amortized cost include all assets credit losses. By contrast, under the simplified approach for of collecting the expected contractual cash flows over their term, with contractual terms that give rise to cash flows on specific determining expected credit losses permitted by IFRS 9, but also generating cash flows from their sale. At BASF, certain dates, provided that these cash flows are solely payments of impairments for receivables such as lease receivables and trade securities that are reported as other financial assets or marketable principal and interest on the principal amount outstanding in accounts receivable always cover the lifetime expected credit securities are allocated to this category. BASF does not exercise accordance with the cash flow condition in IFRS 9, to the extent losses of the receivable concerned. the option to subsequently measure equity instruments through that the asset is held with the intention of collecting the expected At BASF, the credit risk of a financial asset is assessed using both other comprehensive income. contractual cash flows over its term. At BASF, this measurement internal information and external rating information on the Assets measured at fair value through other comprehensive category includes trade accounts receivable, as well as receivables respective counterparty. A significant increase in the counterparty’ s income are initially measured at fair value, which usually reported under other receivables and miscellaneous assets and credit risk is assumed if its rating is lowered by a certain number corresponds to the transaction price of the securities allocated to certain securities. of notches. It is generally assumed that the credit risk for a this category at the time of acquisition. Subsequent measurement Initial measurement of these assets is generally at fair value, counterparty with a high credit rating will not have increased is likewise at fair value. Changes in the fair value are recognized in which usually corresponds to the transaction price at the time of significantly. other comprehensive income and reclassified to the statement of acquisition or, in the case of trade accounts receivable, to the Regional and, in certain circumstances, industry-specific factors income when the asset is disposed of. transaction price pursuant to IFRS 15. Subsequent measurement and expectations are taken into account when assessing the Impairments on financial assets measured at fair value through effects are recognized in income using the effective interest extent of impairment as part of the calculation of expected credit other comprehensive income are calculated in the same way as method. losses and individual impairments. In addition, BASF uses internal impairments on financial assets measured at amortized cost and and external ratings and the assessments of debt collection recognized in profit or loss. agencies and credit insurers, when available. Individual impairments are also based on experience relating to customer solvency and customer-specific risks. Factors such as credit insurance, which covers a portion of receivables measured at amortized cost, are likewise considered when calculating